Hedge funds launched by first-time managers produce higher returns than funds started by established firms, according to a new Preqin survey.
The study reveals that the average long/short fund started since 2007 by an emerging manager has yielded annualized net returns of 8.8% in its first three years of trading. In comparison, the annual rate for new funds launched by experienced firms was 5.4%.
However, the study shows that first-time funds launched by new managers are more volatile than funds managed by established firms. The average annualized volatility of returns for established-manager long/short funds was approximately 14.7% during the three years following inception. In contrast, the annual volatility for emerging-manager long/short funds was 17.3%.
The survey also finds that 22% of emerging-manager funds launched since 2007 posted a loss in their first year of trading, compared with 26% of funds started by experienced managers. But first-time managers that saw a loss in the first year tended to experience larger declines.
Despite the benefits of emerging-manager funds, most investors are less willing to consider them than they were a year ago, and investors, on average, are looking for a longer track record from managers before considering them, according to Preqin.
“However, the majority of investors will consider smaller managers with less than $500 million in assets, and this is something that more investors may have to think about, as larger funds become closed to new investment as they reach capacity,” says Graeme Terry, associate commercial manager for hedge funds with Preqin. “To stand out among a crowded market for first-time funds, emerging managers need to ensure that they have a strong team, robust infrastructure and a coherent strategy, as well as strong early performance.”
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