Q&A: Tyra Jeffries, CreativeCap Advisors
AW: Tyra, CreativeCap Advisors has created an incubator program for emerging alternative investment fund managers. This structure has been around in the VC world for a few years; what’s changing with regards to the needs of emerging managers in the hedge fund space?
TJ: Our program focuses on both hedge fund and private equity/venture capital firms; we did this distinctly because we think there is a lot of potential with both sides of the industry. We’re seeing a growing interest from institutions looking to capitalize on the innovation more commonly yielded by emerging managers, regardless of whether they are a hedge or private equity/venture capital fund.
There has been a tremendous spike in interest from large industry players looking to invest into managers at earlier stages. Endowments, pensions funds, investment consultants and family offices have become large players in this market; the recent implementation of PAAMCO Launchpad is a highlight of that trend.
Although there is an increasing spotlight on and interest in emerging managers, it is still important for fund managers to understand how to build a business, not just manage a portfolio. This is where our program comes into play and creates value.
AW: Investors like New York City Comptroller and Texas Teachers/ERS have dedicated emerging manager events now. Some say that many new hedge funds are too small and too new for large pension funds and asset managers to allocate to. What’s the benefit for the investors?
TJ: Well, every investor has different requirements and I believe this is a common misconception. Most funds are under the impression that a potential investor will not consider you if you do not have three-plus years in business or have less than $100 Million in assets under management. This is simply not the case for all investors. I’ve had several conversations with emerging manager investors who have said they will look at a fund as soon as Day 1, or in the first six months.
The greatest gauge of a fund’s potential success an investor has includes looking at their track record, the chief investment officer’s pedigree followed by the pedigree of the team. Naturally, having a higher asset level signals greater cash flow which inherently reduces the risk of them going out of business the next day, but investors really pay attention and will consider investing if they see the potential is there and that you have the right partners and vision to execute. It is also important to maintain relationships with investors. Institutions take time to assess a fund for investment; it won’t happen in the first meeting, or rarely does because there is too much money and risk at stake. The benefit investors have in investing into emerging managers is owning a piece of what could be the next Winton, Bridgewater or D.E. Shaw. That point for investors offers a very exciting and lucrative opportunity. I believe owning a piece of what could be potentially a very successful business is an attractive proposition for anyone.
AW: You have a ‘virtual pitch day’ coming up, where incubatees from your inaugural cohort can pitch some well-known asset owners. What are you hoping the firms participating will get out of this?
TJ: One of the best aspects of our program is that investors know going in that these [the cohort] are fund managers who want to and are passionate about building a business. That is one investor checkbox already made by managers coming into the program. Oftentimes when a fund manager is pitching, they come in wearing just the portfolio manager hat when in reality they forget that they are building a business, not just a portfolio. What investors seek from a potential fund manager is knowing that by investing with them that they are seen as a partner, not just as someone holding the purse strings.
As it relates to the funds, they are able to get in front of some very high-quality investors - and more distinctly, senior-level decision makers - and present themselves. It is a match made in heaven because investors are always on the lookout for high-quality emerging managers and this is at the heart of what we offer. What everyone will get out of this Pitch Day, at the most basic level, are high-quality connections and hopefully potential partners.
AW: It’s not difficult to find data showing emerging managers outperform larger, more established ones; however, data also suggests that capital inflows are still going to those larger managers, with risk being cited as a primary reason. Will larger investors ever get out of the ‘nobody gets fired for buying IBM’ headspace?
TJ: I don’t think so, but I think those investors who are becoming active players in the emerging manager space have to naturally shift their thinking. An institution will look at other key characteristics to signal future success of a manager, while they may not be ‘IBM’ today, perhaps they could become the next ‘IBM’ in 5, 10 or even 15 years. When you are assessing for potential it becomes much harder to do because the hard data is not there the same way it would be at a larger firm. Investors have to really understand what to look for to play in this space. If you understand the nuances and understand the key indicators, then you will become wildly successful. This mindset and understanding are very similar components to the one early stage venture capitalists have to have. You must ask yourself after - and perhaps even before - you’ve conducted your due diligence, ‘do I trust this person, this product and this team?’ Trust is a significant component of early stage investing across any industry because data is very limited.
AW: Finally, as you look ahead to 2019, are you seeing any trends with regards to strategies and/or geographies that investors like?
TJ: As it relates to hedge funds, I think geographically, Europe and Asia are of growing interest to US- based investors, although US fund managers still remain on the radar. As a result of the Brexit vote, I have been seeing a shift of interest to funds located in other European countries - Luxembourg, Sweden, Germany and France, to be specific. As far as strategies, the range is across the board; you have certain strategies that some love and other investors just wouldn’t touch. I think 2019 will be a very exciting year for emerging managers as investors look to explore alternative ways to generate returns for their portfolio. Early stage investing offers the greatest upside if it is executed and managed well.
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