Survey Shows Hedge Fund Investors Ready to Provide Seed Capital

Dec 14 2010 | 10:00am ET

Demand for seed capital has risen and institutional hedge fund investors are showing an increasing willingness to meet it, according to the latest survey from the Preqin research group.

Preqin says the number of hedge fund investors expressing an interest in seed investments has increased from 11% in 2009 to 21% in 2010.

Preqin's Amy Bensted told FINalternatives the findings were based on data from 650 institutional investors.

Investors say the benefits of this type of investment—fund ownership, fee negotiations and early access to the next generation of hedge funds—outweigh the disadvantages in the current economic climate.

Preqin’s findings also suggest seed investments are evolving post-crisis, with investors injecting seed capital into more established vehicles that are having trouble raising funds or have lost assets in the crisis.

The survey also found that investors are less likely to trust managers with track records under two years (only 38% of respondents say they’d consider such managers, compared to over 50% in 2009).

At the same time, investors are more likely to consider investing in small funds—in 2009, 25% said they’d only invest in funds managing at least $500 million; in 2010, that number fell to 19%.

A full 72% of funds of hedge funds will invest with an emerging manager and another 13% would consider such an investment.

Bensted, manager of hedge fund data, said: “The industry contracted following the market crisis, and most funds lost assets. Investors have recognized this and are now willing to invest in smaller funds. Although investors are wary of investing in funds in their very early stages, fund managers that are able to build up a track record through investment of their own capital, or of a small fund, will be attractive to the institutional market.  In 2011 we can expect investors to continue to look at smaller, and indeed emerging fund managers, and more capital to flow into the sector.”

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