Service Providers See Big Market In Small Hedge Funds

Feb 10 2006 | 9:48pm ET

By Deirdre Brennan 

Small hedge funds mean big business for companies catering specifically to their needs. Increasingly, service providers are taking notice of this segment of the hedge fund industry, which includes firms with 1 to 5 employees managing under $50 million in assets.

"The large prime brokers have ignored or don't want to deal with the smaller clients; they obviously want the large, behemoth hedge funds," said Robert Miles, managing partner of Wonderdog Capital, a small long/short equity hedge fund that he founded in 2002. His firm currently uses online broker BrownCo, and does not employ a prime broker or an administrator.

Geoffrey Tudisco, founder and former executive of online brokerage Buy and Hold, which is now owned by Oppenheimer, took notice that small hedge funds were a tremendous, untapped market, and is revving up to launch a brokerage firm aimed at this segment of the investment world.

"There are 2,500-3,000 hedge funds in the U.S. managing less than $25 million each, which represents a sizable market," Tudisco said. "[They are] vastly underserved by current service providers, namely prime brokers and fund administrators."

Tudisco's latest venture, VanthedgePoint Group, is set to open its doors in early April, and will provide brokerage and portfolio administration services to small and emerging hedge funds with under $50 million in assets under management. "Our platform is designed to help improve productivity, reduce operating costs and increase marketability," he said. VanthedgePoint won't provide compliance services, but it will offer referrals for the services that it does not offer.

Tudisco has also observed that institutional investors are becoming more interested in smaller hedge funds because the larger managers are capacity constrained. "We think we've hit a sweet spot in the marketplace. Right now there is no one competing for that sized client," he said.

Consultants and technology providers are getting in on the small hedge fund game as well. Just this week, investment management consultant Citisoft, which has offices in Boston and London, launched a hedge fund and derivatives business aimed at meeting the growing demand for consulting services from alternative investment managers, and last week Gravitas Technology opened an office in Connecticut to serve the growing hedge fund community there.

Jayesh Punater, ceo and founder of Gravitas Technology, which specializes in providing IT services to alternative investment firms, said he first realized there was a need for robust technology among small and mid-sized alternative investment firms back in 2002 when many executives left big Wall Street firms to launch their own funds.

"The small firms didn't have much of an IT staff," he said, "and specifically, we noticed that in the alternatives space there were a lot of hedge funds and private firms starting up, and they had very demanding technology users who came from large trading environments."

Punater, who also serves as vice president of the Connecticut Hedge Fund Association, believes that Securities and Exchange Commission registration has added to the burden that smaller hedge funds must shoulder, not only from a direct cost perspective, but also from a management and administrative perspective.

"Fundamentally, we think hedge funds and private equity shops should focus on two things, acquiring assets and managing money," said Punater, adding that these firms like to outsource. "This is a niche where there is a large appetite and demand for technology providers," he said.


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