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Emerging Managers

Emerging Managers. Formation and Evaluation Brian T. Bares, CFA. 1. EMERGING MANAGER INTRODUCTION. EMERGING MANAGER FORMATION. 2. EVALUATING EMERGING MANAGERS. 3. WHAT NEEDS TO CHANGE. 4. What is an EM?. Emerging Managers are: Small (low levels of AUM)

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Emerging Managers

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  1. Emerging Managers Formation and Evaluation Brian T. Bares, CFA

  2. 1 EMERGING MANAGER INTRODUCTION EMERGING MANAGER FORMATION 2 EVALUATING EMERGING MANAGERS 3 WHAT NEEDS TO CHANGE 4

  3. What is an EM? • Emerging Managers are: • Small (low levels of AUM) • Young (less than 5 years old) • Owner/Operators

  4. Typical Manager Lifecycle Emerging Managers AUM Time

  5. Why Emerging Managers? Better Performance

  6. Supporting Comments “Hedge Funds under three years of age tend to perform better than do older hedge funds without necessarily adding to the volatility of returns.” - Lazard Asset Mgmt Study

  7. Supporting Comments “The annualized returns of Emerging Managers stood at 9.49% compared with 7.61% for bigger peers.” -Neuberger Berman 2011 strategy outlook

  8. Supporting Comments “Between 1996 and 2008, funds with less than $100mm delivered 13% annually compared with 10% for funds over $500mm.” - PerTrac Financial Solutions Study

  9. Why Better Performance? • Freed of legacy positions • Freedom to be more concentrated • Incentive fees • Flexibility with lower AUM • Niche/innovative strategies • Focused and dedicated talent

  10. 1 EMERGING MANAGER INTRODUCTION EMERGING MANAGER FORMATION 2 EVALUATING EMERGING MANAGERS 3 WHAT NEEDS TO CHANGE 4

  11. What Does It Take? Breakeven Insufficient Recurring Fees Sufficient Recurring Fees

  12. What Does it Really Take? Client’s Interests Manager’s Interests Optimal AUM

  13. 1 Fundraising 2 Optimal 3 Asset Bloat Optimal AUM 2 1 Investment Return 3 AUM

  14. EM’s Time Choices Fundraising Research

  15. Paradox of Investor Demands Marketing & Fundraising Breakeven Sufficient Recurring Fees

  16. EMs Need to Market • Target a receptive niche • Be proactive in raising your profile • Market even at optimal AUM

  17. Figure Out Your “Fit” Public & Hedge Examples Long/Short Equity Global Macro Event Driven Real Assets 2 1 3 4 Private Equity Fixed Income

  18. Our Story Direct Investors Family Offices Endowments Foundations High Net Worth Fund of Funds Seeders Emerging Manager Specialists Strategic HNW Seed Programs One-on-Ones are Critical

  19. Outsourcing Fundraising • Third Party Marketers • Can Be Expensive • EM must still “close” • Personality must fit • Prime Broker/Capital Introduction • Wholesale Relationships Remember: Institutions rarely invest without meeting the investment decision makers

  20. Insourcing Fundraising • Inside Salesperson • Captive 3rd-party marketing • Closer to the investment process • Expensive Investors will still require one-on-ones with the decision makers

  21. Databases Database entry is time consuming but worthwhile BarclayHedge Consultants Lipper Morningstar eVestment Informa Manager

  22. 1 2 New Manager Formation Registration Service Providers Hire Team 3 4 Initial Funding Emerging Manager Low Barriers to Entry

  23. Startup Example $21,195.14

  24. Typical Expenses 80% 60% 100% 40% 20% Compensation 50% Infrastructure 18% HR 13% Client Development 3% Other 8% Income 7% Source: Charles Schwab & Co.

  25. Helpful Hints • Carving out from an existing firm • Existing track record • Expertise • Relationships • Initial Accounts or Partners • Breakeven is an easier hurdle • Existing investors make it easy to attract more investors

  26. 1 EMERGING MANAGER INTRODUCTION EMERGING MANAGER FORMATION 2 EVALUATING EMERGING MANAGERS 3 WHAT NEEDS TO CHANGE 4

  27. The Check Boxes Prospective Institutions May Require: • A Multi-Year Track Record • A Limit on % of Strategy/Fund Assets • Expensive Infrastructure • Transparency • Prior History of Investment Team

  28. Institutional Hurdles

  29. Fewer/Better Check Boxes • Investors with EM-friendly Due Diligence: • High Net-Worth Individuals • Family Offices • Specialty Fund of Funds • Some Foundations and Endowments • Specialty Institutions

  30. Due Diligence for EMs • The Key Determinants for Success: • People • Philosophy • Process • Historical Performance (if relevant)

  31. People • Key Members of the team: • History • Personality • How they work together • Drive and motivation • Intelligence • Investment Skill • Integrity

  32. Philosophy • Value vs. Growth • Efficient vs. Inefficient • Macro

  33. Process • Source of your investment edge • Is it repeatable?

  34. Add text title Add text title Performance The Potential for Outperformance is Everything

  35. One-on-One Meetings • Nearly all Prospective Investors Require One-on-Ones • Meetings Usually Cover: • History of the Firm • Bios on Key Team Members • Investment Approach • Sample Ideas/Investments • Strategy/Fund Structure

  36. Emerging Manager Fees • They are dependent on: • Niche • Optimal Asset Base • Return Potential • EMs should not need to excessively discount if capacity is limited

  37. Chicken and Egg Problem Emerging Managers Institutional Due Diligence AUM Hurdles Agency Issues

  38. Agency Issues Institutions want to avoid being: • More than 10% of strategy AUM • Alone in their allocation Social Proof • Wrong about their decision Maverick Risk Agency Issues

  39. 1 EMERGING MANAGER INTRODUCTION EMERGING MANAGER FORMATION 2 EVALUATING EMERGING MANAGERS 3 WHAT NEEDS TO CHANGE 4

  40. Due Diligence Must… • Remove Barriers to EM Allocations • Length of performance track record • AUM restrictions • Focus on Qualitative Due Diligence • People • Philosophy • Process • Be Proactive and Constructive

  41. $95B to $1.6T $215B to $3.3T All Other Firms All Other Firms The Big Get Bigger Market Share By AUM 75% 25% 2001 2009 Top 30 Firms Top 18 Firms Source: Northern Trust Global Advisors

  42. Benefits of More EMs • Less “too big to fail” • More experimentation • Better institutional performance • More diversity • More industry jobs

  43. In Summary • To BE an Emerging Manager • Be an entrepreneur • Get to know your prospective clients • Have a strategy that fits • Work your ass off • To HIRE an Emerging Manager • Get rid of the impediments for funding • Seek out People, Philosophy, Process • Work your ass off

  44. Thank You Brian T. Bares, CFA

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