Such is the demand for hedge fund investments that individuals who have invested in such funds for their own benefit find themselves being pulled into the hedge fund business.
Two examples come to mind: the founders of Sage Capital Management LLC, White Plains, N.Y., and Federal Street Partners, Stamford, Conn.
Sage Capital Management was started by three retired Goldman Sachs partners: Robert Friedman, who was chief financial officer at Goldman and partner in charge of Goldman Sachs Asset Management; Peter A. Levy, son of the legendary Gus Levy, headed the firm's New York Stock Exchange floor operations and traded the firm's proprietary equity positions; and Ronald Tauber, general partner and chief operating officer of the J. Aron & Co. division. They were joined by Anne Brown Farrell, who had founded Goldman Sachs' futures and options division in Dallas.
The four started the firm eight years ago to invest $25 million of their own assets in a selection of hedge funds with the aim of earning equity-like returns without the full equity risk. But relatives and friends, often colleagues or former colleagues from Wall Street, would ask the group to invest for them or a favorite charity.
"We would say, `You don't want to do this,"' said Mr. Tauber, "but we gave way, and when we got to about $80 million we thought we would do better if we professionalized it. So we hired some people, we now have 11, and we're growing pretty quickly."
Two years ago the firm still focused on wealthy individuals, but they received a consultant's questionnaire in the mail and filled it out. The consultant was seeking a manager-of-hedge-fund-managers for a foundation, and Sage won the business.
The Sage partners realized they were in the institutional business. The firm now has $280 million under management from wealthy individuals, foundations and endowments. Sage runs two funds, each composed of 30 hedge funds; one for individuals, and one for institutions. "We are diversified across many hedge fund sectors," Mr. Tauber said. The primary goal, he adds, is to achieve equity-type returns with half of the stock market volatility.
The process was almost identical at Federal Street Partners, which was started by Edgar Barksdale and Will Green, two of the founders of RCB International, which offered manager-of-manager funds specializing in international investment to institutional investors and was acquired by Northern Trust Co.
Messrs. Barksdale and Green started investing in hedge funds for their own accounts in 1999, after they became convinced that the first decade of the new century was likely to produce low equity returns, following the extraordinary returns of the 1980s and 1990s.
They decided that to earn good equity returns on their personal investments in the new environment they would have to hire managers who were flexible, could use leverage and could sell short, Mr. Barksdale said. They persuaded several friends, high-net-worth individuals, to invest with them and soon were investing $110 million.
After Mr. Barksdale left Northern Trust at the end of 2000, and Mr. Green joined him in April 2001, they decided that if they were to be really successful with their investments they needed to travel extensively to discover and thoroughly research emerging hedge funds.
Like Sage, Federal Street Partners has two funds and invests in 37 hedge funds. The years Messrs. Barksdale and Green spent researching managers for RCB International have provided them with valuable contacts in the manager community from which most hedge fund managers emerge. Federal Street Partners just won its first institutional client, a university endowment.
With the principals of Sage and Federal Street Partners, and other knowledgeable groups out seeking and even helping initiate hedge funds, the supply of hedge fund talent might just keep pace with demand.