Wednesday, 17 September 2014
Last updated 18 min ago
Oct 12 2011 | 6:19am ET
Larch Lane Advisors has helped build hedge fund portfolios for clients since its founding in 1999. But the Rye Brook, N.Y.-based firm, an Old Mutual Asset Management Affiliate, has its hand in another, increasingly hot, area of the alternative investments industry: hedge fund seeding.
Over the past 10 years, the firm has done 26 deals with start-up and early-stage hedge funds, the last five with PineBridge Investments. As of early 2011, their Select Plus fund had allocated $400 million to five funds. FINalternatives Senior Reporter Mary Campbell spoke to Larch Lane founder Mark Jurish recently about fund seeding in the current market environment.
How is the current environment for hedge fund seeders like Larch Lane?
It is very conducive for seed firms because of the tremendous amount of talent that’s looking to start a hedge fund, leaving both large hedge funds and banks’ prop desks. The 2008 financial disaster, coupled with Dodd-Frank and further fueled by institutional investors looking to allocate to already well-established hedge funds, has made a great dynamic for hedge fund seeders.
What are some of the criteria you use when evaluating seed candidates?
This process is very holistic and it’s very experience oriented. We don't have a formula, but basically we’re looking for pedigree. Let’s be clear, when we’re seeding we’re not looking to seed a 25-year-old analyst that might have come out of Harvard and worked for three years for Goldman Sachs. We’re looking for experienced hedge fund-type people—that would include working at another hedge fund or a prop. trader from an investment bank—folks who have amassed a fair amount of their own capital, which they then will put into the fund alongside us. Teams that are already in place; again, not two people who have worked together but a team, including somebody who can help run the operations and help run the marketing. Certainly this team would have a fair amount of experience, perhaps not a direct track record, but a lot of experience managing the particular strategy that we’re looking to seed and a very deep understanding of that strategy, particularly the risks and how to mitigate them.
I would add that we are looking for teams that know how to run a business, not just know how to trade, because ultimately our investors do get rewarded when that fund that we seed is able to grow their assets. And growing assets in today’s environment is more than just making money; you have to have best practices—institutional-quality back offices surrounding that hedge fund. And finally, that fund that we seed, that strategy that we seed, we do want that to have fairly substantial capacity. So if it’s a niche strategy that can only manage $100 million or $200 million, we’re not interested.
What does Larch Lane bring to the table when it agrees to seed a fund?
In any seeding arrangement, the duration of the capital is the most significant thing, especially in the situation where we’re attracting entrepreneurs who allegedly know how to run a hedge fund. They don’t need us to say, "Here’s the front-office trading system that you should use" or "Here’s the prime broker." We help them with that, but they don’t really need that. If we were attracting 25-year-old analysts, it would be much more important for us to really be the business people behind it, but that’s not who we’re looking to attract.
What we provide them with is nice, chunky capital that we commit for a period of time which we think is appropriate. We provide them with our strategic understanding of the business, including their trading strategy. We certainly know a lot of institutional-type investors—that never hurts. Although we don’t act in any third-party marketing capacity, we do have a fairly good Rolodex. What I think we can offer to our seed managers is a real direct knowledge of the markets themselves, because we’ve been involved in these markets for 25 years, and have a really good understanding of what investors are looking to allocate to and the types of managers they’re looking to allocate to.
What is the average size and duration of your investments, or does it vary widely?
It does vary. I would say is that it’s sizeable, it gets them to what we believe is a critical mass day-one and we tend to lock up, subject to risk controls. We get daily transparency to ensure that those risk controls are in place and not being violated, and if everything is according to plan, then our investment is typically multi-year.
You mentioned the importance of infrastructure earlier. Would you say you’re placing more emphasis on that since 2008?
I wouldn’t say any more emphasis post-2008 than pre-2008; it’s always been of the utmost importance. It is critically important to us, and to our hedge funds, that they have the appropriate infrastructure in place: the right prime broker, the right lawyer, the right accountant, the right documents that are sufficient for the strategy they are running.
How do you find the funds you seed? Do they come to you? Do you seek them out? Or is it some combination of the two?
It’s certainly a combination but much more skewed towards them finding us. This is a very efficient business. Think of it this way: Somebody wants to start a new fund, the first thing they’re going to do is say, "Do we have enough of our own capital to make a go of it?" If they do, they go out and they do it. And if they don’t, then they’ve got to look elsewhere—and there’s a lot of sources of capital, seeding being one…If they come around to, "You know, we should really go down the seeding route," then I will tell you that they probably already know of us because there’s only, legitimately, a handful of seeders who could provide sustainable, day-one capital. They already know us or they’ll call their friends in the business, they’ll call their lawyer, their accountant, their prime broker, who definitely will know about Larch Lane.
Are there any particular strategies or regions you’re focusing on right now?
I would say regionally we are focusing on Asia. We believe that over the next number of years—as has been the case over the prior few years—the Asian region, particularly because of the growth of China, is going to be a bigger player in global capital markets. And as those regions get further developed and provide opportunities to invest in deeper, more liquid capital markets, that’s a good recipe for a hedge fund. So we have been spending a lot of time in the Asian region looking for managers who have found strategies that we think can capitalize on that growth.
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