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.

About the report

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

Hedge fund manager survey respondents in the survey had an estimated aggregate AUM of $18.3bn and an average AUM per manager of $107m. The research was carried out in H1 2024.