Allocators Back Younger Hedge Funds as Ops Bar Rises

Allocators are increasingly willing to invest in smaller, younger hedge funds, AIMA and Marex research published this week shows.

The average minimum fund size investors would consider fell to $94 million, down from $106 million in 2024 and $151 million in 2022. Fifty-four percent of respondents said they would invest in managers with less than one year of track record, and nearly three-quarters would consider a manager running under $100 million.

Operational standards remain high. Eighty-six percent of survey participants named operational due diligence as the single biggest barrier to allocating to emerging managers. Concern about strategy drift and illiquidity rose to 84% from 72% year on year.

Managers are building institutional infrastructure earlier. Average headcount across surveyed firms rose to 9.5 employees. Firms with under $100 million in assets now run average teams of 6.1 people, up from 5.5 in 2022. Firms report higher fixed costs from earlier investment in compliance, risk and investor relations.

Those costs pushed average breakeven assets under management to $82.9 million, up from $70.1 million in 2024, an increase of almost 20% in two years. Smaller managers have a total expense ratio of 1.11% versus a 0.99% market average, while their breakeven AUM of $57.4 million remains below the broader cohort’s level.

Lawrence Obertelli, head of EMEA prime service sales at Marex, observed: ‘Emerging managers are launching on stronger institutional foundations and allocators are more flexible on size and track record, even as fundraising remains hard.’ Tom Kehoe of AIMA added that investors are placing greater weight on platform quality and strategy merits rather than assets or tenure alone.