Adding Alpha through Emerging Investment Managers

May 3, 2024 |
3 minute read
|
Adding Alpha through Emerging Investment Managers
5:49

 

Commonfund Forum 2024 convened a panel of emerging investment managers to spotlight their unique investment approaches. Moderated by Caroline Greer, managing director at Commonfund OCIO, the panelists were: Renee Yao, founder of Neo Ivy, Pardon Makumbe, founder of CRE Venture Capital, and Arthur Young, founder of Tensile Capital. The panel explored what emerging managers are and some of the key attributes that can support their alpha generation.

What are emerging managers?

Commonfund CEO, Mark Anson, spearheaded the term “emerging manager” around year 2003, to focus on relatively small managers that often have a strategic niche. While there are many definitions of emerging managers, “relative” is the key word. A billion-dollar fixed income fund is considered small, so may be in the emerging category, whereas a billion-dollar frontier equity market manager would be considered large. The panel speakers’ investment approaches spanned Africa-centered venture capital, an AI-derived quantitative hedge fund, and a fundamental equity manager, with each illuminating how their relative size can serve as a source of alpha, enabling them to identify and access opportunities that larger firms might miss.

The demographically diverse panel reflected the reality of overlap between emerging managers and diverse managers. Conceptually they are distinct groups, with the former focusing on size and the latter on demographics. However due to a confluence of factors, not least historical wealth inequalities and the biases that constrain access to capital, there is an overlap in which many emerging managers are also diverse. The recognition that less than 2 percent of assets are managed by women and people of color, as well as broader DEI initiatives, have contributed to an increased demand for diverse managers - including implementation of diverse manager targets or other commitments in the Investment Policy Statement (IPS) – a trend we have documented in Commonfund’s benchmarks studies across the nonprofit institutional investor space.

Here are three things we learned from the panel about the keys to success for emerging managers today:

Depth vs. breadth. The success of emerging managers across asset classes and strategies proves that bigger is not always better. Both Makumbe and Young emphasized that the limited number of investments they make are a critical part of their strategy, as each one is rooted deeply in relationship building – with both LPs and CEOs – as well as longer-term strategic partnerships and activism. These tactics require a depth of research that might serve as an opportunity cost for bigger managers that cast wider nets. Between research, relationship building, and active participation in the growth and development over time, these strategies would not be feasible for funding “even thirty companies” per funding round. That inherently caps the asset or portfolio size these managers can sustain. Makumbe suggested this strategy can best capture the power law of returns in venture capital, in which a small number of companies drive the bulk of returns.

First-mover advantages. Yao runs a small, highly specialized quantitative AI hedge fund. Like Makumbe as a venture capital firm focused on the African continent, Neo Ivy did not wait for the rest of the industry to dive into a relatively unchartered territory. Growth in AI-driven strategies might be in early stages, potentially limiting the size of any one firm. Yao explained that machine learning was previously used to detect patterns based on prior data, but those patterns might not be relevant for the future. Now generative AI can spontaneously learn to create new predictions and allow the team to stay on the cutting edge of market opportunity exploration – aligning with the first mover mentality. This helps the firm navigate any rapid unexpected market swings that may arise, from pandemics to geopolitics; whereas Makumbe sees vast opportunities in African countries on their paths to industrial development. This sets their team apart from those following the more well-trodden path in places like Silicon Valley. In these cases, alpha is generated by bridging gaps across continents, having in-depth long-term vision and collaboration with firms, or using the latest technology.

Culture, competency, and cohesion. Each panelist described ways in which their team is a strategic input into their strategy. For Makumbe, that involves working with a team that’s local to, and more deeply understanding of, investment opportunities part-way across the world. All panelists emphasized having a relatively small, tight-knit team with diverse backgrounds, capabilities, and ways of thinking as critical to staying on the forefront of their market opportunities. That might look like bringing together a multi-disciplinary team to build leading technology or dispersing geographically to make hyper-local connections in an emerging market. The often-touted benefits of diversity for return potential rings true in the cases of these managers – their relatively small and intentionally constructed teams contribute to the ability to find often unrecognized opportunities. It doesn’t hurt that investors are increasingly aware and interested in these benefits.

To learn more about the program and view additional Forum Spotlights click here.

Amanda Novello

Author

Amanda Novello

Senior Policy and Research Analyst

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.