Why It's Time to Ditch the "Emerging Manager" Label

Explore the need to abandon the 'Emerging Manager' label in finance. Learn why it's time for a more inclusive and equitable approach.

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Why It's Time to Ditch the "Emerging Manager" Label

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The financial industry has long used the "emerging manager" label to categorize new and smaller investment firms. However, this term may soon become outdated. Just as the Hedge Fund Standards Board distanced itself from the 'hedge funds' label, there is a growing movement to rethink how we define and support these dynamic players in the market. As the landscape of alternative investments continues to evolve, it's time to consider whether this label truly reflects the potential and impact of these firms. Lets explore why the time has come to ditch the "emerging manager" tag and embrace a more progressive approach to these industry participants.

The Concept of "Emerging Manager" in the Financial Industry In the world of finance, the term "Emerging Manager" has long been used to describe investment managers or funds that are relatively new or small in size. These entities are often seen as up-and-coming players in the industry, seeking to establish their foothold in the competitive world of asset management. However, the label "Emerging Manager" has raised important questions and debates within the financial sector.

The Origins of the "Emerging Manager" Label

History and Evolution of the Term The term "Emerging Manager" has its roots in the financial industry, dating back several decades. It originally emerged as a way to categorize and differentiate investment managers or funds that were relatively new and small in size compared to established giants in the field. Over time, the label has evolved, but its core purpose remained to identify these emerging players in the asset management space.

Initial Intentions Behind the Label The initial intentions behind labeling certain investment firms as "emerging" were twofold. First, it served as a recognition of the challenges faced by newer and smaller managers in breaking into the highly competitive investment landscape. Second, it aimed to provide investors with a clear identifier for funds that might offer unique and potentially high-reward investment opportunities. The label was intended to be a signal for investors to pay attention to these managers, considering them as potential sources of alpha.

Use of the Label in Practice In practice, the "Emerging Manager" label has been used by various stakeholders within the financial industry, including asset allocators, institutional investors, consultants, and regulatory bodies. Investment consultants and gatekeepers often use this label to categorize and assess managers when making recommendations to their clients. Institutional investors may allocate a portion of their portfolios specifically to emerging managers in pursuit of diversification and higher returns. Regulatory agencies may have specific guidelines or criteria that apply to emerging managers, influencing their compliance and reporting requirements.

The Problem with the Label

A. Limitations and Drawbacks of the "Emerging Manager" Designation

  1. Perpetuating Bias and Inequality: The "Emerging Manager" label can inadvertently perpetuate bias and inequality within the financial industry. It may lead to unfair assumptions that emerging managers, particularly those from underrepresented backgrounds, lack the experience or capability of their more established counterparts. This bias can hinder diversity and inclusion efforts in the industry.

  2. Limiting Opportunities and Access to Capital: Emerging managers often face challenges in attracting capital from investors. The label can limit their access to capital because some institutional investors and consultants may automatically categorize them as riskier or less experienced, leading to missed opportunities for both investors and managers.

  3. Reinforcing Stereotypes: The label can reinforce stereotypes about what it means to be an emerging manager. It may suggest that these managers primarily rely on high-risk strategies or have less sophisticated investment approaches. Such stereotypes can be detrimental to emerging managers' reputations and hinder their ability to compete on an equal footing with established firms.

B. Real-World Examples of Negative Impact

  1. Underrepresentation of Women and Minorities: Research has shown that women and minority-owned investment firms are often labeled as emerging managers, even when they have substantial experience and successful track records. This labeling can limit their access to institutional capital, perpetuating underrepresentation in the industry.

  2. Missed Investment Opportunities: Investors who automatically categorize managers as "emerging" may miss out on promising investment opportunities. Some emerging managers have outperformed their more established peers, but biases associated with the label can deter investors from considering them.

  3. Regulatory Challenges: Regulatory bodies may impose specific requirements on emerging managers, which can lead to administrative burdens and compliance costs. These requirements may not be commensurate with the actual risks or characteristics of the managers, creating inefficiencies and barriers to entry.

  4. Impact on Fundraising Efforts: Emerging managers often struggle with fundraising, and the label can exacerbate this challenge. When potential investors view them through the lens of the "emerging" designation, it can be difficult for these managers to convince allocators of their worthiness and potential for success.

Alternative Approaches

A. Alternative Ways to Categorize and Support Investment Firms

  1. Lifecycle-Based Classification: Instead of using the "Emerging Manager" label, a more dynamic approach could classify investment firms based on their lifecycle stages. This could include categories like "Startup," "Growth," and "Established." Such categories would better reflect the evolution of firms over time, accounting for factors like size, experience, and track record.

  2. Strategy-Based Categorization: Categorizing investment managers based on their investment strategies and approaches can provide more relevant information to investors. For instance, categories such as "Equity Specialists," "Fixed-Income Experts," or "Alternative Asset Innovators" could help investors identify managers based on their strengths and expertise.

  3. Performance and Risk Assessment: A data-driven approach that assesses investment managers based on their historical performance and risk metrics can provide a more objective view. Investors could consider managers' actual track records, risk-adjusted returns, and consistency in delivering results when making allocation decisions.

B. Benefits of Alternative Approaches

  1. Promoting Diversity and Inclusion: Alternative categorization methods can promote diversity and inclusion by removing biases associated with the "Emerging Manager" label. By focusing on factors like strategy and performance, investors are more likely to evaluate managers based on their merits rather than preconceived notions about their experience or background.

  2. Encouraging Innovation and Competition: Alternative categorization methods encourage innovation and competition in the industry. When managers are not confined by a limiting label, they have the freedom to innovate, develop unique strategies, and compete on a level playing field. This can lead to a more dynamic and innovative financial sector.

  3. Reducing Stigmatization: By moving away from the "Emerging Manager" label, the financial industry can reduce stigmatization and unfair assumptions about certain firms. Managers who have proven themselves with strong performance and risk management can gain recognition and credibility, regardless of their size or age.

Alternative approaches to categorization can lead to more informed investment decisions and a more inclusive industry environment. Investors can select managers based on their specific needs and preferences, while managers can focus on delivering value rather than conforming to a limiting label. Overall, these approaches can contribute to a more dynamic and equitable financial ecosystem.

Case Studies

A. Successful Investment Firms Thriving Without the "Emerging Manager" Label

  1. Bridgewater Associates:

    • Bridgewater Associates, founded in 1975, is one of the world's largest and most successful hedge funds.
    • Instead of being labeled as an "Emerging Manager," Bridgewater gained recognition through its unique investment philosophy, including its focus on risk parity and quantitative strategies.
    • Their commitment to transparency and research-driven decision-making has attracted institutional investors, demonstrating that firms can succeed based on their approach rather than their size.
  2. Vanguard Group:

    • Vanguard, founded in 1975, is a massive asset management firm that has become a leader in passive investing.
    • Vanguard's success is not attributed to being labeled as an emerging manager but rather to its low-cost index funds, which have appealed to cost-conscious investors.
    • They disrupted the industry by offering a simple, low-cost investment approach, and this innovative strategy led to their growth and prominence.

B. Strategies and Factors Contributing to Their Success

  1. Unique Investment Philosophy: Bridgewater Associates' unique approach to risk management and quantitative investing set it apart from competitors. Its focus on principles rather than labels helped it attract institutional clients seeking innovative strategies.

  2. Innovation and Disruption: Vanguard disrupted the traditional asset management industry by introducing low-cost index funds and an investor-friendly approach. They emphasized providing value to investors, which led to tremendous growth.

  3. Transparency and Trust: Both firms emphasized transparency and trust as essential components of their success. Investors appreciated the clear and consistent communication of their strategies and results.

  4. Consistency in Performance: Both Bridgewater and Vanguard maintained consistent performance records over the years, proving their ability to deliver results to investors. This track record built trust and credibility.

  5. Client-Centric Focus: Both firms prioritized their clients' needs and focused on providing investment solutions that addressed those needs effectively. This client-centric approach helped attract and retain investors.

These case studies demonstrate that investment firms can thrive and achieve success without relying on the "Emerging Manager" label. Instead, their focus on innovative strategies, transparency, performance, and client-centricity played pivotal roles in their growth and prominence in the financial industry.

The Road to Change

A. Steps to Transition Away from the "Emerging Manager" Label

  1. Reevaluate Classification Criteria: The first step in transitioning away from the "Emerging Manager" label is to reevaluate the criteria used for classification. Industry stakeholders, including regulators, investors, and industry organizations, should work together to develop more relevant and inclusive categorization methods.

  2. Promote Transparency: Investment firms should enhance transparency by clearly communicating their investment strategies, track records, and risk management practices. This will help investors make informed decisions based on merit rather than preconceived labels.

  3. Educate Investors: Industry organizations and regulatory bodies can play a crucial role in educating investors about the limitations of the "Emerging Manager" label and the benefits of considering a broader range of factors when evaluating investment opportunities.

  4. Encourage Research and Data-Driven Assessment: Encouraging investors to assess investment managers based on performance, risk-adjusted returns, and consistency can lead to more data-driven decision-making. This approach allows for a more objective evaluation of managers.

B. Role of Regulatory Bodies, Investors, and Industry Organizations

  1. Regulatory Bodies: Regulatory bodies should review and update their guidelines to ensure that emerging managers are not unfairly burdened by compliance requirements. They should also encourage transparency and provide guidance on best practices for fair evaluation.

  2. Investors: Institutional investors can lead the way by adopting more sophisticated evaluation methods that go beyond labels. They should actively seek diverse investment opportunities and consider the potential value that emerging managers can bring to their portfolios.

  3. Industry Organizations: Industry organizations can facilitate discussions among stakeholders, promote best practices, and create industry standards for categorizing investment managers. They can also conduct research to highlight the benefits of alternative evaluation methods.

  4. Collaboration: Collaboration among regulatory bodies, investors, industry organizations, and investment managers is essential for driving change. Open dialogues and partnerships can lead to the development of fairer and more effective approaches to evaluating investment firms.

  5. Advocacy: Advocacy groups focused on diversity and inclusion can raise awareness about the impact of labels like "Emerging Manager" on underrepresented groups. They can work with industry stakeholders to push for change and promote fairness.

Transitioning away from the "Emerging Manager" label requires a concerted effort from all stakeholders in the financial industry. By reevaluating classification criteria, promoting transparency, educating investors, and collaborating effectively, the industry can move toward a more equitable and inclusive approach to evaluating investment managers. Regulatory bodies, investors, and industry organizations play pivotal roles in driving this change and fostering a dynamic and innovative financial landscape.

Better Outcomes

By collectively working towards these goals, we can create an industry where investment managers are evaluated based on their merits and contributions, rather than being confined by limiting labels. This shift will not only benefit emerging managers but also promote innovation, diversity, and fairness within the financial sector, ultimately leading to better outcomes for investors and the industry as a whole.

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