$100M HFs Snubbed By Institutional Investors, Prime Brokers

Jun 20 2008 | 2:00am ET

So what does $100 million in initial assets get a rookie hedge fund manager these days? Not much, according to Dick Del Bello, senior partner at Conifer Securities.

Del Bello, who previously headed UBS’ prime brokerage for the Americas, says the hedge fund industry is becoming more institutionalized and, as a result, investors are demanding sound infrastructure and transparency be in place before they commit to managers. And in light of the Bear Stearns fiasco, institutions are questioning the safety of their assets, and are dictating to their managers where they want their assets kept.

“If you were an institution in a hedge fund that was custodied at Bear, you would rightfully be very concerned,” said Del Bello. “That same thought process is going on today with Lehman Brothers just because they’re in the news.”

The institutionalization of hedge funds have forced investment banks’ prime brokerage units to focus on servicing hedge funds that manage a minimum if $1 billion, leaving less well-heeled funds to fend for themselves.

So how much in initial assets does a fund need to attract interest from investors and prime brokers? According to Del Bello, $500 million will get you noticed by the banks, but even at that level, some institutions won’t invest in your firm unless you have at least a one-year track record.

“Hedge funds can’t get enough access unless they’re generating enough revenue for the top-tier investment banks,” said Del Bello, who added that he recently met with a $1 billion hedge fund that wanted to add a second prime broker, but couldn’t generate enough interest because “they were a plain vanilla long/short fund that’s a lot more long than short right now and didn’t fit the bill.”

The void left by the big banks has created opportunities for smaller primes, or mini-primes, to step in and take over the “heavy lifting” of servicing these hedge funds in terms of reconciliation, documentation and even office space setup. “It is in this space that we see great growth opportunities,” said Del Bello.


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