Q&A: Seeding The Future Of Multi-Strat Hedge Funds

Jan 30 2008 | 1:00am ET

Emerging hedge fund managers post better returns than their more well-established peers. Still, most new money entering the hedge fund space is going to firms with longer track records. But the recent proliferation of emerging hedge fund seeders offers investors access to new funds, with the added incentive of revenue sharing.

FINalternatives spoke with Anthony Scaramucci, co-founder of New York-based SkyBridge Capital, which has raised some $900 million for its first group of seven emerging hedge fund managers. Scaramucci spoke candidly about what SkyBridge brings to the table and where he sees his business going forward.

FIN: What are the advantages of using a seeding firm, as opposed to simply raising investment capital?

SkyBridge's Anthony ScaramucciSkyBridge's Anthony ScaramucciScaramucci: Acceleration of growth out of the box to ensure the business’ survival. We act as a strategic partner, and not just as a seeder, so we’re going to be very aggressively marketing on behalf of our managers through our broker/dealers. We have a fully integrated risk management and due diligence business, and that helps in co-branding by bolstering the ability of the new business get institutional quality orders from day one.

FIN: As the size of hedge funds increase—in other words, as smaller funds find themselves decreasingly viable—what is the role of a seeding firm?

Scaramucci: Clearly, there is a huge opportunity for seeding funds as a result of what’s going on in the space. Eighty-five percent of new capital flowing in is going to the top 150 to 200 managers. Yet, a lot of academic research suggests that the emerging manager may do better than mature managers as a result of size and the economics associated thereto. The fact that these guys are having trouble raising money gives us an opportunity.

Big institutions know that they can’t put every incremental dollar into the top hedge funds. They also know that there’s a big opportunity in the emerging manager space because they seem to be outperforming on a relative basis.

FIN: What are you looking for in a hedge fund manager in terms of size and strategies?

Scaramucci: We’re really looking for talent. In real estate, it’s location, location, location, and in the hedge fund industry it’s talent, talent, talent. We’re looking for pedigree, well-trained guys from terrific shops.

We’re less-strategy specific and more talent-specific. There’s no optimal size, so we’ve done deals with firms that already had $100 million to $200 million under management but were looking for a little bit of a goose and [the manager] was willing to trade a piece of his business to get us in there to goose him. And we’ve done deals where we were the first check writers.

FIN: How many managers do you see and how many do you actually invest in?

Scaramucci: We’re probably seeing 500 proposals per year and we’ll look very intensely at 10 of those proposals and back between four to eight managers per year. We invest between $25 million to $50 million per manager.

FIN: How do you compete with larger hedge funds and investment banks with an appetite for increasing their stables of hedge fund managers?

Scaramucci: We will always have competition from the larger hedge funds for portfolio managers, but there’s always a group of passionate entrepreneurs who want to have their names on the doors of their businesses. If you do an 80/20 split with us, then you get to own your businesses and control your clients.

FIN: In general, what sort of stake in a firm’s operations do you and other seeding firms seek?

Scaramucci: We’re getting 20% to 25% of the gross revenues from these businesses.

FIN: When it comes to high-profile managers—especially those leaving big shops that may be in a position to seed their own ventures—how do you approach the situation? What does a firm such as yours have to offer?

Scaramucci: If a guy is high-profile and leaving a firm, it depends on how close I am or my partner is to that person. We’re not going to get everyone and we’re also not the right firm for everyone. I’m looking for the guy who doesn’t think that I have the pizza cutter out to carve into their pie. Rather, I’m looking for the guy who gets our business and wants to make a bigger pizza pie together with us.

My partner, Scott Prince, was on the risk management committee at Goldman Sachs, where he ran and trained prop traders. So we have a group that almost acts like an outsourced risk management for underlying managers. Our clients like the fact that we have somebody looking at risk at an arm’s length from the general partners.

FIN: Can you tell us a bit about the firms you’ve invested in? How have their asset levels and investor profile changed?

Scaramucci: I have four managers who are ahead of their benchmarks, three who are still brand-new and one that we let go. I think I’ve got four winners in the first fund and I’ve raised over $900 million in capital for that group.

Our business is predicated on good performance and our ability to raise capital off of the performance. So we have to cut our losers quickly and let our winners run, and that’s the sign of a good business.

FIN: How has your business changed since inception?

Scaramucci: When we started the business, people said there would be adverse selection where managers who weren’t any good would take our deals. We now have what I’m calling affirmative selection where we’re now getting very talented managers because of the uncertainty in the markets and the difficulty in fundraising. That’s been the most dramatic change.

This business looks great on paper but is very hard to execute. It requires people to have a long-term mindset and our fund has to be thought of as a private equity fund because even though we have a three-year lockup, investors have to have a five-to-seven year mindset.

FIN: What is the future for seeding firms?

Scaramucci: Seeding firms will be the next multi-strategy firms because they have all the best features of a multi-strat with better risk management, because none of my funds can knock the other ones out of business. Each one of these guys are in their own steel-tight container so you can come into our fund, get exposure to a multi-strat and own a piece of the forward revenue on the multi-strat.

FIN: We hear that you’re looking to expand your footprint in Europe and Asia. Any truth to these rumors?

Scaramucci: Our goal is to open an office in London by the third quarter. I think we need to get a footprint in London, which will increase our global exposure. London gives you the rest of the world in terms of the time zone and the fact that you can access funds, endowments and other large institutional groups. I hope a longer-term goal for us is to put an office in Hong Kong, Shanghai or Singapore.

by Hung Tran

For more on hedge fund seeding and incubation, including a directory of seeding firms, please see our special Seeding & Incubation issue.


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