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By Peter Urbani, KnowRisk Consulting
Early signs of a renaissance in Emerging Manager
Hedge Fund Returns ?
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Emerging Manager Funds (defined here as those Hedge Funds Funds which are less
than 36 months old and have less than $300m in AUM) tend to be run by highly
motivated, entrepreneurial and focused managers.

In addition, the exploitable opportunity set they have identified in the marketplace
is more likely to persist over the short-term.

Simply put Emerging / Early Stage Managers try harder.

All of this translates into excess returns or alpha of up to 600bp per annum*.

It is fair to say that the price of this excess alpha is in the form of higher business
risk associated with a start-up operation.

Why Emerging Managers ?
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This places a higher burden of responsibility on those performing qualitative due
diligence to verify the managers ability to properly scale and grow their businesses.

* Depending on which database is used some of this may be attributed to backfill
and / or survivor bias. However, notwithstanding these biases, Emerging Managers
deliver at least 200bp per annum in excess of the returns of established managers.

Emerging Managers do have occasional periods of relative underperformance to
established managers , typically after crisis periods, however the drawdowns
associated with Emerging Managers are also lower.

Why Emerging Managers ?
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Average Returns decrease with time
Average Hedge Fund Returns versus no of Months
8.92%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126
No of Months
R
e
t
u
r
n
s

(

A
n
n
u
a
l
i
s
e
d

)
Avg Ann Returns per no of months
Avg Ann Returns - All periods
The Seven Year Itch ?
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Emerging vs. Established Returns
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Emerging vs. Established Returns
Emerging Managers versus Established Managers
3101
844
0
500
1000
1500
2000
2500
3000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Emerging Managers less than 12 months old and less than
$100m AUM
Established Managers older than 12 months
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Emerging vs. Established Returns
Emerging Managers versus Established Managers
2007
638
0
500
1000
1500
2000
2500
3000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Emerging Managers less than 24 months old and less than
$200m AUM
Established Managers older than 24 months
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Emerging vs. Established Returns
Emerging Managers versus Established Managers
1786
469
0
500
1000
1500
2000
2500
3000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Emerging Managers less than 36 months old and less than
$300m AUM
Established Managers older than 36 months
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Emerging vs. Established Statistics
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What about Survivorship Bias ?
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Only 20% of Funds ever exceed $1bn
Time to achieve AUM Milestones versus % Achieving AUM
1416
26
587
449
345
237
131
7.80%
9.39%
11.68%
15.27%
21.19%
3.72%
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
0 5 10 15 20 25 30 35 40 45 50 55 60
Average time in Months
A
U
M

$
m
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
%

A
c
h
i
e
v
i
n
g

A
U
M
Average Fund Size at time
% of Funds achieving AUM
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Emerging Manager Alpha
Emerging versus Established Manager 'Alpha'
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
MorningStar EM Alpha Eurekahedge EM Alpha
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Fund of Funds Flows finally turn up
Net Asset Flows to Fund of Hedge Funds 1990 Q2 2014
($120,000)
($80,000)
($40,000)
$0
$40,000
$80,000
$120,000
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
Source: HFR
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Number of Funds recovering
Number of Hedge Funds and FoF
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
FoF HF
Source: HFR
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Emerging vs. Established Returns
Emerging v.s. Established Manager Returns
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Emerging Managers less than 36 months old and less than $300m AUM
Established Managers older than 36 months
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After struggling mightily post the GFC there are finally some early signs of a possible
renaissance in Emerging Manager excess returns or Emerging Manager Alpha.

The recent downturn was caused by ongoing fallout from the GFC, uncertainty
about pending legislation and consolidation in the Funds of Funds space.

The total number of Hedge Funds and FoF is approaching its pre crisis high of over
10,000 funds

More importantly, Fund of Funds which were a major source of seed capital for
Emerging Managers have finally stopped hemorrhaging AUM.

As a result we expect to see continued improvements in relative outperformance
from Emerging Managers as hedge fund issuance / new launches picks up.
Conclusions
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Emerging Manager Alpha
Emerging versus Established Manager 'Alpha'
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
MorningStar EM Alpha Eurekahedge EM Alpha
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Emerging v.s. Established Returns
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Persistence Return Risk
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Important Notes
The information contained herein (the "information") is intended for illustrative purposes only, has been developed
internally and has been based on variations of existing funds, managed accounts, simulations, extrapolations of other
investment programs, pro forma data or taken from trade and statistical services and other sources that we deem reliable,
although no warranty is made that the information is accurate or complete and it should not be relied upon as such.
The information is not intended to depict or predict actual investment performance of any financial product and is subject
to change without notice.
Any opinions expressed herein reflect KnowRisk Consultings judgment at the date and time hereof and are subject to
change without notice.
The information should not be construed as legal, tax, investment or other advice.
This does not constitute an offer to sell, or the solicitation of an offer to buy, any product. An offer may only be made by
means of the offering memorandum and governing documents of the relevant funds (the "Fund Documents"), which should
be read in their entirety.
The information is not intended to be complete or final and is qualified in its entirety by the Fund Documents. In the event
the Information is inconsistent or contrary to the descriptions or terms of the Fund Documents, the terms of the Fund
Documents shall prevail.
Interests in the funds are privately offered to investors who satisfy the eligibility criteria described in the Fund Documents.
The Information is CONFIDENTIAL. It is intended only for the use of the person to whom this document is given and may not
be reproduced or redistributed without permission.
Any securities discussed herein may not be suitable for all investors. Transactions of the type described herein may involve
a high degree of risk, and the value of such instruments may be highly volatile.
Past performance is not guarantee of, and cannot be construed as an indication of, future results.