Emerging Managers Outperform Established Funds In 2017

FundSeeder Technologies, whose platform tracks thousands of independent traders, has published statistics that show smaller traders, or so-called “emerging managers,” can dramatically outperform established hedge fund managers.  According to data recently made available by FundSeeder, as of the end of December 2017, the FundSeeder Top Trader Index (formerly known as the NHT5 Index) was up approximately 18.5%. When contrasted against the comparable HFRI Fund Weighted Composite Index, which was up roughly 8.5% for 2017 or the Barclay BTOP50 Index, an alternative investment CTA index, which was actually down approximately 0.9% for the year the index figures tracking emerging managers are impressive.

FundSeeder’s CEO, Emanuel Balarie, states that, “This performance highlights the abundance of undiscovered traders and investors who persistently outperform but are unable to crack into the hedge fund industry because of the significant start-up and infrastructure costs needed to be competitive with established funds.”  Many emerging manager investors, which include family offices, endowments, sovereign wealth and pension funds, agree with that statement and have been searching for new managers that could provide additional alpha to their portfolios.  Mr. Balarie, whose career has been spent allocating to emerging managers before co-creating FundSeeder said, “2018 is an opportune time for FundSeeder, and the participating active managers on the platform, given the ripeness of the markets to potentially revert to the mean when it comes to volatility and returns. We believe active management will outperform in more volatile environments and particularly in declining markets where risk controls become exceedingly important.  Given the current bull market, we also believe the top active managers using FundSeeder should continue to outperform by significant margins. Should the market correct, the human-factor will be key to managing losses.”  These sentiments were echoed by Gary Klopfenstein, the Chief Investment Officer of FundSeeder Investments, who said that, “Not only is active management an important complement to a total portfolio strategy, but smaller and more nimble managers can take fresh approaches to alpha creation that many larger managers cannot duplicate.”

The actual outperformance by the FundSeeder Top Trader index is however less extreme than these comparisons may suggest. The reason? Both the aforementioned HFRI and Barclay indexes are based on actual investment products which deduct fees paid by investors, typically a 2% annual management fee and 20% performance based incentive fee, whereas the FundSeeder index does not since its managers remain undiscovered. Never the less, at just over 2 years old, the FundSeeder Top Trader Index is now up roughly 32.3% since its inception on December 1, 2015 making these emerging trader’s impressive none-the-less.

When asked to comment on this story, Jack Schwager, the Chief Research Officer of FundSeeder, provided further detail about the Top Trader index and why it is unique, “One of the key principles underlying the design of the Top Trader Index was that it avoid any hindsight bias. In fact, this core value was in its original name—‘NH’ stood for ‘no hindsight.’” Schwager explained. He continued be sharing that the constituent traders that compose the index in any given month are defined, or selected for inclusion in the index, at the end of the prior month as determined by a trader’s assigned FundSeeder Score.  The FundSeeder Score, is a proprietary performance measure developed to identify and rank the top 5% of FundSeeder traders as of the end of each month based upon the quality of their returns. Traders in the index are then assumed to receive equal allocations for the next month, and their composite performance defines the daily returns in that month for the overall index. For example, the traders in the index in December 2017 are those who were selected as being in the top 5% by FundSeeder Score at the end of November 2017.

In order to continue growing the FundSeeder platform, Mr. Balarie has recently hired Bill Stephenson, formerly Global Head of Trading at Franklin Templeton, to help top managers on the FundSeeder platform elevate their marketability by creating the first ever ‘virtual accelerator’ for undiscovered and emerging talent. These are the traders that have largely been unable to crack into the top-heavy hedge fund industry where large AUM funds tend to dominate.  Mr. Stephenson explains, “The accelerator will be our way of curating the best traders on our platform and providing them with world-class advice and access through our relationships with some of the industry’s most respected asset allocators.  These highly successful professionals are giving back by helping to develop the next crop of the world’s best asset managers.”  The accelerator, which is expected to last two months, will conclude with the “FundSeeder Harvest,” which will be an invitation-only event where these top traders will present to some of the largest and most successful emerging manager investors in the world.  Participants in the program will be selected by FundSeeder management and advisers based on multiple criteria. Mr. Balarie noted that, “you need to be on the FundSeeder platform to be eligible to participate in the Accelerator” and that the early applications so far have “highlighted incredible trading talent from across the world, particularly from Asia via our partnership with OP Investment Management a leading asset management firm in the region.”

While the hedge fund industry and active management in general are under siege as a result of both underperformance and high fees, the rise of emerging managers supported by technology, specialized events, lower fees, index products, and forward looking investors may help create significant opportunity for new talent to provide untapped sources of alpha for institutional investors.

PLEASE BE ADVISED THAT PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE PERFORMANCE DATA INCLUDED IN THIS STORY IS BEING PRESENTED FOR COMPARATIVE AND INFORMATIONAL PURPOSE ONLY. INDEXES MAY NOT BE DIRECTLY AVAILABLE AS INVESTIBLE PRODUCTS TO AN INVESTOR AND SHOULD BE UTILIZED FOR BENCHMARKING PURPOSES ONLY.