The Window is Opening for Smaller Newer Managers

With elite multi- manager firms closing to new investors, some investors are moving to new or smaller managers to fill the void.

The pandemic hurt asset raising for smaller new managers but the situation is improving.

“We had seen bifurcation between larger and smaller managers due in part to the pandemic and the inability of investors to do on-site due diligence. That made it more difficult for new managers to meet new people and attend conferences. Once investors became accustomed to online conferences and Zoom manager meetings, it changed. But it took a long time for people to accept this way to conduct due diligence,” observes Amy Hirsch, chief executive officer of Paradigm Consulting Services.

The pandemic put a big strain on investors and how they could allocate and rebalance assets. Because they couldn’t travel, they tended to reallocate or re-up to existing managers. It was very difficult for very small managers to raise money.

“That continued to some extent until the middle of this year. We are now starting to see investors allocate to new managers,” Hirsch adds. “Allocations are stronger than they were – even without travel.”

Susan Waterfall, director of marketing and investor relations at Morgens, Waterfall, Vintiadis & Company, a firm with about $200 million under management, is seeing more interest for funds between $100 million and $300 million. It had been difficult to raise assets during the pandemic but now they plan on having meetings with investors and embark on a marketing campaign. Their focus is on institutional investors globally who want to add hedge funds to their portfolios.

Investors are looking at a variety of strategies ranging from relative value for consistent, but lower performance expectations to lending strategies to outright long strategies. It really is across the board, says Hirsch.

She feels smaller managers have a slight advantage now. “Institutions tend to have a larger need for managed accounts. They’re willing to go to smaller or second tier managers because they can get a managed account set up easily, transparency is more readily available as are the terms they need in exchange for larger allocations. In addition, trading strategies are getting attention now because of the pick-up in volatility and the current shift in policies.”

Others feel, however, that the field for emerging managers is much smaller today. One industry expert, who wished to remain anonymous, says the top emerging managers are already picked over and have joined the multi-strategy funds.

“Each large multi-manager firm often has more than 100 portfolio managers. Because of their compensation structure, the top 1000 portfolio managers are working at large multi-manager firms. ?It’s about economies of scale. Portfolio managers at a multi-manager fund are typically paid about 13-15% if the fund charges 2/20. If the portfolio manager manages $100 million and makes 100%, the portfolio manager gets paid $13-15 million. Millennium reportedly can pay a full 20% which is what they’re doing with their best portfolio managers. So, you can’t be a small emerging manager like you could in 2005. It is difficult for a smaller manager today to comply with regulatory requirements, hire people, answer investors, and write monthly reports. It is too time- and resource-consuming.”

Excerpt from just-released Peltz International White Paper, “Stars Aligning for Hedge Funds.” 212 689 0180, https://peltzinternational.com/product-category/research/

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