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Panelists Matthias Knab, Opalesque for New Managers: This updated article on the recent interactive Investor Workshop "Generating Alpha with Emerging Managers - Opportunities and Approaches" now includes transcribed quotes from the investor panelists. This session has been designed to prep Agecroft Partner's 5th GAINING THE EDGE (June 17-28) which will be the largest virtual cap intro event for the remainder of the year. The event is free for investors, and there are exclusive registration benefits for managers (a $3,478 goodie bag), click here for more.
The webinar featured a panel of hedge fund and investment veterans, including Caroline Gillespie Greer, Managing Director Commonfund, Lionel Erdely, Co-CEO and CIO Investcorp - Tages, Adam Choppin, Assistant Portfolio Manager, Xponance and a family office investor who discussed the topic of emerging fund managers. The panelists defined an emerging manager as a fund manager with a smaller asset size and less than three years of track record. They also noted that the definition can vary depending on the asset class and the specific investor.
The panelists continued discussing the advantages and risks of investing in emerging managers. The advantages include access to innovative strategies that may yield superior alpha, transparency and direct access to decision-makers, fee discounts and favorable terms such as appropriate hurdles, and the potential for higher returns due to the emerging manager premium.
Their smaller size allows them to be more agile and identify opportunities that larger funds may overlook. However, the risks include operational risks, the possibility of redemptions, and the potential for the manager to take on too much risk in order to avoid losing their business. Emerging managers can display specific operational risks due to a lack of robust infrastructure. Redemptions may impact smaller managers more significantly.
Technology and qualitative due diligence
The panelists further discussed the critical due diligence factors when evaluating emerging managers. These include assessing the manager's alignment with the investor's goals, understanding the manager's investment process and strategy, evaluating the manager's track record and performance, and conducting thorough operational due diligence which also assesses the team's alignment and stability, often involving in-depth background checks and personal references.
In terms of finding promising emerging managers, the panelists suggested looking for managers with a clear investment thesis, a differentiated strategy, and a strong track record. They also recommended networking and attending industry events as a way to identify and connect with emerging managers, such as direct engagement events like "Gaining the Edge" and personal outreach. Commonfund has been utilizing a diverse manager portal to specifically target managers from underrepresented backgrounds.
The use of technology helps streamline quantitative analysis and risk assessment, but it does not replace the need for qualitative evaluation. Investors are encouraged to explore revenue-sharing models that better align the interests of investors and managers, or to add value by offering referrals, providing strategic business advice, and serving as a reference to other investors. Emerging managers should maintain transparency through a clear organizational plan that can accommodate future growth.
Overall, the panel encouraged both investors and emerging managers to remain transparent and open in their communication, emphasizing the importance of mutual benefit in investment partnerships. Emerging managers should focus on cultivating relationships, leveraging events, and providing clear, concise messaging to attract potential investors.
The investors emphasized the importance of conducting thorough due diligence when evaluating emerging managers, but also noted the potential for higher returns and the benefits of access to decision makers and transparency. They encouraged investors to consider emerging managers as part of a diversified investment portfolio.
The user-friendly video REPLAY of this interactive Investor Workshop is now available here.
For your convenience, we have transcribed the following soundbites for you from the live session:
1. Advantages and risks of investing with emerging managers
Family Office Investor: "There's obviously certain risk you're taking with a firm [that] might have $1 billion or $1.5 billion but no track record. We don't know how the back-office processes are. Exceptions [are] where people were in previous firms where they have a track record, we can ascribe something to it."
"You get access to decision makers. You get significantly more transparency with regards to portfolio holdings and changes. We are not a group that bothers our managers intramonth. We firmly believe that we're paying our managers good money for them to make us money. There's a fee discount and other tools you can play with terms-wise that can really help us outperform."
Caroline: "The operational risks with smaller managers can be higher particularly when you get into really small assets. There is some ability to farm that out today in ways that didn't exist in the past. You can use an outsourced provider, but then you're still not getting 100% attention from the team that's servicing you operationally."
"When we look at emerging managers that are small, we want to make sure that they don't have all their eggs in one basket with a single investor. We want to make sure that there is some investor stability there as well. And we don't want to be the largest investor in the fund."
Lionel: "If a manager doesn't succeed in the first three to four years in delivering superior quality performance, the probability that they are out of business is high. If the objective of investing in emerging managers is to deliver better risk-adjusted returns, you have a better alignment. The drive, the focus of the team will be better."
"If managers don't perform, the risk that go out of business is a massive stress for them. That's when they could start doing things harmful to the portfolio.
2. How do you find promising, young emerging managers that are not mainstream?
Family Office Investor: "I probably look through every single fund that fits our parameters on every platform. I take a lot of meetings and it takes an enormous amount of time. The fund may not fit us, but [seeking emerging managers] is 'kissing a ton of frogs.' It's exhausting but it's worth it in the end."
Adam: "It takes looking at a lot of managers, a lot of options, which means often not dismissing stuff out of hand for facile reasons."
"If you're looking at emerging managers, you're usually doing so because there's some pricing power as an allocator. You should normalize that from other places as opposed to looking at the net of fees take. If you're including fund expenses on a low AUM fund, but you're going to invest with them it's going to be a higher AUM fund, then you're doing bad math to look at what your take would be on post investment."
Caroline: "We encourage diverse managers to submit an application through our Diverse Manager Portal because I can't tell if somebody is a diverse manager just by what comes into my email inbox."
3. How has technology integration changed your approach to evaluating work with these emerging managers?
Caroline: "Our Diverse Manager Portal is extremely important. It's provided a platform to collect very specific details on managers. The manager can identify what asset class they belong to and upload as many materials they want associated with their strategy.
"You're greatly benefited as an emerging manager if you do have a three-year track record or some kind of track record that we can use to replicate or anticipate how your strategy might perform. We do an extensive amount of quantitative analytical work on our managers in advance to try and anticipate the appropriate role that they would have in a portfolio."
Adam: "There's no new shortcuts or no new technology that we've seen or predict to come out in assessing [manager skill]. That's still bottom up, talking to managers. No deck can tell me that."
Lionel: "In the way we all conduct our due diligence, the quantitative screening for instance, we have better technology than before. It's easier to outsource, to develop internally, but on the emerging managers specifically, you need a lot of references and qualitative work as you have less data to analyze. It will take time before AI can be a credible substitute."
4. Creative ways how smaller and emerging managers to get on your radar
Adam: "The Cap Intro 'speed dating' events are the best value in terms of spending your marketing dollars. Poor value are events where you're hoping to exchange business cards over cocktails. Those are worth maybe $500. The going rate for cap intro events is about $1,000 a meeting. As long as those meetings are with allocators who have looked at your profile in advance and self-select themselves into taking a meeting, that's a meeting worth having."
Caroline: "There's a great advantage to participating in events. If the event is too large and the allocators are seeing managers for the sake of seeing managers then that is not a productive way to spend time for either party. There's a balance in size that is sometimes lost in some events. As a manager, you should look at what is your ratio of attendees to meetings to try and achieve a balance between the people that are attending and their interests in the strategy that you're offering."
5. Advice for managers and LPs
Caroline: "Do look at diverse and emerging managers. Please understand the difference between those two things. Just because you're diverse doesn't make you emerging or vice versa."
"Try and do as much homework as you can. You don't want to spend time reaching out to people who are never going to look at you."
Adam: Emerging managers should also ask: "What are all the reasons why you can't invest with us? Then you find out the constraints that whoever the allocator that you're talking to might have that makes it not worth your time to pursue any further."
"If someone sent me a cold request, I just ignore it because I don't know them or why they're contacting me. But, if you send me a note, even if it's as simple as, 'Hey, I saw you at the webinar. You were interesting.' Then usually I respond to those things."
Family Office Investor: "Try to read as much as you can. If you don't get something, try to ask a fellow LP or GP to understand it because it can add a lot of value to your portfolio. Feel free to ask us questions about us. I've had people who would never ever fit in our portfolio try to pitch us for an hour after I told them it doesn't fit for us and I can't help you out."
Lionel: "There is a risk premium associated with investing in emerging managers. To harvest any risk premium, you need to have an appropriate level of diversification. Our recommendation is to follow this rule also when it comes to deploying capital in emerging managers. A concentrated portfolio would be suboptimal. This diversified approach should increase the inflows to the space, which is beneficial to the industry as it will foster the emergence of new talent. "
Here again the link to watch the user-friendly video REPLAY of the full interactive Investor Workshop is now available here:
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