Emerging managers – those who have been managing funds for less than two years - have a tendency to outperform their more experienced compet...

Emerging managers – those who have been managing funds for less than two years - have a tendency to outperform their more experienced competitors, according to a report by Hedge Funds Research. The study contradicts the conventional wisdom that more experienced hedge fund managers with a good track record will always outperform new entrants. The primary driver for this is new managers are under intense pressure to achieve results in order to attract new business, and tend to take more risks to obtain higher returns for investors. Smaller hedge funds were more "nimble" and therefore more flexible in their trading activities. It has long been a feature of the hedge fund industry that trading strategies that work for relatively small amounts do not work when the fund is scaled up as larger trades are more likely to priced adversely – especially in the less liquid markets. The new entrant effect was most pronounced during the first twelve months of a new hedge fund's life, according to the research. However, this was also the most vulnerable period for new hedge funds, precisely because they need to take more risks and are more reliant on performance fees to stay afloat.