By Niki Natarajan
All the world's a stage. Jacques in William Shakespeare's
As You Like It, could almost have been prescient. In
his monologue of the seven stages of man's life, he could
almost describe the seven stages of hedge fund investing.
If the standing room-only session at the recent EuroHedge
Summit in Paris was anything to go by, early stage investing
has entered its second childhood, but it would seem that the
struggling actors have yet to see this.
The session called Start-ups, Seeding and Capital Raising
saw the audience sitting on the edge of their seats, eagerly
awaiting snippets of wisdom from the allocators on the panel
about where the money for emerging managers was coming
Although numerous research papers endlessly wax lyrical
about the outperformance aspect of this hedge fund sub-set, ask
most of the managers in the room - many of whom manage $50
million or less - how their asset raising efforts are going and
nearly all throw back their heads with dramatic despair.
The reality is that nearly every small hedge fund at the
800-strong event wanted to know if emerging manager investing
was a myth or a reality kick-started by the Volcker Rule. But
when Matteo Dante Perruccio of Hermes BPK Partners unveiled his
coup de grâce the underlying sense of defeat could be
felt as their worst fears seemed to be reinforced. The day the
Hermes BPK press release announced the seeding joint venture
with Northern Lights Capital, the firm received 350 replies -
for assets that still need to be raised.
The life of an unknown actor and a start-up hedge fund are
not so different: constant rejection often leading to a
wavering sense of self and purpose. But thinking seeding by a
Blackstone, SEB or IMQubator is the only way to raise assets is
like believing the only way to be a star is to be on a high
profile talent show.
True, assets under management and mentoring can make an
unknown hedge fund a celebrity faster, but if the underlying
talent is there, even a jobbing actor without stage school
training can make it big; it might just take longer. The seven
stages of hedge fund investing have not changed that much with
the advent of the institutional investor.
Experienced institutional investors are those that seeded
the hedge fund brands of today, now there are simply more of
them and some choose to seed the seeders rather than go direct.
According to InvestHedge, Abu Dhabi Investment Authority looked
at seeding commodity trading advisors; Arizona Public Safety
Personnel Retirement hired Goldman Sachs for seeding; New York
State Common Retirement Fund added money to the Rock Creek
Emerging Manager Fund; and Texas Teachers is working with
Reservoir Capital to seed managers.
The newer generation of experienced ex-FoHF investors going
directly to the brands are just in the 'soldier' stage of life:
they just want to go to war on their own. One day, as 'justice'
sets in, they too will look at smaller managers for
outperformance and capacity.
Until that time, what emerged clearly in Paris are other
types of investor that actually want to court the smaller hedge
funds. Many of the much maligned funds of funds were behind
many of today's brands -led by stalwarts like GAM and HSBC.
Their main rule is that the strategy has to have capacity
but young hedge funds ignoring funds of funds because of the
bad press are ignoring experienced investors that have a track
record in spotting talent.
Some like Protégé Partners have dedicated
products mixing seeding with arms' length investing, others
like PAAMCO or Fundana have early stage preference without the
potential conflicts of seeding, while real thrill seekers such
as Jean Louis Juchault have
launched a fund to invest in these emerging manager
Most children start life in a family, and family offices
such as Blennemann Family Investments are some of the most
prolific investors in new, hungry young stars with raw talent,
and have always been in their quest for out performance.
Like the children of famous actors, only high profile
spin-offs can hope to have day-one institutional tickets, most
start-ups without a family name or experience have to tread the
boards and work towards institutional grade money.
Beyond the seeders, those with outstanding performance need
to find a way to look beyond the obvious. In the US endowments
have always been ahead of the hedge fund curve and behind some
of the names of today. Sanjay Tikku at KAUST left the audience
in Paris relieved that someone somewhere out there was actively
seeking small high performing strategies where asset gathering
is actually capped.