Current Environment for Emerging Managers

Based on a number of interviews with prime brokers, recruiters, seeders, attorneys and other service providers, Peltz International found the general consensus is the environment for start-ups is much improved and far better than launch statistics indicate.

Hedge Fund Research says 129 new hedge funds launched in Q2 2020 compared with 84 which launched in Q1 2020. Q1 2020 launches had been the lowest quarterly estimate since Q4 2008 when 56 hedge funds launched. Liquidations during Q2 2020 were 178 compared with 304 in Q1 2020.

Leor Shapiro, head of capital intelligence at Jefferies, observes: “The environment overall is better as far as new launches go. For us, the quality has gone up, the size of launches is up, and the volume of launches for us is up. All the metrics point in the right direction.”

In a given year, Jefferies usually has more than 20 new launches. This year, it is more than doubled.

The pedigree of the new launches is also stronger. Shapiro notes that new launches coming out of blue chip firms is on the rise. “The current generation could be considered the fourth or fifth generation going back to Julian Robertson, the Tiger cubs, and now various others. We’re 20-30 years into the meat of the business.”

Many of the new managers have worked at established hedge funds. “Many started as junior analysts and are now senior analysts and portfolio managers. They are ready to start their own fund,” says Shapiro. “I’m bullish on the environment. A lot of the people I’ve spoken with in the past few months - I think highly of - are ready to launch now or early next year. We’re getting behind them. A lot are raising money.”

The average launch a few years ago for Jefferies was roughly $30 million. This year, it’s up to about $130 million. It’s skewed by a few managers that grew very fast. Still, the median numbers are double of what Jefferies was seeing a few years ago.

Thomas Zucosky of Fox Chase Capital also hasn’t seen a slow-down. He’s seeing more small attractive managers with strategies that are uncorrelated and unique that are willing to do managed accounts than he can handle. He describes the market as “vibrant.”

Ari Glass, founder of Boothbay Management, a multi-manager platform that allocates capital via exclusive and non-exclusive relationships with small and emerging alternative investment managers, says they remained active throughout 2020, making 20 new capital allocations. Around 90% of the non-exclusive relationships are with emerging managers running strategies with less than $100 million at the time of allocation.

Not everyone is so optimistic. “There are launches but times are very uncertain,” says Steve Nadel, a partner at Seward & Kissel. “There has been an up and down in terms of activity. And a number of managers have also hung up the towel.”

Cliffwater’s Chris Solarz observes that in the past three years, there have been more closures than launches. In the last quarter, there were more launches than closures – an encouraging sign.

Zucosky notes that opinions on the start-up environment differ for various reasons. “I’m not in the market looking for people ready to launch. I’m looking for small managers, looking to grow, who will do managed accounts and have uncorrelated alpha and will leverage. Sometimes it’s a new launch. I’m interested in people who have a pedigree, a track record and a small amount of assets. We want to help them grow.”

Strategies

A number of the industry experts highlighted long/short equity funds, specifically technology and healthcare, as well as distressed debt as the likelihood exists that more bankruptcies are coming.

Recently, Jefferies Capital Intelligence is spending a lot of time with managers in the financial space. Financial stocks, including banks stocks, have been beaten down. “In the past few months, we’ve seen six or seven new launches that we believe are high quality. People are coming out of established firms that were financials-focused that will launch now or early next year,” says Shapiro.

Emerging managers in Asia have generated a great deal of interest. Glass says in 2020, Boothbay Management has allocated to 10 managers based throughout Asia.

“I’ve seen a number of long/short fundamental equity launches that cater to Chinese equities or companies that are facing Chinese markets i.e. have exposure via manufacturing, supply chain, customer base or directly trading in China. They are taking a focus in internet and TMT sectors,” says Edite Agolli, principal of Beylere Advisors. “A lot of demand exists for managers focusing on that space. I see a growing demand for quant managers that trade in Chinese equities as well.”

Excerpt from the just-released white paper: The Current Environment for Emerging Hedge Fund Managers. Click here for more details or to order. [email protected]. 212 689 0180