Institutional interest in portfolios of hedge funds managed by minority- and women-owned firms is rising, but finding enough talented managers to put large allocations to work is a challenge.
Asset owners earmarked $850 million for investment in dedicated minority- and women-owned hedge fund portfolios in 2014, with some searches extending into this year, Pensions & Investments' reporting shows.
But these programs have more difficulties than those focused on traditional investment strategies, sources said.
For one thing, the universe of hedge fund companies with substantial ownership by minorities or women numbers only 350, with the vast majority managing less than $250 million (often much less) with short performance track records and varying degrees of institutional infrastructure, said David J. Katz, president and chief operating officer of hedge funds-of-funds and seeding specialist manager Larch Lane Advisors LLC, Rye Brook, N.Y.
Only 20 or so minority- or women-run hedge fund companies manage at least $1 billion, the most common minimum size criterion for institutions, Mr. Katz estimated. Size is important because many institutions can't let their investment represent more than 20% of a manager's total assets. Also, many firms in the minority-/women-owned universe have yet to hit the three-year track record required by institutional prospects.
“If you look at who comes out of the investment banks, bank proprietary trading desks and hedge funds to set up their own firms, there really are very few minority and women managers,” said Putri S. Pascualy, managing director and portfolio manager at hedge funds-of-funds manager Pacific Alternative Asset Management Co. LLC, Irvine, Calif.
“First and foremost, the manager has to be a superb investor, an institutionally oriented hedge fund manager with a good pedigree, experience and enough personal net worth to be able to live without a paycheck for a couple of years as the firm is built out. These are high bars.” If any of the remaining firms happens to be minority- or women-owned, “that's an extra cherry on the cupcake,” Ms. Pascualy said.
PAAMCO manages $9.5 billion in hedge funds-of-funds strategies, of which $1.5 billion is invested in emerging managers, including a high proportion of minority-/women-owned firms, she said.