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 from.
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 FoHFs.
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.