Emerging HF Managers Finding a Way Amid Difficult Environment — Evening Brief – 09.16.24

Emerging hedge fund managers face a more difficult startup environment defined by leaner operational models and challenging fundraising conditions, according to a study by the Alternative Investment Management Association (AIMA) and Marex Prime Services.

The report, Standing Strong: Emerging Manager Survey 2024, analyzed the present scenario for emerging managers, which are hedge funds that manage assets worth up to $500 million. It investigated fee structures, staffing levels, and breakeven and operational costs, among other things.

Emerging managers, long considered a vital component of the hedge fund business, are successfully managing competitive fee models while maintaining leaner operating models to remain attractive to investors, according to the report.

Firms are increasingly taking longer to exceed $100 million in assets under management due to a harder capital-raising climate. Nearly half (48%) of investors continue to demonstrate constant interest in funds with a one-year track record or less. However, the number of potential investors who prefer a flagship fund’s track record to be greater than three years has nearly doubled, rising to 22% from 12% in 2022.

However, two-thirds of investors are still willing to allocate to emerging managers with less than $100 million in assets, and about half would contemplate investing with an emerging manager with less than a year of experience.

The results indicate that new hedge funds or those in the process of establishing themselves are operating with a correspondingly reduced operational budget. The average breakeven cost for emerging managers is currently $65 million. Although this represents a modest increase from the $64 million identified in the 2022 study, it remains significantly lower than the $85 million identified in the 2018 study.

Fees continue to be competitive as well, with the average management fee for emerging hedge funds currently at 1.37%, a decrease from 1.40% in 2022. Performance fees have modestly increased to 16.36% from 16.27% in 2022.

“Despite higher costs and intense fee pressures, these businesses continue to stand strong, attract investors and expertly manage expenses to stay ahead,” said Tom Kehoe, managing director and global head of research and communications at AIMA.

The poll includes 171 global emerging hedge fund managers with a total AUM of $18.3 billion. The study also polled 60 investors, primarily fund of funds and single families, as well as endowments and foundations, multi-family offices, sovereign wealth funds, and others, with a total asset value of $400 billion.