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New Managers March 2012

A look at funds of hedge funds that invest in emerging managers

Funds of funds and emerging managers: a mutually beneficial partnership

One place emerging managers can be sure of being welcomed are funds of funds, at least those that tend to invest in them. Specialist funds of funds who actively support emerging managers offer a safe haven. They share their entrepreneurial stance: they see potential in start-ups. And at the same time, they are well equipped - better than a lot of institutions for example - to do thorough checks and to assess the risks.

To determine key trends in early stage investing since 2008, Citi Prime Finance, a prime brokerage and capital introduction firm and a subsidiary of the bank Citi, interviewed 90 firms: investors who are active in that space and recently launched managers. This resulted in a useful report for emerging managers, called Day One and Early Stage Investor Allocations to Hedge Funds.

The majority of Day 1/Early Stage (D1/ES) investors surveyed by Citi are funds of hedge funds (FoF) - around 70%. One of the reasons for this is that FoF are the biggest investors in start-ups. Their capital is dedicated to investing in hedge funds and must be fully invested at all times, unlike other investors, institutional or private, who tend to invest across other asset classes too. FoF also have bigger due diligence (DD ) teams, are better positioned to know of managers launching new funds, and are not constrained by "rigid concentration limits that restrict the percentage of a new manager's assets under management (AuM) they can represent." Furthermore, institutional investors tend to go to FoF if they want exposure to emerging managers instead of making a direct investment.


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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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