During the financial crisis, investors flocked to the safe haven of big, well-established hedge funds. But the lackluster returns of some of these funds may have tempered the notion that bigger is better.
Smaller funds and hedge fund start-ups offer a healthy premium to investors brave enough to take the leap, says Jeroen Tielman, CEO of seeding fund IMQubator, in an article in EuroMoney magazine.
“Start -ups are no more risky on the investment and risk-management side; they tend to be experienced investors. Their lack of experience is only on the operational side. Most emerging fund failures stem from operations problems, or failures in sales and marketing,” Tielman said.
What’s more, start-up funds can be bolstered with the assistance of seeding funds: funds that contribute capital to smaller hedge funds allowing them to expand. Tielman thinks 2012 will be a strong year for these smaller funds, strong enough to perhaps even reverse the flight to safety in big funds.
Marketing firm and consultancy Agecroft Partners agrees in a report indicating that it expects 2012 to be a strong year for hedge funds, predicting $100 billion in net inflows for the coming year.
This would be the highest water mark for inflows since 2007. And Agecroft suggests that small- and medium-sized firms may benefit the most as concern over diluted alpha in large funds weighs on investors’ minds.
In addition, larger firms such as IMQubator that “seed” hedge fund starts-ups can help these fledgling firms with the transparency, operational support and marketing clout to make an impact on the market.
“We demand transparency from the outset,” says Tielman. “Since we work with new funds, we can put in place the proper structures for transparent operation, without having to remove a pre-existing system. We can make sure that the proper balance between managers and investors is there from the beginning.”