How to invest with emerging managers like an institutional investor


By Rich Gockelman, CIMA®

Institutional investors are usually the early adopters of investment strategies, and the current trend to emerging managers appears to be no exception.

The idea is to invest with talented emerging portfolio managers while they’re small enough to remain nimble, and not bloated with assets. Indeed, the odds are that the next Warren Buffett is someone out there that investors haven’t even heard of yet.

As director of manager relations at Covestor, one of my favorite things about my job is talking to emerging portfolio managers “off the beaten path” who are helping investors reach their financial goals.

It’s refreshing to see successful managers from all walks of life who don’t necessarily reside on Wall Street or at a traditional asset-management firms. It appears that fair disclosure of information, lower trading costs and other facets of modern financial markets have helped level the investing playing field. As an online investment marketplace, Covestor offers more than 100 actively-managed portfolios and lets individuals invest with portfolio managers they may not have discovered otherwise.

Why emerging managers?

I recently had the opportunity to attend the Emerging Managers Summit in Chicago, hosted by Opal Financial Group.

This conference was a showcase of up-and-coming investment managers who are considered to be in the earlier phases of development.

Many institutional investors are interested in emerging managers because they offer unique investment opportunities that they cannot often find with established larger investment managers. Public pension funds, foundations and other institutions are searching out emerging managers.

At the Opal conference, many institutional managers said there are many different reasons why they like emerging managers. Smaller managers are not distracted by administering a large businesses, they can take a more entrepreneurial approach to the business of investing, they live and breathe their business, and they offer innovative strategies.

At the same time, what attracts institutional investors to emerging managers also presents challenges in working with them. By definition, emerging managers may have a limited track record or no real live performance measurement of their strategy. Additionally, sometimes these emerging managers are located in custody arrangements that make it more difficult to operationally connect with them for investment management.

Some individual investors are also drawn to emerging managers because they’re looking for unique investment strategies that will help them accomplish their financial goals. The challenges and opportunities for institutions can be the same for individual investors as well.

An online marketplace       

Investors are clearly interested in emerging managers, but they can be unsure how to find them and clearly understand their strategies.

Covestor can help investors overcome these challenges, and provide access to unique emerging manager investment strategies.

The Covestor investment platform is a marketplace that connects emerging investment managers with investors who are comfortable making their own investment decisions, with some help and guidance from Covestor if they want it. After investors choose portfolio managers, the manager’s trades are replicated in clients’ own accounts. (Read more about how Covestor works.)

Emerging managers have to go through a rigorous vetting program before they become available on Covestor’s marketplace.

First, each of the managers coming to Covestor goes through a preliminary investment review of their strategy. They then have to put their own capital into a real live account, and run their strategy in an incubation phase before it is potentially made available to investors.

This allows the Covestor Investment Management Team to observe, analyze and run comprehensive proprietary reports on the manager’s strategy. Once the incubation period has concluded, the investment management team conducts a formal review with the manager on their strategy.

Covestor reviews what the managers did, how did they do it, how they managed risk, and how the strategy performed relative to the benchmark.

Not only do managers on the Covestor platform invest their own capital into their strategy account that investors follow, but they also pay the same transaction costs their investors do every time they buy or sell a holding in their portfolio. The goal is to align the interests of portfolio managers and investors following them.

Covestor uses Interactive Brokers as our custodian for both manager and investor accounts. Interactive Brokers is a leading industry discount broker that has been in business for over 37 years. At Covestor, the investment manager’s and the investor’s interests are equally aligned.

‘Managing’ the emerging managers

Going back to institutions, once an institutional investor has found an emerging manager to invest in, they then have to maintain ongoing monitoring and due diligence of that manager and their strategy.

Sometimes they do this in-house, with an investment management group, or sometimes they outsource it to a third party firm. Either way requires both financial and skilled personnel resources. Finding good manager talent is important, but so is the ongoing management of that manager.

At Covestor, our own Investment Management Team and portfolio operations group maintain regular monitoring and management of the managers and their strategies. Each day, the managers’ investment strategies are updated with daily performance reporting and risk management metrics relative to the strategy benchmark.

This allows for complete and timely transparency, so investors can see how their strategies are performing.

For investors looking for undiscovered, unique and emerging managers, Covestor can help identify managers and monitor them after selection. Access, information and support can allow just about any investor to invest like an institution on Covestor when it comes to emerging managers.

Rich Gockelman, CIMA® is Director of Manager Relations at Covestor.

DISCLAIMER: Covestor Limited (“Covestor”) is an SEC registered investment adviser.  Information pertaining to the registration status of Covestor can be found at, or may be received from Covestor upon request. Past performance is no guarantee of future results.