New Normal’ requires nimbler, younger and smaller managers, says IMQubator’s Tielman
Jeroen Tielman, CEO and founder of multi-strategy hedge fund incubation platform IMQubator, sees advantages from nimbler, younger and smaller managers in the ‘New Normal’ world of investing.
Alpha, more than ever, must be the guiding star for investors in the years to come. The investment world has been transformed beyond recognition. The risk free asset – in the form of government debt – is now anything but risk free, and the ability of governments to renege on commitments without defaulting also renders credit insurance worthless.
Volatility rewards those with a flexible and dynamic approach to risk taking, and punishes those investors trapped in the straitjacket of traditional investing. Equities, commodities and currencies have displayed extreme volatility and governments are interfering with markets in many ways. Long only investors can only profit from half of the opportunity set in any market, since they cannot profit from lower prices.
In spite of all these concerns about conventional investing, most pension funds remain overwhelmingly invested in traditional assets. The long only bias of most institutional investors is ill equipped to meet their liabilities that keep on growing – with inflation, life expectancy, and other demands – whatever happens to equities and bonds. Only absolute returns, ahead of zero, can hope to meet these liabilities, which have no real link to conventional asset classes. Against this challenging landscape, skill based, absolute return investing is a pre-requisite.
Emerging hedge fund managers deserve to form a core element of any alpha generation strategy. Time and time again, academic studies confirm the outperformance of newer and smaller hedge funds as the entrepreneurial spirit shines through bull and bear markets. The latest research, a new report from PerTrac called Impact of Size and Age on Hedge Fund Performance: 1996 – 2011, reported that small funds with assets of less than $100m have outperformed large funds (those with assets of over $500m) in 13 out of the last 16 years. In addition, young funds (those started within the previous two years) had cumulative returns of 827% since 1996, well beyond the 350% posted by funds in operation for more than four years.
Yet these studies focusing on fund performance nearly always ignore several other performance engines enjoyed by hedge fund seeders: discounted fees, seeding economics and acceleration economics. In some cases these may only be the icing on the cake, in other instances these additional return sources can eclipse even the premium investment performance produced by emerging managers.
It is clear that nimbler funds, like speedboats, are better equipped to explore and navigate the unknown, uncharted waters that make up the “new normal” of the current political and economic environment. Larger funds operate like supertankers and need a longer time to test the waters and change course, while they also need to be prudent and stay in deep water only. The present economic climate favours the quick and nimble and could punish the large, slow and cumbersome.
So now could be the time to make allocations to more agile funds with multiple return drivers, and potentially better transparency and governance.
Jeroen Tielman is CEO and founder of IMQubator, a leading multi-strategy hedge fund incubation platform