Why Investors Should Consider Investing in Emerging Managers

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WHAT IS AN EMERGING MANAGER? • Typically, emerging managers operate newly formed funds with a relatively small asset base. Easier to execute certain strategies with fewer assets Manager can remain focused and nimble on execution • Small funds under $100M represent more than 60% of the hedge fund universe. However, larger funds of over $500M represent over 85% of total hedge fund assets. * • Minority-controlled firms such as women-run hedge funds, are sometimes considered a part of the emerging manager space. @DarcMatterHQ *According to a study by BarclayHedge D A R C M A T T E R

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PERFORMANCE YEAR 1 YEAR 3 YEAR 5 YEAR 7 ESTABLISHED MANAGERS EMERGING MANAGERS According to a Preqin study, first-time funds Since 2007, the average emerging manager However, emerging managers experienced have generally posted superior returns long/short fund returned 8.8% net of fees in more volatile returns compared to during their first 3 years compared to the its first three years of trading while established managers. those of funds launched by veteran fund established managers returned 5.38%. managers. Sharpe Ratios were similar for both emerging and established managers across all strategies @DarcMatterHQ D A R C M A T T E R

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REASONS FOR OUTPERFORMANCE In order to survive, emerging managers need to outperform their peer group to attract assets and build their business. @DarcMatterHQ Emerging managers tend to be more nimble in making investment decisions while not having to deal with bureaucratic and approval structures inherent in bigger firms. Emerging managers can also invest in smaller investments that are simply too small for multi-billion dollar managers. D A R C M A T T E R

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THE DIFFERENCE IN FEES • Established managers generally tend to deal with more institutional investors. A large AUM means proportionally large management fees. As institutional investors tend to be more risk averse, established managers may not want to alter their risk-return profile for the possibility of greater returns. • Emerging managers have the rely more on performance-based compensation. This leads to more aggressive and risky strategies, which translate into potentially higher returns with more volatility and greater potential losses. @DarcMatterHQ D A R C M A T T E R

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ADVANTAGES EMERGING MANAGERS HAVE NEW MANAGERS Emerging managers can begin Can learn from mistakes made by Are less likely to be plagued with an unhealthy with a blank slate, as opposed to managers in the past. firm culture, old operational and technological established managers with systems, and unqualified employees. legacy operational inefficiencies. Typically, building an operation from scratch today will result in more efficiency than building off of old legacy systems from ten years ago. @DarcMatterHQ D A R C M A T T E R

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GROWING INSTITUTIONAL INTEREST IN EMERGING MANAGERS Pension funds and endowments are increasingly setting mandates to invest in emerging managers. The 3 largest pension funds in the U.S. have mandates for including allocations to emerging managers that are majority-owned by people who have been underserved or excluded from the industry, such as minorities or women. A program introduced by the North Carolina Department of State Treasurer required the Equity Investment Portfolio to include emerging managers. These initiatives serve to seek the highest ROI as well as the additional social benefit in supporting SME’s in the community. @DarcMatterHQ D A R C M A T T E R

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CHALLENGES EMERGING MANAGERS FACE Raising capital is difficult for firms without an extensive track record. • Oftentimes a new manager will launch with seed money raised from friends and family. • Early performance will allow the fund manager to market a track record of solid returns to outside investors. • Crucial to form a quality investment team, good operational infrastructure, and trustworthy service providers. Without these resources, managers have to divert their time & energy away from investment strategy execution. • An increasing option: Emerging managers take on a strategic partner that provides capital in exchange for economic benefits into the hedge fund. @DarcMatterHQ D A R C M A T T E R

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EMERGING MANAGERS REPRESENT HIDDEN TALENT • Many emerging managers rise from established hedge funds or private equity firms. • Talented managers take this legacy information and experience with them while also taking advantage of the benefits inherent in being an emerging fund. • The biggest funds dominate the attention of institutional investors, leaving an opportunity for other investors to source hidden and often overlooked talent. • The advantages present in emerging funds may be worth the due diligence required to sort out and find emerging talent in an increasingly fragmented hedge fund space. @DarcMatterHQ D A R C M A T T E R

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CONCLUSION NO FINANCIAL ADVICE – The Information on this presentation is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. The Information contained in or provided from or through this forum is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information on this website and provided from or through this forum is general in nature and is not specific to you the User or anyone else. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS FORUM WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. You understand that you are using any and all Information available on or through this website AT YOUR OWN RISK. @DarcMatterHQ D A R C M A T T E R

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DarcMatter is an online investment platform where investors can transparently access alternative investment opportunities. @DarcMatterHQ Visit DarcMatter at: https://www.darcmatter.com/ Find this video helpful? Check out the DarcMatter blog at: www.darcmatter.com/blog

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