Track records are heavily relied upon as important data that institutional investors evaluate when considering allocations to hedge fund managers. Most investors do not maintain strict minimums in terms of track record length, and many operate with ranges as guides as opposed to being a clear requirement within their respective investment policies. Preqin’s Hedge Fund Investor Profiles has extensive information on investors globally, including their preferred minimum track record requirements when considering investments with hedge fund managers. In this blog, we will examine the characteristics of investors in regard to their stated track record preferences, and to what extent this information is at the forefront of all investors’ minds during fund manager selection.
While the vast majority of investors reporting to Preqin (66%) target managers with a minimum track record of between three and five years, investors preferring minimum track records of less than three years (27%) outnumber investors with a required track record of at least five years (7%) by nearly four to one. Preqin data suggests that the majority of investors demand a healthy number of years’ experience from hedge fund managers. This is unsurprising as experience provides proof of the characteristics and abilities of the fund manager. Nevertheless, there is evidence to suggest that institutional investors are more willing to allocate capital to newer, emerging managers, rather than limiting themselves to the most established firms.
Furthermore, Preqin data reveals that investors with larger assets under management (AUM), and those with a higher exposure to hedge funds, are more likely to have lower manager track record requirements. For instance, Preqin data shows that larger investors are willing to invest in managers with track records of less than three years – these investors have an average of $32.5bn in AUM, and allocate on average 14.5% of their portfolio to hedge funds. By comparison, more conservative investors targeting track records in excess of five years manage an average $11.2bn in AUM and typically allocate 11.4% to the asset class. It can be argued that larger investors have the experience and resources to allocate to newer, potentially riskier hedge fund opportunities through emerging managers while relatively smaller institutional investors prefer to see proven track records of at least three years. Moreover, investors with a lower exposure to hedge funds tend to favour managers with longer track records, indicative of a more conservative approach to hedge fund investing.
While larger investors appear to be inclined to consider less experienced managers, this alone is not enough to attract capital from these large institutional investors. They have the knowledge and experience to identify opportunities without focusing entirely on the lack of an extensive track record, and perhaps are more inclined to tap into unique opportunities and strategies that these prospective managers could offer. Moreover, institutional investors with higher hedge fund allocations will also consider managers with a shorter track record. The experience and confidence of these investors in the asset class demonstrates their ability to consider talented emerging managers and appear not to be deterred by the lack of a proven track record. For other institutional investors, however, track records remain an important aspect of fund manager selection, and so they would prefer to see evidence of the manager’s abilities before investing.