Northern Trust released a study demonstrating that smaller hedge funds can provide stronger returns and better downside protection in volatile markets than larger ones investing in the same asset class – large-cap U.S. equities.
“Our new study indicates that emerging managers may help investors squeeze more out of their most important, and most challenging, asset class,” said Ted Krum, CFP, Investment Program Manager for the Program Solutions Group at Northern Trust Global Investments, the asset management arm of Northern Trust. “Despite market declines and portfolio reallocations, U.S. equities still make up the largest portion of many institutional client accounts, making this asset class a key driver of performance for institutional investors.”
According to Northern Trust’s new research, titled No Contest: Emerging Managers Lap Investment Elephants, investment firms with less than $3.6 billion under management – the smallest firms that collectively manage 1 percent of all assets in the institutional market – outperformed the largest firms and all other groups studied, as well as the S&P 500 Index, over the five-year period ending June 30, 2010 .
Northern Trust examined eVestment Alliance performance data for large-cap core U.S. equity products managed by 284 investment firms of all sizes, with total assets under management of $12.3 trillion. Details of the study include:
• Firms with less than $3.6 billion under management gained 0.67% per year in their active large cap U.S. equity portfolios for the five-year period, a higher return than larger firms or the S&P 500 Index, which was down –0.80% per year over the same period.
• Small firms tend to reduce risk when it counts the most – in bear markets. The emerging manager composite outperformed the S&P 500 Index in five of the eight bear quarters over the past five years by a cumulative 3.65% – the best results of the groups studied. They were also the only group with total volatility less than the index (18.1% per year versus 18.5%).
• The median small manager outperformed the median large firm by 72 basis points per year, which translates to an advantage of more than $7 million on a typical $200 million institutional allocation over five years.
• When all active large cap U.S. equity products are pooled into a single universe, emerging managers make up 44 percent of the top performance quartile and only 28 percent of the bottom quartile, while comprising 36 percent of the overall pool of managers. Large firm results are skewed in the opposite direction, with a smaller share of the top quartile and larger share of the lowest quartile compared to their weight in the pool.
“These results suggest that clients can increase their chances of hiring a potential winner by expanding their search into the emerging universe,” said Investment Program Manager John McCareins, who works with clients of Northern Trust Global Investments’ Program Solutions Group that utilize emerging manager solutions. “With continued consolidation in the asset management industry, the largest firms effectively are the financial markets in which they operate, in terms of assets and transactions. These firms may have difficulty stepping aside when the market enters a downdraft, but we believe that small entrepreneurial firms can benefit at such times from management focus, rapid decision processes and fewer liquidity constraints.”
No Contest: Emerging Managers Lap Investment Elephants is the eighth in a series of research reports by Northern Trust. Since 1988, Northern Trust has studied the relative performance of emerging managers in a variety of market conditions. As part of its manager-of-managers programs Northern Trust invests approximately $5 billion with more than 40 emerging investment management firms. The manager-of-managers approach is designed to help large institutional investors access these smaller firms by addressing capacity constraints and concerns about due diligence, business risks, and administrative overhead.
The Program Solutions Group of Northern Trust Global Investments is a leading provider of multi-manager investment solutions, with $31.5 billion under management for institutional and personal clients.
About Alex Akesson
Alex has been specializing in hedge fund and alternative investment news since April 2006. Working mainly in research and manager interviews, she has published breaking news on the hedge fund industry on her blog, as well as several industry publications.
Her access to hedge fund managers gives her insight into news stories as well, and the ability to track press releases and other breaking news in real time.
Emerging Manager Hedge Funds Maintain Performance Edge in U.S. Equity Investing
Northern Trust released a study demonstrating that smaller hedge funds can provide stronger returns and better downside protection in volatile markets than larger ones investing in the same asset class – large-cap U.S. equities.
“Our new study indicates that emerging managers may help investors squeeze more out of their most important, and most challenging, asset class,” said Ted Krum, CFP, Investment Program Manager for the Program Solutions Group at Northern Trust Global Investments, the asset management arm of Northern Trust. “Despite market declines and portfolio reallocations, U.S. equities still make up the largest portion of many institutional client accounts, making this asset class a key driver of performance for institutional investors.”
According to Northern Trust’s new research, titled No Contest: Emerging Managers Lap Investment Elephants, investment firms with less than $3.6 billion under management – the smallest firms that collectively manage 1 percent of all assets in the institutional market – outperformed the largest firms and all other groups studied, as well as the S&P 500 Index, over the five-year period ending June 30, 2010 .
Northern Trust examined eVestment Alliance performance data for large-cap core U.S. equity products managed by 284 investment firms of all sizes, with total assets under management of $12.3 trillion. Details of the study include:
• Firms with less than $3.6 billion under management gained 0.67% per year in their active large cap U.S. equity portfolios for the five-year period, a higher return than larger firms or the S&P 500 Index, which was down –0.80% per year over the same period.
• Small firms tend to reduce risk when it counts the most – in bear markets. The emerging manager composite outperformed the S&P 500 Index in five of the eight bear quarters over the past five years by a cumulative 3.65% – the best results of the groups studied. They were also the only group with total volatility less than the index (18.1% per year versus 18.5%).
• The median small manager outperformed the median large firm by 72 basis points per year, which translates to an advantage of more than $7 million on a typical $200 million institutional allocation over five years.
• When all active large cap U.S. equity products are pooled into a single universe, emerging managers make up 44 percent of the top performance quartile and only 28 percent of the bottom quartile, while comprising 36 percent of the overall pool of managers. Large firm results are skewed in the opposite direction, with a smaller share of the top quartile and larger share of the lowest quartile compared to their weight in the pool.
“These results suggest that clients can increase their chances of hiring a potential winner by expanding their search into the emerging universe,” said Investment Program Manager John McCareins, who works with clients of Northern Trust Global Investments’ Program Solutions Group that utilize emerging manager solutions. “With continued consolidation in the asset management industry, the largest firms effectively are the financial markets in which they operate, in terms of assets and transactions. These firms may have difficulty stepping aside when the market enters a downdraft, but we believe that small entrepreneurial firms can benefit at such times from management focus, rapid decision processes and fewer liquidity constraints.”
No Contest: Emerging Managers Lap Investment Elephants is the eighth in a series of research reports by Northern Trust. Since 1988, Northern Trust has studied the relative performance of emerging managers in a variety of market conditions. As part of its manager-of-managers programs Northern Trust invests approximately $5 billion with more than 40 emerging investment management firms. The manager-of-managers approach is designed to help large institutional investors access these smaller firms by addressing capacity constraints and concerns about due diligence, business risks, and administrative overhead.
The Program Solutions Group of Northern Trust Global Investments is a leading provider of multi-manager investment solutions, with $31.5 billion under management for institutional and personal clients.
About Alex Akesson
Alex has been specializing in hedge fund and alternative investment news since April 2006. Working mainly in research and manager interviews, she has published breaking news on the hedge fund industry on her blog, as well as several industry publications. Her access to hedge fund managers gives her insight into news stories as well, and the ability to track press releases and other breaking news in real time.