Although we hear more often in the media about large asset managers, there can be substantial advantages to investing with a smaller and more nimble manager. In fact, evidence suggests
that taking advantage of market opportunities becomes more difficult when managing a large portfolio. Some strategies or asset classes such as small capitalization stocks or certain derivatives may even be completely off limits to large hedge funds or portfolio managers.
The following article from Business Insider, explains the reasons behind the trend toward allocating assets to emerging managers: Change in the Hedge Fund Industry.
Reasons to choose an emerging manager:
- Recent studies have shown that emerging managers are more successful in preserving investor capital
- Personal compensation is more directly tied to portfolio performance, unlike larger managers who have a sizeable “cushion” from baseline fee income from larger asset pools
- Substantial alpha potential due to higher active share portfolios
- Early stage access to capacity constrained asset classes/ strategies
- Better alignment of incentives through independent firm ownership
In short, emerging managers have the ability to:
- Take advantage of opportunities in all markets including the most thinly traded
- Choose from a complete range of asset classes instead of being limited to traditional blue chip stocks and bonds
- Be more nimble in entering and exiting positions
- Be flexible to adapt to the needs of individual clients
- Offer more competitive pricing structures