"Emerging hedge fund managers are profitable below USD100 million AUM"

From HedgeWeek:

Emerging managers have a lot to be bullish about because even though the fund raising environment remains challenging, the break-even cost of running a hedge fund is surprisingly less than people might believe. 

A new emerging manager survey* produced by AIMA, in conjunction with GPP, a London-based boutique prime broker, canvassed the views of 135 global small and emerging managers – defined by AIMA as those with less than USD500 million in AUM – and the results are likely to allay concerns that running a hedge fund has become too expensive in today’s post-regulatory world. 

According to the survey, in which the total AUM of those surveyed totalled USD16 billion, and where the average fund size was USD133 million, the average break-even figure across all fund strategies, came in at approximately USD86 million.

Improvements in technology, increased adoption of outsourcing, and a shift in mindset whereby managers understand it is not always necessary, from a cost perspective, to appoint tier one providers, could all be contributory factors. And a sign that the barriers to entry for operating a successful hedge fund are far from onerous. 

“We serve this group and we want to be their voice – what are the challenges they face? What are the aspirations of this group? That’s what we wanted to find out in this survey,” comments Sean Capstick (pictured), Head of Prime Brokerage, GPP.

In many ways, this flies in the face of perceived industry wisdom that today’s hedge fund manager needs USD200 million or more to operate a profitable business. Part of this is because the tier one primes see the industry through a specific lens. Faced with their own regulatory costs, namely Basel III, banks are more inclined than ever to service large established hedge funds; the 703 ‘billion dollar club’ funds that control 88 per cent of the hedge fund industry’s AUM.

The economic realities, if AIMA/GPP’s survey is anything to go by, are far more modest. 

“The key finding of the survey is that these managers can be profitable at a small size. One third of managers surveyed said they were profitable with less than USD50 million. We therefore dispute the claim that you need USD200 million or more to break even. We think there is tight evidence that you can do it at a lower AUM number,” asserts Capstick....MORE