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 Cayman Islands and the United States remain the dominant domiciles with more than two-thirds of funds launched in the past year selecting one of these two jurisdictions. Cayman increased its share from 50% to 56% between 2017 and 2024.
Meanwhile, 68% of investors prefer to allocate to offshore managers, up from 58% in 2022, the survey of 171 fund managers and 60 institutional investors found.
‘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 $500 million – 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 assets under management (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.
Tom Kehoe, managing director and global head of research and communications at AIMA, said in a press release, “This year’s research highlights the remarkable resilience and adaptability of small and emerging managers.
“Despite higher costs and intense fee pressures, these businesses continue to stand strong, attract investors and expertly manage expenses to stay ahead,” the report’s co-author said.
Investor interest in emerging funds
The survey reveals several reasons emerging fund managers can be optimistic about investor interest.
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.
There is strong interest in smaller funds as two-thirds of investors surveyed are still open to allocating to emerging managers with less than $100 million in AUM.
And 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, AIMA said.
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.
The survey found that when working with managers investors are most concerned about ensuring robust fund operations and transparency, alignment of the investment approach with investor agreements and the presence of a solid business plan.
Hedge fund operational drivers
AIMA noted that against a macro backdrop of rising costs, the average breakeven point has increased since 2022 when 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.
The survey found that 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-and-20 model.
“This year’s findings highlight that fund managers are resolute in the face of geopolitical and macroeconomic headwinds as fees have held firm, costs are contained, and headcount has been maintained,” said Jack Seibald, global co-head of Prime Services and Outsourced Trading at Marex. “By focusing on costs and efficiencies, smaller and emerging hedge funds are able to succeed in a challenging economic climate.”
