Frequently Asked Questions

What is an emerging manager?

The definition of emerging managers is constantly evolving. Traditionally, managers with $2 billion or less in total assets under management and a track record of less than five years are considered emerging managers. Years of historical research conducted by Leading Edge shows emerging managers:

Outperform their larger peers
Offer investors a better risk profile
Generally, more diverse ownership

Why invest with emerging investment managers?

Similar to small and micro capitalization stocks, emerging investment managers are often excluded from mainstream consultant searches and plan sponsors due to their relatively small asset bases and short tenure in business. Leading Edge offers additional value to investors based on the following:

Emerging investment managers are under-researched by large institutional pension fund consultants and, as such, provide investors with opportunities that have not been tapped by other investors.
Firm owners are seasoned investment professionals with established performance track records who choose the path of entrepreneurship to focus on their specific investment expertise.
The interests of firm owners and investors are aligned because the personal financial resources of firm owners are at stake in their investment strategies, in the formation of the firm, or both.

What are the risks associated with emerging managers?

Risks generally fall into three categories: investment risk, operational risk, and business risk.

Investment risk is borne by all managers and their clients irrespective of size.
Operational risk is generally greater for firms that are scarce on people, systems, and resources. Emerging firms may outsource functions that are not critical to the investment process or managing client relationships in order to mitigate operational risks. These functions include back office, middle office, legal, and human resources.
Business risk refers to the chance or probability that a business enterprise will run out of capital before it generates enough revenue to support its costs, growth, and development. Business risk is generally more prevalent among smaller firms and argues for a manager-of-managers approach to secure the opportunity represented by emerging investment managers.

What barriers prevent emerging managers from securing significant assets?

Traditional barriers have been established to exclude managers.

Managers with little to no market exposure
Managers with limited track records
Perceived risks (business, investment, operational, and reputation)
Managers with small asset bases (capacity constraints)
Too many emerging investment firms for traditional consultants to research and monitor
Barriers to securing significant assets are rooted in thinking that does not understand the advantages and misstates the risks associated with emerging investment managers. LEIA research confirms that:
- Limited market visibility has no bearing on quality of performance
- Limited track records are of lesser concern since many investment professionals who head investment firms are often experienced and seasoned, with extensive records of outperformance.
- Small asset bases translate into an execution advantage. Emerging investment managers buy and sell more efficiently and do not disturb the market due to their smaller size. Proprietary trading desks are not going to take positions in front of smaller firms because doing so will not produce “trading” profits. In short, smaller managers work with greater anonymity, which benefits clients.
- Small asset bases translate into greater portfolio flexibility, as portfolios can be quickly adjusted for up- and down-markets.
- Small asset bases often correlate with single-product firms. A focused research effort and management of a single product results in better performance.