(HedgeCo.Net) – There are several factors an emerging manager must overcome when getting started. The most important aspect of running an investment fund is a track record. A younger manager withouta track record has the most difficulty, since he simply does not have the lengthy experience at a big brokerage house or at a mutual fund shop with an audited record of his performance. I am speakingabout this because this is my experience as a 26-year-old emerging fund manager out of college, without a formal institutional background.

There may be some benefits to going this route, like not to have been exposed to the bureaucracy and the inefficiencies of the institutional world, big brokerage houses, or the corruptions (as we have seen from the recent mutual fund scandals) in the Mutual Fund industry. Many of these savvy individuals like myself who venture out on their own, are not jaded yet by the industry, have very creative and original ideas, and are optimistic about the future. One thing they do not have is the �experience� and do not have some of the business contacts that you develop over a lifetime of working in an industry, and instead they must develop them going forward. It is not surprising that many managers start their careers when they are 40 or 45 years old. By that time they have made a decent amount of money to use as a �nest egg,� have had many years of experience in portfolio management at a big firm, and a lot of contacts they can pick from to help start their businesses.

A track record is usually a string of 2,5,10,15+ years of audited yearly returns. Investors like to see that a manager is consistently beating the market. The track record acts as empirical evidence that the manager can outperform the rest of the market, and it gives the investor confidence about his future ability.

Reputation is probably another key determining factor that is needed for a fund manager to gain access to managing capital. Reputations are built with track records, and with the overall character or personality of the manager, over the course of time. I have seen some very nice managers, who are friendly and have the demeanor of an upbeat stockbroker (who have no problem raising a lot of money), but their performance is that of a US Government T-Bill. In my opinion, real �reputations� are built on both strong character, and additionally require long-term superior performance.

Trust is finally the ultimate ingredient to an investor�s decision to go with a manager. This is probably more of an emotional decision than a rational or logical one. It is the overall feeling of the fund and its manager. With little track record or not a very big reputation, it would be very hard to get any investor to make the commitment, or �trust� an emerging fund manager.

Standard deviation of monthly returns, volatility, Sharpe ratio, etc does not mean much to most long-term investors, in my opinion. Investors care about the bottom line ultimately, whether the investor is an institution or an individual. People with money want to see it grow at the best rate possible and compound it over time. You can paint about any picture you want with statistics. I have seen all of these performance ratios that try to make investing a science such as the profitable percentage, Sortino ratio, Jensen ratio, Treynor ratio, Sterling ratio, and Calmar ratio. All the ratios attempt to find the fund or funds with as little �risk� as possible, which does not follow the general market, and produces �consistent returns� on a monthly or yearly frequency. It would be nice to think that investing with managers can be broken down into an exact science, and there are some institutional people who believe this. Those that do buy into this �voodoo� run huge fund of funds and institutional money that produce US Government T-Bill-like returns (5% per year after all fees etc). They are basically constructing a synthetic T-Bill or Bond, using alternative investment vehicles, and marketing them as �hedge funds�.

Investing isn�t an exact science because if it were, everyone would make infinite returns without ever losing money. So how could analyzing the returns of an investor or manager be such a precise science? It�s not. Eventually it comes down to the bottom line (annual return), over the long run (10-20 years). The cream rises to the top, and track records and reputations are either built up or destroyed. Investing with an emerging manager is merely a pure play on the manager�s vision and goals– it requires a leap of faith, but so does investing by analyzing only statistics and ratios with older managers.

John Chalekson
Emerging Manager
John Chalekson
Manager, General Partner
John@rockfishcapital.com

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