Hedge Fund Seeders: Looking For The Right Fit

Feb 1 2008 | 12:12pm ET

It’s no secret that emerging hedge fund managers vastly outnumber the firms that are in the business of seeding them. But while they may be too few, they are certainly varied.

Wanted: Volume, Liquidity

Some seeding firms focus on plain-vanilla strategies, such as equity long/short. Simon Clowes, a partner at VCM Fund Management, said his firm specifically focuses on equity and derivatives strategies, including event-driven or special situations, statistical arbitrage and futures-based strategies.

“We’re not focused on highly structured products in the credit or mortgage space or private equity or long lockup strategies,” he said. 

Last year, VCM entered into a joint venture with Robeco to launch an emerging manager platform and a fund of hedge funds, the Robeco VCM Emerging Managers Fund. The platform has already spawned a long/short hedge fund with a systematic futures strategy. What’s more, another two or three strategies are waiting in the wings, according to Clowes.

“Our platform has three functions: seed capital, marketing and operational infrastructure, which we offer to portfolio managers,” he said. “We also have an internal fund of hedge funds, which gives investors a blended return from a variety of different funds. Or they can invest directly into the underlying managers.”

The platform, which will allocate up to €20 million (US$29.5 million) per underlying manager, shares in a portion of the management and performance fees depending on how much seed capital, marketing or operational resources they’re looking for. Clowes said he’s looking for experienced managers with strong trading backgrounds and “fully-formed strategies.”

Talent, Talent, Talent

Other firms take a much more opportunistic approach to sourcing managers. For SkyBridge Capital, it’s all about talent. “In real estate, it’s location, location, location, and in the hedge fund industry it’s talent, talent, talent,” said co-founder Anthony Scaramucci, who added that the firm has been involved with cash-strapped managers as well as better-capitalized ones.

SkyBridge takes 20% to 25% of the gross revenues from underlying managers in exchange for its risk management and marketing services. The $330 million firm is reportedly raising a new fund to broaden its portfolio to include global emerging managers but Scaramucci declined to comment on the new offering.

Investcorp, a $7 billion alternatives shop, takes a similar approach to SkyBridge’s. The firm’s single-manager platform opportunistically invests up to $50 million in managers across a range of strategies including global macro and distressed strategies.

Deepak Gurnani, co-head of Investcorp’s hedge fund, said the firm wants to empower emering managers and make them feel like entrepreneurs in control of their own firms, while having a partnership with them at the same time.

“We provide the initial capital, operations and risks oversight and let the investment professionals invest,” he said.

Investcorp looks to sign up two to three funds on its single-manager paltform—which manages some $900 million in total assets—every year, but that mandate is not written in stone.

“We’re not under pressure to sign up funds, but, for example, we got Washington Corner [Asset Management] and Stoneworks [Asset Management] at about the same time because we thought both of them were interesting,” Gurnani said.

Happy Shopping

Two managers currently on the Investcorp platform said that the firm’s added value stems from its hands-off approach.

“If you’re really looking for a complete platform, then that’s not the Investcorp approach,” offered Gary Link, CEO at Stoneworks. “For someone looking to run an independent shop and trying to get stable capital, advice, plus marketing, then I would definitely recommend Investcorp.”

Link said the firm, which currently manages $160 million, originally launched its fund and traded for about four months before realizing that it wasn’t going to raise enough capital to meet its ongoing financial obligations.

After doing its due diligence on the market, the firm chose Investcorp because of its bigger-than-industry-average checkbook, distribution network and marketing teams. Link said Investcorp’s deal was also enticing because “they weren’t looking to take away any of our independence or force us to use platforms or infrastructure that we didn’t want or need.”

Ed Banks, founder of Washington Corner, added that the Investcorp model takes no ownership stake and has a definitive “sunset” date with no buyout clause or lingering alliances. “There are pluses and minuses to having somebody like Investcorp behind you,” said Banks. “Obviously, the economic split is a cost, but the benefit is the high-end institutional infrastructure that they have and that type of seeder takes away a lot of headaches.”

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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