EMERGING MANAGERS—AN INTRODUCTION
“emerging managers” was not often discussed. Subse- quent to the 2008 financial crisis, emerging fund man- agers had to learn how to market and sell themselves like never before. Competition stiffened, fees dropped, and barriers to entry exploded. Differences between pre- and post-crash practices were like night and day. Industrial consolidation created a handful of winners and many, many losers. Regulation and infrastructure costs tight- ened at precisely the same time that new entrants were pouring in. Trusted gatekeepers with direct access to clients ruled supreme. In an effort to survive, emerging managers were required to alter their business models to adapt to changing market conditions. Pivot or die; it was just that simple. Managers had to raise assets and chart unfamiliar waters while navigating SEC regulations and jumping gatekeeper hurdles. They also had to ensure a unique investment strategy and differentiate themselves among an expanding set of competitors. Most importantly, they needed to accomplish all of this while simultaneously gen- erating strong, verifiable performance—preferably with a five-year, GIPS-compliant track record and a minimum of $100 million assets under management (AUM). And therein lies the conundrum: without a lengthy track record and significant AUM, emerging managers cannot attract new assets, and without a significant level of assets, emerging managers cannot generate a lengthy track record. It is a formidable Catch-22.
What exactly is an “emerging manager”? By defi- nition, emerging managers are often referenced in the context of performance track record and assets under management. Of the two factors, AUM is more impor- tant. The length of time or level of AUMvaries depending on the audience, but as a general rule of thumb, the threshold is less than five years performance track record and under $1 billion in AUM. Some programs state that an emerging manager is anything below $2 billion. Life as an emerging manager involved a constant balancing act between raising assets, managing money, and running a business. Post-2008 market conditions made for bleak odds of success. Emerging manager sur- vival rates plummeted. Similar to the woes of a newly hatched sea turtle, only a small percentage ever reaches maturity. The vast majority fall victim to hostile envi- ronmental factors and predatory industry practice.
HIGH INDUSTRY DEFAULT RATES
Exhibits 1 and 2 represent the Evestment database of investor products. Managers who wish to present their performance to potential investors list returns and firm information on this database, among others. It is not used by all managers, although it represents a large number of professional funds. As Exhibit 1 illustrates,
E X H I B I T 1 Traditional Manager Survival Rate
Source: Evestment (Traditional Investments), September 1, 2015.
2 T HE E PHEMERAL L IFE OF AN E MERGING F UND M ANAGER
W INTER 2015
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