01/02/2012 Author: Elana Margulies

Investors size up emerging funds

Amid the discussion and predictions at last week’s GAIM USA 2012 conference in Florida, the popularity of smaller managers was a prominent topic for those identifying industry trends for the year ahead

After a period spent largely on the periphery of investor plans, smaller hedge fund managers look set see their popularity increase this year. Industry developments, data and sentiment are all helping paint an optimistic picture, and opinion at this year’s GAIM USA 2012 conference did little to suggest otherwise.

Speaking to HFMWeek on the sidelines of last week’s Florida-based event, Richard Bartels, heads up third-party marketing for Boston-based Race Rock Capital, said smaller managers – with their focus, hunger for success and a growing ability to outperform larger peers – offer more flexibility and can ably accommodate clients’ needs.

“They are being held to the same standards of due diligence as the bigger managers, but can be more easily vetted by the investor who will then benefit from early-year returns that are well documented in literature,” he said.

“Larger funds, like larger investors, have been cautious and failed to deliver or receive performance because of the committee decision impact,” he added.

A recent survey by data and intelligence provider Preqin, released in January, revealed institutional investors are expected to deploy $1bn or more to hedge funds this year, of which many will allocate to emerging managers. More specifically, about 70% surveyed said they would consider an investment in smaller funds.

New York City Retirement Systems is one such institutional allocator, which at the beginning of the year said it would increase its investments in emerging managers. Its decision comes hot on the heels of other municipalities who have also made a similar step. Late last year, HFMWeek reported that the City of Richmond Retirement Systems hired seeding firm Protégé Partners in order to gain further exposure to new hedge fund talent.

Also attending GAIM USA 2012 was Ronen Schwartzman, founder and CEO of New York-based hedge fund advisory firm Ten Capital Advisors. He told HFMWeek his investor clients have expressed increasing interest in emerging managers, defined by him as those with between $100m-$400m of AuM as well as a three-year track record managing their own fund.

“Last year, investors realised investing in large hedge funds is not like investing in large-cap stocks. They saw there is value in hedge funds and they are looking more on the emerging manager side,” said Schwartzman.

“It is easier to manage a smaller amount of money, you can be more nimble in your security selection, as most of their liquid net worth is in the fund and they are hungrier to succeed. They are much more accessible during the due diligence process,” he added.

In terms of strategies, global macro and long/short equity appear to be investor favourites, said Schwartzman, arguing that macro funds are benefiting amid the economic slowdown and increased market volatility.

Daniel Solomon, chief operating officer of Lyford Group International – a nearly $100m global macro manager in New York, has seen institutional investors continuing to express interest in more liquid strategies. “Institutional investor interest in global macro and other nimble liquid trading strategies appears to remain strong in 2012,” he said.

“The reasons allocators cite include: the ability to generate returns, lack of market beta in their portfolios, generally liquid investment terms and greater potential to capitalise from market dislocations, should they occur,” he said. It is no coincidence that Sprott Asset Management, a Canada-based $9.1bn investment manager focused on commodity investments, had its second close of $350m earlier this month on its Sprott Physical Silver Trust, a pure silver bullion NYSE-listed investment.

The close happened at virtually the same time as the manager filed the Sprott Physical Platinum and Palladium Trust on the Canada’s Toronto Stock Exchange – the firm’s third closed-end fund.

“We are very bullish on the outlook for metals products,” said Eric Sprott, founder. “I believe the market has made gold the reserve currency,” he added.

If the findings of Preqin prove correct, and more institutions besides New York City Retirements Systems and City of Richmond continue to find ways to deploy capital to the up-and-coming players in the industry, smaller funds like Lyford may well be able to reap the benefits of fresh inflows this year.