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LP Outlook for 2018: What are Investors Focusing on?

Fintech is shaping the future of investing, Cryptocurrencies are gaining momentum, and there are new initiatives such as facial recognition for managing online safety. In addition, passive funds are recording inflows while active funds, in general, are experiencing a dry season. There is an upward trajectory of emerging manager funds. We are in an exciting era of investment opportunities. At our third annual Alternative Investment Summit in New York, Christine Iijima, a director at Wafra; Sheryl Mejia, director of emerging managers at the New York State Common Retirement Fund; and Kirk Sims, an investment officer with Teachers’ Retirement System of the State of Illinois, discussed what the investors are focusing on today.

A case for emerging managers and alpha:
When it comes to asset class allocation, the markets are seeing an increased share being allocated to emerging manager funds. Emerging managers are often characterized by their small fund size and limited employee pool with the same talent, strong track record, and professional and education background as their counterparts in larger institutions. In fact, they are often spinoffs from a larger firm, but have opted to be more entrepreneurial -- offering diverse and creative investment strategies. For some strategies, size is the enemy. Studies show that with greater AUM, there is less probability of outperforming the market. The market is always looking for emerging investment managers with smaller deal size that offer an extra return through a well-capitalized and differentiated process. Keeping costs low is critical and balancing the act of low cost and high return will differentiate the future EMs.

Geo-political concerns:
At the middle market level, geo-political issues address more of a broader market risk than necessarily an investment risk. When dealing with global investments, the focus is on specific investment opportunities, understanding bottom up sourcing, capability of managers and firms’ internal exposure. Buy and hold does not always return value.

Fee perspective:
Are the investors increasingly more vocal about fees? Depending upon the size and objective of the board of directors, the answers may vary. In the institutional private equity world, investors often have to commit to a large amount before concessions in fees can be even discussed. Alternatively, investors are definitely seeing more concessions in the hedge fund space with more creative approaches to align interests. However, the crusade on fees is driven by investors seeking better alignment and less by an actual fee concession. Investors succeed when the fund managers succeed, which may eventually lead to overall lower fees.

EisnerAmper would like to thank the panelists for their time and insights.

To check out our blog series from each panel from the EisnerAmper 3rd Annual Alternative Investment Summit, please click below.

Ramya Bala is a Financial Services Group Senior Tax Manager serving asset management clients, including private equity funds, hedge funds, funds of funds and investment advisors.

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