After the challenges of 2015 and the potential for lower investment levels in the year ahead, new hedge fund managers may face the question, Why bother?
Raising money for a new fund was already difficult before last year’s lackluster returns. Then the HFRI Fund Weighted Composite Index finished 2015 down 1.02 percent; a whopping 695 hedge funds closed their doors last year, according to industry tracker Preqin. What’s more, a recent Preqin survey found that 32 percent of investors plan to cut back on their investments in hedge funds.
“It’s been a hard year, but people are still looking for the next superstar that will deliver really good returns,” says Judith Posnikoff, founding partner at Irvine, California–based Pacific Alternative Asset Management Co. “It’s still hard to raise that first dollar, though. It’s very, very hard.”
| New Funds update | ||||
| Firm Name | Strategy | Manager | Previous Job | AUM* |
| Samsung Asset Mgmt | Asian stocks | Chang Hwan Sung | BlackRock | $20 million+ |
| Advenio Capital Mgmt | Global equities | Nigel Hart | BlackRock | N/A |
| — | Equities | Michael Weinberger | York Capital Mgmt | N/A |
| 3EDGE Asset Mgmt | Macro | Stephen Cucchiaro | Windhaven Investment Mgmt | $50 million |
| Caius Capital | European distressed credit | William Douglas & Antonio Batista | Goldman Sachs & Och-Ziff | N/A |
| Muddy Waters Capital | Activist/long-short equity | Carson Block | Muddy Waters Research | $100 million |
| *Estimated initial funds raised. Current assets under management may be higher or lower. | ||||
| Source: Alpha research. | ||||
Seed funding is as important as ever, and some new managers are becoming more amenable to deals that give early investors a bigger chunk of revenue, as well as reduced fees on their investments. The hope is that the loss of revenue will be offset by a larger asset base when other investors come calling, confident that the fund is a worthy bet, Posnikoff says.
Investors are also growing more demanding when it comes to compliance and risk controls, setting expectations that can be hard for smaller funds to meet. One way to differentiate a new fund is with strategy, and it helps to be “disruptive,” says Lyxor Asset Management’s Philippe Ferreira. “Innovation remains the key to being differentiated.”
The irony is that the most disruptive strategies are often some of the most expensive to start up. Quantitative and systematic approaches, for example, are seeing a lot of interest, according to Posnikoff and Ferreira, but they take more resources to create and maintain than a macro or long-short equity fund would, thanks to the cost of gathering data and building trading infrastructure.
In January former BlackRock director Chang Hwan Sung launched a new fund under the umbrella of Samsung Asset Management that is investing in Asian equities using a computer-based strategy. Hong Kong–based Sung is reportedly seeking additional funding from South Korean financial institutions.
Most new launches this year seem to be taking a more traditional approach. Michael Weinberger left York Capital Management with few details about what his new fund will look like; he said in his departing letter that he wanted to build “a more streamlined fund around a more narrow focus” — presumably, comparing his plans with the New York–based firm’s event-driven strategy.
3EDGE Asset Management, recently launched by Windhaven Investment Management co-founder Stephen Cucchiaro, has a new hedge fund that is using a macro strategy, whereas Carson Block’s Muddy Waters Capital fund aims to place activist long-short equity bets. Caius Capital, the brainchild of ex–Goldman Sachs manager William Douglas and former Och-Ziff Capital Management manager Antonio Batista, reportedly will focus on European distressed credit.
