Preqin: Emerging Hedge Funds Outperform Established Peers

Jul 5 2017 | 11:28pm ET

Emerging hedge funds outperform their more established peers in their first three years, according to new research from Preqin, booking consistently higher returns than the industry at large. 

The new research examines the industry’s newest entrants in two ways; first, as “small” first-time funds with $300 million or less in AUM, and secondly, as “new” first-time funds with a three-year track record or less. 

Each group has posted higher returns across 12-month and 3- & 5-year annualized horizons compared to the wider fund industry, Preqin’s research found. In particular, “New” emerging hedge funds have posted higher rolling 12-month performance than the wider industry for most of the past five years. While this level of performance has historically been accompanied with a higher level of volatility, the company notes, three- year volatility for “new” funds has converged with that of the wider industry in 2017. 

Results of the research were contained in Preqin’s June 2017 Hedge Fund Spotlight. Other key emerging hedge fund facts: 

  • “New” emerging hedge funds show the strongest performance, returning 14.10% across 12 months, and 12.22% annualized over five years. In comparison, emerging hedge funds classified as “small” added 11.91% and 8.98%, respectively, over the same time frames, whereas the wider industry returned 10.22% and 7.71%, respectively. 

  • Since January 2012, “new” emerging hedge funds have consistently recorded higher rolling 12-month returns compared to both “small” ones and the wider hedge fund industry. 

  • While emerging hedge funds show slightly higher risk metrics, three-year volatility for “new” ones has converged with that of the wider industry in 2017, and now stands at 4.03% compared to 3.70% across all hedge funds. 

  • “New” emerging hedge funds have significantly higher five-year Sharpe ratios (2.51) than both “small” ones (1.56) and the wider industry (1.54). 

  • Investors prefer to invest in “small” funds. Seventy-two percent of active hedge fund investors will consider “small” emerging hedge funds, but only 32% will consider one with a three-year track record or less. 

  • Funds with a three-year track record or less are more dispersed geographically: 21% are based outside of North America and Europe, compared to 15% across the industry as a whole. 

  • Half of “new” emerging hedge funds follow an equity strategy, above the industry average (43%). Meanwhile, 16% of “small” emerging hedge funds are CTAs, compared to just 9% across all hedge funds. 

“After seeing outflows across 2016, improved recent returns have resulted in investor inflows to the hedge fund industry for the first time in five successive quarters in Q1 2017,” said 
Amy Bensted, Head of Hedge Fund Products for Preqin. “This has set the tone for emerging managers in the asset class; with the past performance of first-time funds stronger than that of the wider hedge fund industry, now could be a prime opportunity for new hedge fund managers. 

“Notably, newer funds have generated strong returns [and] achieved higher net gains than small funds,” she continued. “This stronger performance may encourage institutional investors to look past the risks of these first-time funds and find opportunities with emerging managers. Indeed, the volatility of funds with a track record of three years or less has decreased and converged with that of the wider hedge fund industry, indicating that investors can access the better returns these funds may present with a comparable level of investment risk.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. More than 40,000 professionals in 90 nations use the company’s products.

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