Small Managers Surge

Terry Flanagan

2012 is projected to be a year of raising assets for growing hedge funds, according to some market observers.

According to the Institute of International Research (IIR), 40% of emerging hedge funds are aiming to raise an excess of $50 million or more in new assets.

Often sought for their innovative, off-the-radar strategies and lack of asset bloat, some institutions have reportedly prefer actively investing with start-up managers, defined at having less than $250 million in assets.

“In a competitive hedge fund environment, institutional investors think smaller, more nimble funds are more likely to outperform their larger peers,” said an unnamed institutional investor.

The IIR surveyed 90 emerging managers that attended its signature GAIM conference and reported that 40% of expect to raise more than $50 million in new capital in 2012—in some cases, doubling their assets, though cited that capital raising is the most “difficult” challenge in the year ahead. Larger hedge funds project they will increase assets under management by 20%.

Due to recent legislation that mandates larger pensions to diversify alpha generation amongst a variety of hedge fund sizes, the $230.1 billion California Public Employees’ Retirement System (CalPERS) and the $72.6 billion New Jersey Division of Investment are among the few plans that have made significant investments in small hedge funds in the last few years, and sources say the bulk of U.S. corporate and public pension funds have yet to make the move.

Consultants have been helping. The institutional intermediaries often coined the “gatekeepers” between institutions and alternative investment firms are playing a bigger role in introducing hedge fund managers to pension funds. According to Reuters, the State of Wisconsin Investment Board is currently using the consultancy Cliffwater to identify suitable hedge fund investments for 2% of the state’s $69.6 billion pension fund.

“Next year will be an impressive year for emerging manager growth, and we are already starting to see interest improve,” said Nathan Anderson, principal of alternative investments at Blue Heron Capital and chief executive of ClaritySpring, a firm focusing on hedge fund transparency services.

“When Madoff and the financial crisis hit in 2008, the focus shifted– investors sacrificed performance for safety and flocked to the larger funds with infrastructure and well-recognized brand-names,” Anderson said. “Every year since then hedge funds have improved transparency and investors are starting to feel more comfortable looking at smaller managers again.”

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