Emerging Manager Program –A Hedge Fund Strategy

Hedge funds are alternative investment classes which use strategies like event driven; long/short equity, long/short technology, global macro, volatility and interest rate parity and these funds are less correlated with the traditional investment classes like equities and fixed income. Emerging manager program a strategy which is employed by the hedge funds over the last decade, is becoming more popular now with the rising number of emerging managers. By definition emerging managers are managers whose asset under management is less than or equal to one billion dollar or the managers who belong to any ethnic minorities or women or disabled veterans.

The main objective of the emerging manager program is to identify and help the young developing fund managers who is generating good risk adjusted alpha, and to unlock the opportunities which would otherwise be hidden, and to diversify the investment and to protect the capital  when the markets are in a downturn.

California State Teachers’ Retirement Trust (CalSTRS) a California based retirement pension fund, which is the thirteenth largest public pension fund in the world with total assets under management of $189.70 billion and the California Public Employees Retirement System (CalPERS)which manages pension and health benefit of more than 1.6 million California public employees which is the largest public pension fund in the US with total assets under management of $300.30 billion. CalSTRS and CalPERS announced a joint control on April 2006 to create a database of emerging managers and financial service providers. The main objective of this joint control is to capture the untapped talent in the investment industry to diversify their investments. According to their database there are 130 real estate emerging manager and diversity manager with total asset of $10.4 billion in the real estate space, of which 32 (24%) are Women/Minority owned funds.

There has been a lot of studies which show that the small managers can generate better risk adjusted returns for institutional investors. Franklin Templeton and Morgan Creek, which are also in the business of raising money for investing in emerging managers, conducted a survey which revealed that more than 50% of the small managers with total assets under management of $1 billion or less are able to generate better result than a similar larger fund which is investing in the same sector.

In addition to generating a higher risk adjusted alpha there are lot of additional advantages of investing in emerging managers, which includes identification of “Fresh Talent” with new strategy, new ideas, new energy and new structures which has the potential to deliver better results and additional diversification in  the particular sector, and smaller managers are more projected towards their strategy and they are better aligned with their investors and are more adaptable to the dynamic market conditions than their larger rivals and thus preserving the capital during the market downturn. Another advantage of investing in emerging manager is to getting into a good relationship with the emerging manager from the beginning and so a getting chance to stay with them as they emerge.

Presently lot of other funds like endowment fund, a fund used by nonprofits, colleges and churches which are funded by donations, funds of hedge funds which mainly invests on another hedge fund and foundation funds, a fund managed by nonprofit public or private foundations started using the emerging manager program as one of their investment strategies to generate excess risk adjusted alpha.

This blog is written by Ebenezer R Benjamin, CFA Level 1 Candidate, Semester III, MBA-FA (2014-16), Delhi Campus.

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