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Emerging managers add twice the alpha
Tuesday, 5 June 2012 12:45pm

The performance of emerging manager hedge funds is roughly twice that of established manager hedge funds over the past 20 years, according to new research.

This is despite large hedge funds attracting most of the inflows, said Peter Urbani, formerly chief investment officer at Infiniti Capital, who conducted the research using the Eureka Hedge database.

An emerging manager is a new manager that has been in operation less than three years and which has less than $300 million in FUM, but they are not necessarily boutique managers.

Urbani said, "Over the full 19.25 year period of the study from 1993 to March 2012, the Emerging Managers proxy generated an excess CAGR of 3.66% pa over and above that of the Established Managers that returned 4.13% arithmetic excess. This translates into a 99.84% cumulative total out-performance."

Urbani said, however, that, "Emerging Managers do have periods of relative underperformance typically following market peaks and crisis periods, eg in 1997-98, 2002-04 and 2009-10. This probably reflects a decline in issuance of new funds immediately following such periods but is a topic for further investigation".

The conclusion, he said, is that emerging managers perform better than established managers on almost every performance and risk measure.

"Even if we assume half of the excess returns are attributable to survivor and other biases (other research has indicated they are of this sort of magnitude), the excess alpha of around 200bp pa is still more than enough to cover the full cost structure of most institutional funds," he said.

Urbani added that at launch the average Hedge Fund had $26 million in FUM and that it takes an average 16 months to grow above $100 million. Only 4% of funds ever managed to grow their FUM above $1 billion.

More disturbingly, Urbani said, "After 84 months (7 years ) the average annual arithmetic return of a fund falls to the long run average of 8.52% pa irrespective of when the fund was launched".

"If Smaller and emerging hedge funds truly pose the equivalent of the 'Small Cap' effect in equities, as the research suggests, this is likely to prove costly to those who fail to consider them," he added.

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