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11 Compelling Reasons To Use A Small Fund Manager

HIGHLY MOTIVATED:

“THE PSYCHOLOGICAL REASON OF ‘MAKING IT’ AS A SUCCESSFUL ENTREPRENEURIAL
INVESTMENT MANAGER MAY BE A PARTICULAR CATALYST IN THE EARLY YEARS. AS ASSETS
GROW AND MANAGERS REACH CERTAIN LEVELS OF WEALTH, THEIR WORKING DAYS, AS WELL
AS THEIR EFFORT PER UNIT OF AUM IS REDUCED, SO THAT RETURNS ARE MORE LIKELY TO
GRAVITATE TO A LOWER LEVEL. EARLY STAGE MANAGERS GENERALLY HAVE MORE SWEAT
PER DOLLAR OF AUM, AND WORK A LOT HARDER TO ‘MAKE IT’ AS A SUCCESSFUL
MANAGER.”***

We find this particularly true in the alternative space as it takes considerable digging to uncover and keep
abreast of current happenings and developments in the areas in which we work.

The compensation of a small asset manager is also a motivating factor. "PERFORMANCE FEES ARE A
HIGHER PERCENTAGE OF OVERALL COMPENSATION AND DRIVE ASSET GROWTH AND
PROFITABILITY. ANALYSIS SUGGESTS THAT UP TO 80% OF THE ENTERPRISE VALUE OF
LARGER FIRMS IS DUE TO CAPITALIZED MANAGEMENT FEE EBITDA AS OPPOSED TO
PERFORMANCE FEES."*

Also, “THE FEE STRUCTURE OF THE FUND INDUSTRY AND THE RELATIVE MASSIVE AMOUNTS
OF REVENUE THAT A LARGE FUND CAN GENERATE RELATIVE TO ITS COSTS, GOES A LONG
WAY IN EXPLAINING WHY LARGER FUNDS OFTEN HAVE LOWER RETURNS. LARGE FUNDS TEND
TO BE FOCUSED ON SIMPLY PRESERVING CAPITAL TO MAINTAIN THEIR ASSETS AND FEES
ATTACHED TO THOSE ASSETS, A US$10 BILLION FUND WITH A 1% MANAGEMENT FEE AND A
20% PERFORMANCE FEE ON 10% RETURNS PER YEAR GENERATES US$300 MILLION ANNUALLY
AND, AFTER PAYING A STAFF OF 50 TO 70 PEOPLE, THE PRINCIPALS ARE JUST NOT
INTERESTED IN DOING ANYTHING WHICH MIGHT JEOPARDIZE THIS AMAZING, EXTREMELY
PROFITABLE, ANNUITY-LIKE RETURN. FURTHERMORE, THE MASS OF MONEY COMING INTO THE
INDUSTRY FROM LARGER INSTITUTIONAL INVESTORS, (WHOM INVEST PRIMARILY IN LARGE
ESTABLISHED FUNDS) IS ENORMOUS, SO JUST BY KEEPING ‘MODERATE RETURNS’,
PRINCIPALS OF LARGE, ESTABLISHED HEDGE FUNDS FEEL ASSURED THAT AUM WILL
CONTINUE TO GROW AND, AS SUCH, THESE MANAGERS ARE OFTEN RETICENT TO TRADE
AGGRESSIVELY. IN STARK CONTRAST, SMALLER FUNDS ARE CONSTANTLY SEARCHING FOR
HIGHER PERFORMANCE, IN ORDER TO ATTRACT LARGER AMOUNTS OF CAPITAL.”***

In real life, in the world of private equity, venture capital, growth capital and hard, cash-flowing assets, this is
especially true for small managers with less than $100 million under management. If an oil well goes down in
a small fund, it is more critical to the income of a small manager than it is to Exxon.

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