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Next generation of hedge fund managers are emerging more resilient and efficient

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Opalesque Industry Update, for New Managers – The Alternative Investment Management Association (AIMA), in partnership with Cowen, a global financial services firm, has published a new report presenting an analysis of the global emerging hedge fund manager community.

The report, ‘Emerging Stronger: The Next Generation Manager Survey 2022’ is informed by two surveys: one of emerging managers running up to US$500 million in assets under management (AuM), and another of the investors that allocate to them.

Key findings:

• The average breakeven has fallen by 25% from its 2017 level of US$86 million in 2017 to $64 million
• Two-thirds of investors will consider allocating to hedge funds with less than $100 million AuM
• The average time to close on new investments for emerging managers is taking 6.3 months on average and even less, 5.6 months, for managers of sub-$100m funds

The research revealed a community of hedge fund managers that have weathered the recent macro-economic turmoil and have emerged hardier and more resilient than before.

This has been achieved by slashing costs where possible (for example, in real estate and travel and headcount), sacrificing salaries, and greater use of regulatory platforms.

For a long time, it has been recognised that fund managers must have a track record of at least three years and also boast an AuM of over US$100 million before most investors will consider them.

On both these counts, investors surveyed dismissed these views, with data showing that the vast majority would consider a fund that was less than three years old and had under US$100 million AuM.

Moreover, investors appear more willing to engage with managers at an earlier stage in their lifecycle and are taking less time to agree to new investments.

Jack Seibald, Managing Director and Global Co-Head of Prime Brokerage and Outsourced Trading at Cowen commented: “This research provides evidence of a changing landscape for both managers and investors. For funds with up to $500m AuM, the impact of the pandemic has resulted in leaner, more efficient and robust operations, with greater opportunities from investors than at any time in recent memory. The steps these funds have taken to safeguard their businesses during the pandemic stand them in good stead moving forwards. These firms have largely insulated their businesses from recession and have the resilience to withstand the predicted economic turmoil ahead.”

Tom Kehoe, Managing Director, Global Head of Research and Communications at AIMA, said: “It’s heartening to see that despite the troubles of COVID, the next generation of fund managers are emerging leaner and more business savvy. Through this research, we have found that firms can build strong and thriving businesses on much less than was previously thought.

Meanwhile, the stability of the fee levels since 2017 offers an optimistic health check on the industry and suggests investors continue to see value in allocating to emerging managers.”

Survey details

This report provides an update to a 2017 report by AIMA which looked at the same demographic. Key areas of focus in the surveys included fees charged, average headcount, costs (including the estimated breakeven costs), and the average length of time to close on a new investment, among other areas.

The data was also interrogated by groups of emerging managers in APAC, North America and EMEA to add context to the numbers.

The manager survey had 149 respondents with an estimated aggregate AuM of US$16.7 billion and an average AuM per manager of $112 million. This research was carried out in Q4 2021.

The investor survey had 26 respondents who together allocated around US$50 billion to hedge funds. Just under half (48%) of investors surveyed allocate more than US$1 billion to hedge funds.

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1 Breakeven refers to the threshold of total costs of running the firm that must be met before it begins to turn a profit

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