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The size of an investment manager’s assets under management is often seen as shorthand for stability and risk mitigation when it comes to manager selection. However, research consistently shows that managers tend to deliver better performance earlier in their life cycles, when they are nimbler and managing smaller pools of capital. While this performance edge is attractive to allocators, there are substantial barriers to gaining board support.
Is there a balanced way for allocators to access emerging talent under fiduciary constraints? Can allocators responsibly tap into emerging talent—those managing sub-$100 million portfolios—while upholding their fiduciary responsibilities?
Accessing Emerging Talent Without Sacrificing Standards
Allocators who pursue emerging managers often do so through large multi-strategy funds or by identifying highly-pedigreed professionals who have already caught the attention of their peers. This approach offers the safety of group consensus and mitigates individual risk. However, putting access to emerging talent aside, the costs associated with it can be prohibitive. Large multi-strategy firms with portfolios of emerging managers offer the aggregated return streams institutions want and are willing to pay for when there are few alternatives.
Within these “manager marketplaces,” however, emerging managers face significant challenges. The commoditization of emerging managers limits innovation, as managers are left primarily to serve as line items in large, diversified portfolios rather than as independent businesses with distinct strategies.
Managers often get confined to narrowly defined asset classes, restricted by strict risk parameters, diminishing their ability to build a unique franchise or business. Those who do manage to spin out often see their former firms take a stake in the new enterprise, reinforcing the grip of established players.
Rethinking Intermediaries and Incentive Structures
The dominance of large multi-strategy firms creates a pricing umbrella that perpetuates high fees for access to emerging talent. From the perspective of allocators, these firms provide a turnkey solution to address fiduciary duty concerns, but this convenience comes at a cost, both in fees and in the potential stifling of innovation. Emerging managers who want to distinguish themselves as independent thinkers find it challenging to compete against established firms that dominate allocator attention.
To address these challenges, a professional mechanism for accessing emerging talent—one that meets fiduciary requirements without burdensome costs—would be an answer to the conundrum. Investors with genuine interest in early-stage managers are willing to pay fairly for access, provided managers can establish efficient operations. With the right infrastructure and strategic support, these managers could bypass expensive multi-manager firms while meeting the fiduciary standards of institutional investors.
The Evolution of Risk-Management and Transparency Standards
For decades, scaling in asset management was largely confined to the traditional mutual fund industry. Since the early 2000s, however, institutional scaling within liquid alternatives has accelerated, driven by the desire for transparency and real-time data on manager performance. Still, large-scale risk management and transparency standards have lagged among emerging managers, creating friction for institutions eager to align with smaller, more agile managers while meeting their risk management mandates.
Today, emerging managers are under pressure to meet institutional-grade reporting and transparency standards much earlier in their growth cycle. Allocators have growing expectations around portfolio visibility, risk metrics, and adherence to ESG considerations, among other factors. Allocators, in turn, must develop the infrastructure to interpret these insights effectively, which brings us to the next point: how best to leverage transparency.
Efficiently Utilizing Transparency to Meet Fiduciary Standards
Direct access to emerging talent entails two primary costs for allocators: selection and monitoring. Selection involves primarily due diligence and consultant meetings, while monitoring requires ongoing oversight. Traditionally, institutions have paid large multi-strategy firms high fees to manage these responsibilities, knowing the firm will enforce restrictions if a manager breaches protocol. The fees cover the cost of oversight, especially for investors lacking internal monitoring capacity.
As more managers adapt to investor calls for transparency by offering granular data, allocators face the challenge of translating this data into valuable information.
The solution lies in developing an efficient monitoring framework. By defining clear criteria for monitoring and partnering with specialized firms, allocators can capitalize on full transparency without incurring excessive costs. The ideal infrastructure should allow allocators to assess managers’ opportunity sets and evaluate their effectiveness in capturing alpha, without depending solely on high-fee intermediaries.
Professional Access Structures
For allocators to confidently invest in emerging talent, the industry needs an access structure that aligns with institutional standards. This structure should foster an environment where emerging managers can build sustainable, high-quality businesses that prioritize long-term growth over short-term asset gathering.
Should an allocator and emerging manager agree on terms—potentially through an intermediary that can address size and safety concerns—legal structures become mere details. The investment standards and expectations should remain unchanged. Whether an allocator is accessing a large multi-strategy fund or a single manager, the structure should ensure transparency and alignment with fiduciary duty.
For emerging managers, scaling up to meet institutional standards is the key to unlocking sustained capital flow. While institutional allocators can’t afford to compromise their risk or governance standards, those managers who build infrastructure, demonstrate transparency, and clearly align with fiduciary principles will stand out in a crowded field.
Rather than waiting for allocators to bend on their criteria, forward-thinking managers can focus on meeting these expectations from the start, building a reputation that attracts and retains institutional capital. In the end, no allocator is going to compromise the integrity of their process for incremental gains.
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Kevin Becker is a Co-Founder and CEO of Kiski. Connect with him on LinkedIn here.