How are emerging hedge fund managers attracting capital and keeping their edge?

Emerging hedge funds are balancing competitive fee models and running lean operating models to remain attractive to investors, according to a new research report by the Alternative Investment Management Association (AIMA) in partnership with Marex Prime Services.

The report ‘Standing Strong: Emerging Manager Survey 2024’ is the fourth report by Marex (formerly Cowen Prime Brokerage) and AIMA on emerging managers – those managing up to $500m – produced over the past seven years.

Key areas of focus in the report include fees charged, employee numbers, costs (including the estimated breakeven costs), performance incentives, fund selection and strategy. Investor survey data explores the required minimum track records and AUM for managers before allocation, along with other possible barriers to allocation and recent sourcing trends. For the first time, respondents were also asked about ESG considerations and liquidity terms.

Hedge Fund Operational Drivers

• COVID-era efficiencies remain: Against a macro backdrop of rising costs, the average breakeven point has increased since 2022 where the COVID environment suppressed spending norms. However, hedge funds have focused on cost and operational efficiencies, allowing the latest breakeven figures to remain below pre-pandemic levels.
• Competitive fee model: The fee model offered by emerging hedge funds remains a vital tool for attracting investors, with the average management and performance fees well below the classic 2&20 model.

Investor Interest in Emerging Funds

The survey reveals several reasons emerging fund managers can be optimistic about investor interest.

• Investor behaviour: Investors are likelier to have placed their latest allocation with a new hedge fund manager than in 2022. More than 85% of investors rely on their personal networks or prime broker capital introduction teams to source new hedge fund managers.
• Strong interest in smaller funds: Two-thirds of investors surveyed are still open to allocating to emerging managers with less than $100 million in assets under management (AUM), a welcome counterpoint to the industry’s bifurcation trend.
• Track record requirements: Half of the investors surveyed said they would consider allocating to an emerging manager with a track record of less than a year.

However, investors also expect more from their managers regarding transparency and communications before making an allocation.

• The average time to close on new investments has increased from six to eight months since 2022, with investors taking a more sophisticated approach to due diligence, making emerging managers work harder to secure new tickets.

Tom Kehoe, Managing Director, Global Head of Research and Communications at AIMA (report co-author), said: “This year’s research highlights the remarkable resilience and adaptability of small and emerging managers. Despite higher costs and intense fee pressures, these businesses continue to stand strong, attract investors and expertly manage expenses to stay ahead”.

Jack Seibald, Global Co-Head of Prime Services and Outsourced Trading at Marex, said, “Our in-depth research with AIMA continues our commitment to gaining insight into the evolving landscape of emerging managers and their investors. This year’s findings highlight that fund managers are resolute in the face of geopolitical and macroeconomic headwinds as fees have held firm, costs are contained, and headcount has been maintained. By focusing on costs and efficiencies, smaller and emerging hedge funds are able to succeed in a challenging economic climate.”

Lawrence Obertelli, Head of EMEA Prime Service Sales at Marex (report co-author), said, “As the only report focusing exclusively on emerging hedge fund managers and investors, this comprehensive dataset spanning seven years offers unparalleled insights into the industry’s evolution. The depth and continuity of the data allow us to understand the unique challenges and opportunities these managers face with a level of detail that other reports don’t typically do.”

About the report:

The findings are derived from two surveys: one of managers running funds of up to $500 million AUM (171 respondents) and the other from investors that allocate to this segment, (60 respondents, with an estimated aggregate AUM of $400 billion). We have also gathered data on hedge funds running between $500m-$1bn AUM, which we present for comparison purposes to act as a roadmap to scaling.

Hedge fund manager survey respondents in this year’s survey had an estimated aggregate AUM of US$18.3bn and an average AUM per manager of $107m. This research amongst fund managers and investors was carried out in H1 2024.

Similar to prior reports, the data has been broken down by region and investment strategy in some areas to provide a more granular analysis of how trends differ within the pool of survey respondents.

To download a copy of the report, please visit this link.

ENDS

About AIMA – The Alternative Investment Management Association (AIMA) is the global representative of the alternative investment industry, with around 2,100 corporate members in over 60 countries. AIMA’s fund manager members collectively manage more than $3.0 trillion in hedge fund and private credit assets.

AIMA draws upon the expertise and diversity of its membership to provide leadership in industry initiatives such as advocacy, policy and regulatory engagement, educational programmes and sound practice guides.

AIMA works to raise media and public awareness of the value of the industry. AIMA is committed to developing skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the first and only specialised educational standard for alternative investment specialists. AIMA is governed by its Council (Board of Directors). For more details go to www.aima.org.

About Marex Prime Services
Marex Prime Services (formerly Cowen Prime Brokerage) is a leading full-service institutional prime broker, with a global multi-asset platform tailored for investment managers worldwide. It has a strong track record in supporting both emerging and established funds seeking to work with a single partner or to diversify their prime brokerage counterparties.

Combining a highly personalised concierge-style service model with a comprehensive suite of award-winning services, Marex supports clients in raising capital, strengthening growth and managing risk at every stage of their journey. Services include high and low touch execution, financing, outsourced trading, operational support, capital introduction and business consulting.

Marex Prime Services is a division within Marex, a diversified global financial services platform, providing essential liquidity, market access and infrastructure services to clients in the financial, energy and commodities markets.

With more than 35 offices, access to all major exchanges and technology-powered data and advisory services, Marex enables clients to outperform in today’s investment landscape.

For further information visit marex.com or email primeservices@marex.com

Press Contact for AIMA:
Drew Nicol
Associate Director, Research and Communications, AIMA
dnicol@aima.org

Press Contacts for Marex Prime Services:
Vanessa Green/Melanie Budden, The Realization Group
vanessa.green@therealizationgroup.com / melanie.budden@therealizationgroup.com
+44 (0)771 333 2303

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