Institutional investors and high-net-worth individuals

Best Practices for Scaling Emerging Managers

Institutional investors and high-net-worth individuals diligently search for alternative investments that can produce genuinely different patterns of returns. Emerging managers must provide investment opportunities that are clearly differentiated from well-established funds. Emerging managers must also pursue profitable niches, new technologies, and complex strategies that are not accessible in public markets.

Hedge Fund Success is Driven by the Team

Implementing a vision requires assembling a team of qualified and motivated professionals. The experience and interactions of team members are more important for emerging firms because the funds themselves have much shorter track records.

While a history of working together ensures that daily operations run smoothly, it can also lead to excessive conformity and systematic failures to identify risks. On the other hand, a hastily assembled team may lack the cohesion and discipline necessary to develop and adhere to a plan.

Informed investors can learn if the right balance exists at a firm by observing the interactions of the investment team. A successful team must give its members sufficient independence to provide critical feedback during the decision-making process while remaining united enough to follow up decisions with concrete actions.

Transparency is Essential to Attract Investors

Transparent goals and operations at an emerging firm are necessary to attract capital and maintain relationships with investors. Perhaps most importantly, managers should always be clear about the aims, risks, and methods of their funds.

Emerging managers must always fully disclose any potential conflicts of interest in a timely fashion. They should also seek investor approval before making any significant changes in how a fund operates.

Setting Sensible Fees and Aligning Incentives

Transparency is essential when setting fees. All fees and other expenses must be clearly stated from the outset. Charges should always be justified by the risks and costs incurred by management. While fees must remain in line with industry standards to ensure profitability, emerging managers may temporarily offer lower fees to attract initial investors for first-time funds.

It is also typically good practice to place fees on capital invested, rather than transactions. However, charges for transactions can make sense if they align with incentives.

Establishing the proper incentives ensures that team members work toward achieving the emerging manager's stated goals and avoid conflicts of interest. We typically expect managers to commit more than 10% of the total capital in the seed capital transaction. Moreover, the money invested should be in cash rather than deferred compensation and amount to a substantial portion of the emerging manager's net worth.

Generally, the back-end model of manager compensation offers better incentives to maintain performance. On the other hand, the deal-by-deal model can sometimes provide more motivation in areas with less consistent payout, such as litigation finance. Ashton Global strives to make sure that the incentives for the emerging manager favor the continued growth of capital over the long run.

A Plan for Growth

Having a unique edge and pipeline of interesting investment ideas is crucial for attracting certain investors. Developing and articulating a plan for growth is also essential for scaling emerging fund managers and retaining long-term investors.

Our platform helps emerging and diverse managers scale quickly with institutional capital. An extensive network of distribution channels and capital introduction opportunities provides sustainable growth for emerging asset managers.

The process begins with screening methods to identify managers that are well-connected in emerging and frontier markets, with interesting pipelines of both public and private investment opportunities. Once we identify potential managers that offer unique strategies, we develop these managers with co-investments or smaller mandates to prove out the investment thesis, and to help them build a track record. Contact us today to join our emerging manager platform