New Managers Provide Better (But More Volatile) Returns

Nov 27 2013 | 8:54am ET

First-time hedge funds generate better average returns than funds launched by established firms, but do so with more volatility.

New research from Preqin shows the average emerging manager long/short fund launched since 2007 delivered annualized net returns of 8.80% in its first three years of trading, compared to an annual rate of 5.38% from newly-launched funds managed by established firms.

That said, the neophite managers did exhibit higher annualized volatility than their more experienced competitors—17.3% to the established firms' 14.7%.

Preqin found that 22% of the funds launched by new managers since 2007 posted losses in their first year, compared to 26% of those launched by established managers—but the new managers posted steeper losses, losing more than 20% compared to the 14% losses of the follow-on funds.

The proportion of hedge fund investors tracked by Preqin that are interested in first-time funds has dropped to 38% from 42% in 2012.

Fund of hedge fund managers are the most likely to allocate to emerging managers, 73% of those polled by Preqin expressed interest in new funds, followed by asset managers (46%) and family offices (43%).

Working against emerging managers is that 71% of investors require at least a three-year track record before they will consider a hedge fund manager, although, on the bright side, 75% will invest in funds with less than $500 million in assets.

Last year (2012) saw a record number—274—of new hedge fund managers hanging their shingles and 2013 could beat that (as of November 15, 231 new managers have launched this year). That said, only 44% of these newly launched firms have launched their first vehicle.

“With more first-time fund groups in market than ever before, following the fallout of the Volcker Rule and a revived optimism in the industry, finding the potential star of the next generation is an increasingly difficult task, and one many investors are unwilling to enter into," said Graeme Terry of Preqin.

“To stand out among a crowded market for first-time funds, emerging managers need to ensure that they have a strong team, robust infrastructure and a coherent strategy, as well as strong early performance in order to attract investment from the ever-demanding institutional community.”


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