Canadian hedge fund managers generally have been performing better than the public market indices and the leading global hedge fund indices. The emerging Canadian hedge funds sector, characterized by Manna as newer managers with less than $150 million under management, has been outperforming the larger hedge funds in Canada, as illustrated by this chart:

Challenges of Selecting Hedge Fund Managers

While institutions have been able to actively participate in hedge fund strategies, many investors continue to encounter significant challenges in gaining exposure to the sector.  The most obvious challenge is one of scale, since a diversified portfolio of managed accounts with 10 managers requires the investment of around $10 million dollars (and an allocation of $10m to hedge funds implies a total investment protfolio of at least $100m).

A similar issue arises in establishing an investment team with the appropriate expertise to be able to source, select and monitor hedge fund investments.  All hedge fund investments must be carefully reviewed through a detailed due diligence process that typically continues over a period of months.  Most hedge funds in Canada are relatively small firms, which generally increases operational risk, requiring additional due diligence by the investor. Finally, since hedge fund managers typically retain considerable flexibility, hedge fund investments must be closely monitored to ensure there is no style drift or inadvertent concentration of similar long/short positions within the program.  Without an experienced team capable of reviewing and monitoring hedge funds, the average investor may not be able to develop a successful, diversified hedge fund investment portfolio.

Emerging Manager Focus

Emerging or "undiscovered" managers, defined by MANNA as managers with less than $150MM in AUM, represent the majority of the Canadian hedge fund universe base and many of them outperform the overall hedge fund market. 

MANNA believes that the emerging hedge fund manager sector will be the most rewarding in the next few years. Accordingly, MANNA has created a diversified portfolio of Canadian hedge fund managers, not through a fund of funds, but instead through a multi-manager fund using segregated managed accounts.

Although emerging managers are known to outperform on the whole, sourcing new emergent managers is another fundamental issue for many investors.

MANNA tracks and monitors emerging managers in Canada, through its own database and research. MANNA has a proprietary due diligence process, which it uses to select the emerging managers suitable for investment by the Fund.

Emerging managers can offer significant potential through alpha generating strategies driven by:

• Greater incentive of start-up managers to outperform their peers to attract assets.
• The nimble nature of smaller funds to focus on their best investment ideas. 
• The application of specific expertise to niche exposures.