A fully mature industry and the stringent size requirements of asset owners are forcing many would-be hedge fund proprietors to go out with hat in hand to find a firm willing to provide seed money.
The amount of assets under management by a hedge fund firm is one of the critical factors for the increasing number of institutional investors that have moved to direct investment, and that has raised the bar for new managers.
“Roughly 90% of institutional dollars go into hedge funds managing more than $1 billion, leaving very little to be invested in early stage hedge fund firms,” said Donald A. Steinbrugge, managing partner of third-party marketing firm Agecroft Partners LLC, Richmond, Va.
Unless a new manager secures backing from an old employer or wealthy family and friends, the early marketing experiences for many hedge fund firms likely will be with the cadre of alternative investment managers that have created specialized seeding funds, such as Blackstone Alternative Asset Management, Goldman Sachs Asset Management, Protege Partners LLC and Reservoir Capital Group LLC.
They might also show their wares to the purveyor of an investment platform, which provides the young firm with middle- and back-office infrastructure, access to trading and risk management systems, and business services of the kind that Ramius LLC provides to Quadratic Capital Management LLC (Pensions & Investments, Sept. 21).
“Marketing to a seeder or an investment platform is no different from marketing to a big pension fund,” said Andrew Saunders, senior managing director at Castle Hill Capital Partners Inc., New York, a specialist consultant to hedge funds. “That's just business, having to hit the circuit to get first investors and seeders,” he said.
Making the rounds is exactly what CEO Aurelia Lamorre-Cargill and Chief Investment Officer Marcos Bueno — managing partners of new multistrategy commodities hedge fund manager Argon Capital Management LP — have been doing since mid-September.
In possession of good pedigrees — Ms. Lamorre-Cargill was global head of fixed-income structuring at Barclays Capital PLC and Mr. Bueno was a partner and senior portfolio manager of a commodities strategy for Graham Capital Management LP — the two have good access to seeders, even receiving unsolicited interest, Mr. Bueno said.
“Reaching critical mass is critical. We need a partner,” Mr. Bueno said, to provide assistance with infrastructure, distribution and risk management together with the cultural alignment. The firm will not launch and start trading until it has received a seed investment, Mr. Bueno said.
Critical mass for New York-based Argon Capital would be $400 million, although it's probably more realistic that the firm will attract $200 million and be expected to drum up the balance on its own, Ms. Lamorre-Cargill said.
“Seeding is a sign of the maturation of the hedge fund industry,” Mr. Bueno said, noting “seeders are valuable to both end-investors and the hedge fund manager.”