Why Now is a Great Time to Start a Hedge Fund

Though hedge funds have struggled in recent years due to market conditions that have stifled performance relative to other investment vehicles, there has been a steady stream of entrepreneurial managers who are confident about opportunities in the space and are eager to set up their own shops. Further echoing this optimism, industry research predicts that hedge funds will return to favour with institutional investors expected to increase their allocations in the coming year. Stephen Lewis, Maples Fund Service's Regional Head of Sales and Relationship Management - Europe, explores the considerations that go into launching and growing a hedge fund and the resources new managers can leverage to position themselves for success in this highly competitive market.

Increasing Allocations to Hedge Funds

Alongside the more established hedge fund managers, new launch and emerging managers are working hard to differentiate themselves in a crowded market.  They are offering more choice to allocators by examining new investment opportunities in emerging geographic markets such as India, Vietnam and Korea, or in the rapidly developing fintech sector which encompasses advancements such as artificial intelligence, robotics and blockchain technology.  These managers are also focused on making their funds more attractive through innovative fee schemes which have moved beyond the standard '2 and 20' approach of years past.

Investors have taken notice of these efforts with Preqin's 2018 Global Hedge Fund Report noting that 46% of hedge fund investors plan to maintain their allocations in 2018 while 27% plan to increase them – the highest proportion that plan to do so since December 2014 and an acknowledgment of the opportunity hedge funds provide for diversification and downside risk protection.

Often though, there are a number of other factors – such as the size of fund and the manager’s general approach – that can support attracting and retaining capital. While larger funds can tout an established track record, more recognised talent and the infrastructure to support investor demands, the ways in which they can differentiate themselves from the competition can be quite limited.  This is where opportunity lies for emerging managers to gain traction in this space.

Smaller Funds Outperform

Given the inherent nimbleness of smaller funds, they tend to have a reputation for delivering better performance.  Quantitative research supports this opinion as well with Eurekahedge's Indices illustrating that smaller-sized funds have posted the best gains in 2017 with small hedge funds (under US$100 million) touting a 8.61% return and medium hedge funds (between US$100 million and US$500 million) realising a 8.43% return.  Comparatively, large hedge funds (between US$500 million and US$1 billion) and funds with US$1 billion or more experienced gains of just 6.43% and 5.88% respectively over the same period.

Flexibility to Capitalise on Niche Opportunities

Now is a Great Time, But…

Be Prepared for Operational Due Diligence

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