Nov 20, 2023 - Business

Exclusive: Expect Equity raises first fund to diversify hedge fund managers

Illustration: Sarah Grillo/Axios

Expect Equity, a new incubator for hedge funds led by underrepresented managers, has raised $55 million (out of a $100 million target) for its first fund.

Why it matters: "Excellence is broadly distributed, capital is not," as the saying goes, Expect Equity founder Hallie Label told Axios.

The big picture: As in other assets classes, hedge funds have historically been mostly managed by — and been lucrative for — white men.

  • As of September 2021, only 1.4% of U.S. wealth was handled by asset management firms owned by women and people of color, according to a 2021 study by the Knight Foundation.
  • Of that, hedge funds owned by women and people of color represented only 0.4% of total U.S. assets (or 5.6% of all hedge fund dollars).

What they're saying: "They outperformed when they weren't even able to fully execute on their ideas," says Health Forward chief investment officer Christie Zarkovich when asked why she's taking a bet on the managers Expect is recruiting.

  • This is unique from the typical diversity programs she usually sees, which often back managers that already have their own funds.
  • Health Forward, along with Crewcial Partners and another limited partner Label declined to name, provided the initial capital.

How it works: For each fund it raises, Expect Equity will select two or three manager teams to fund and incubate for three years. These managers have experience investing, but will now get to execute their own strategies.

  • Each team will ideally be seeded with about $50 million set up as a special purpose vehicle.
  • Expect will employ the fund managers for three years until they spin out on their own.

Zooming in: Expect aims to de-risk emerging managers as much as possible in the eyes of limited partners.

  • That means setting them up with the right caliber of back office infrastructure (compliance, finance, legal, etc.) that institutional investors expect.

Between the lines: Seeding the funds with capital from respected institutional investors is also part of this.

  • "Allocators are going to make mistakes.… It's acceptable to fail as a group but it's completely unacceptable to fail alone," Label says about investors' affinity for funds in which their peers have invested.
  • "There's no promotion or pot of gold at the end if you go out and invest in an emerging manager and it goes well," she adds. "But there's immense career risk if it goes wrong."
  • Zarkovich also points out that a program like Expect can succeed only if it's well capitalized. So in a way, it's logical to participate only if there are others also writing big checks.

Yes, but: "There's still going to be a lot of bad emerging managers," Zarkovich says.

The bottom line: "Fundraising is a searching mission.… I'm not gonna convince a soul to invest in this, it has to be something they want to do," Label says.

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