Preqin’s Hedge Fund Investor Profiles database currently tracks 876 institutional investors that invest in, or are actively considering investing in, emerging manager hedge funds. Of these investors, 58% are based in the US, with 32% based in Europe and 10% based in Asia and Rest of World. Recent Preqin research has shown that the majority of these investors (83%) invest in emerging managers due to the potential of new funds to generate stronger returns. Such funds can also provide a number of other benefits to investors such as more favourable terms, access to new strategies and a greater alignment of interests with the fund manager.
2011 proved a difficult year for emerging manager hedge funds seeking institutional capital due to the uncertain economic outlook of recent years. Appetite for first time funds amongst institutional investors has fallen slightly with 48% investors indicating that they would invest in emerging managers in 2011 compared with 54% in 2010. Despite the potential benefits of emerging manager funds, many investors still view emerging managers as too risky due to their lack of track record and as a result fundraising for such funds has proved difficult over the last few years.
Emerging managers tend to be more popular amongst experienced hedge fund investors and as a result funds of hedge funds remain the most important source of intsituional capital for first time funds. In 2011, only 16% of fund of hedge funds managers ruled out investing in emerging managers, showing that there remains a strong appetite for these managers to diversify their portfolio with more embryonic funds. Over the course of 2011 and early 2012 there has also been the launch of several dedicated emerging manager platforms and seeding vehicles. Swedish firm SEB Asset Management is an example of a manager that specifically targets first time funds and the firm plans to add a further four emerging managers over the course of 2012.
Endowment plans are the second highest allocator to emerging manager hedge funds with 58% of this investor group indicating that they would invest in first time funds. Investment in emerging managers amongst this group of investors has followed the overall investor trend having dropped from 65% in 2010. Family offices (44% will invest in first time funds) and asset managers (42%) also remain a popular source of capital for emerging managers, although such funds are less popular with foundations (26%) and pension funds (26%) as many of the investors in these groups do not have the necessary resources to carry out due diligence on new managers.
Overall, the financial crisis has made it more challenging for all hedge fund managers to raise capital and this has proved even more significant for emerging managers due to the tendency of some investors attempting to ‘play it safe’ by investing in managers with a longer track record. Despite the fact that this outlook is likely to continue throughout 2012, there is still reason for emerging managers to remain positive. The Preqin data shows that there is still a significant appetite for first time funds amongst institutional investors and their potential to generate higher returns could be vitally important to investors disappointed with the performance of their existing managers.