By Peter Urbani , Co-CIO, Infiniti Capital
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Emerging Managers, defined as those hedge funds with less than 36 Months of history and less than $300m in AUM, are continuing to deliver on their promise of generating returns 300 – 400bp per annum over and above the returns of older, more established hedge funds.
This is reflected by both the performance of the Infiniti Capital Emerging Manager Indices relative to wider industry fund of funds benchmarks and Infiniti’s own emerging manager funds over the past 12 months to end June 2008.
The approximately 300bp of relative outperformance of the two Infiniti Emerging Manager fund of funds to wider fund of funds benchmarks such as the HFRI Fund of Funds and HFRX Equally Weighted Strategies Index is in line with earlier research conducted by Infiniti Capital on the likely out-performance of ‘Emerging Managers’ as well as that of numerous academic studies.
The updated Infiniti Capital Emerging Managers Indices show that ‘Emerging Managers’ continue to deliver excess returns of up to 500bp per annum over and above the returns of older more established funds.
This finding is in line with that of various other studies. However, Infiniti is one of the few fund of fund managers to actually run ‘Emerging Manager’ fund of funds. Infiniti offers two ‘Emerging Manager’ fund of funds - one a pure emerging manager fund and the other a 50:50 blend of established and emerging managers. Over the past 5 years to end June the Infiniti Emerging Managers Index ( < 36m ) has generated an average excess return of 114bp over and above that of the Established Managers older than 36 months index.
Over the same time period (past 5 years), on a back-tested basis, Infiniti’s own pure Emerging Managers fund of funds would have generated an average excess return of 442bp per annum over and above the return of the Infiniti Emerging Managers Index. We are gratified therefore to see these sort of results being achieved in our first full year of real performance also.
The updated study by Infiniti also reveals some interesting trends about new manager launches and Strategy preferences. For instance, the average number of net new ‘Emerging Manager’ funds entering the Infiniti Emerging Managers Index every year is around 707 funds. However, over the past rolling 12 months to end June 2008 this number has fallen by 22% to just 554 and by 50% to the prior 12 month’s 1113 funds. This is in line with similar studies of new hedge fund issuance in general.
Looking at the number and proportion of net new funds entering the index in each of the Main Strategy groupings over the past 12 months we can see a clear preference for:
1) Statistical Arbitrage type funds where the 13 new funds entering the index in the past 12 months was more than 6 times the average annual number of 2 over the prior 9 years.
2) Macro type funds where the 33 new funds were proportionately twice the number of average new entrants in that strategy.
3) Energy Sector, Options Strategies and somewhat surprisingly both Mortgages and Asset Backed Lending were popular.
Value, Distressed and Convertible Arbitrage Funds represented the lowest number of new entrants to the Infiniti Capital Emerging Manager Index ( <36m ). Of the larger Strategy groupings, both Event Driven and Equity Long/Short were down significantly from prior years.
For further research on Emerging Managers please see:
(1) New Managers Try Harder by, Peter Urbani, Head of Quantitative Research, Infiniti Capital.
(2) The Search for Alpha: Investing in Newer Hedge Funds by, Sam Kirschner, Managing Director; Matthew Hoffman, Chief Investment Officer; Ron Panzier, Chief Risk Officer, Mayer & Hoffman Capital Advisors LLC, New York, Published in Hedge Fund Monthly.
(3) The Performance of Emerging Hedge Fund Managers by, Rajesh K. Aggarwal, Carlson School of Management and Philippe Jorion, Paul Merage School of Business, Published on January 23, 2008.
(4) The Young Ones by Cross Border Capital Limited, April 2001.
(5) Emerging Manager Out-Performance: by HFR Asset Management, Chicago.
(6) Alternative Asset Strategies: Early Performance in Hedge Fund Managers (pdf) Lazard Asset Management, Chicago.
(7) First two years best for hedge funds - FT Article referencing Pertrac study by James Mackintosh, Financial Times, March 26 2007.
(8) HFRAM and Barclays Capital launch Emerging Managers platform - Hedge Week, Oct 2005.
Infiniti Capital is a Fund of Hedge Funds manager that pioneered the practice of charging a performance fee only. Originating from a Swiss based family office, Infiniti recently underwent a management buyout and is now entirely owned by its senior management and staff. The company runs a number of FoFs including two specialist mandate Emerging Manager Funds on behalf of primarily institutional cleints in Japan and Asia.