Peter Urbani is CEO of KnowRisk Consulting, New Zealand, and was formerly CIO for Infiniti Capital, as well as Head of Quant, Head of Investment Strategy and Head of Portfolio Management for a number of buy-side firms.

Emerging manager funds (defined here as those hedge funds that are less than 36 months old and have less than $300m in AUM) tend to be run by highly motivated, entrepreneurial and focused managers. In addition, the exploitable opportunity set they have identified in the marketplace is more likely to persist over the short-term.

Simply put, emerging / early stage managers try harder. All of this translates into excess returns or alpha of up to 600bp per annum.

Depending on which database is used some of this may be attributed to backfill and / or survivor bias. However, notwithstanding these biases, Emerging Managers deliver at least 200bp per annum in excess of the returns of established managers.

It is fair to say that the ‘price' of this excess alpha is in the form of higher business risk associated with a start-up operation. This places a higher burden of responsibility on those performing qualitative due diligence to verify the managers ability to properly scale and grow their businesses.

Emerging managers do have occasional periods of relative underperformance to established managers, typically after crisis periods, however the drawdowns associated with Emerging Managers are also lower.

Emerging Manager Alpha

The Table of returns

After struggling mightily post the GFC (global financial crisis), there are finally some early signs of a possible renaissance in emerging manager excess returns or ‘Emergin......................

To view our full article please login

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