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Alternative Market Briefing

Other Voices: Angel or devil: Seeding arrangements for emerging fund managers

Tuesday, July 12, 2011

The following article was written by Jeffrey E. Kopiwoda of Funkhouser Vegosen Liebman & Dunn Ltd., email: JKopiwoda@fvldlaw.com

Since 2008, increases in investor trepidation and regulatory action have resulted in greater barriers to entry for emerging fund managers. Simultaneously, the number of managers seeking to start their own funds is expected to increase in 2011 as talented professionals leave institutional proprietary trading desks following the implementation of the Volcker Rule restrictions on banks’ proprietary trading activities. As a result, more and more emerging managers are likely to turn to seed investors for early stage capital.

The question is whether entering into a seeding arrangement will more closely resemble a paring with an angel investor or a deal with the devil. Below we discuss 7 key elements of hedge fund seeding arrangements and what terms a fund manager may expect to see and negotiate.

1. The financial arrangement

A seed investor will commonly commit to providing a substantial amount of seed capital to an emerging fund manager as an “anchor” investor in a new fund in exchange for a share of the fee revenues that that the manager generates from the entire pool of assets in the fund. This arrangement should benefit both parties. In the short term, the manager has the opportunity to generate profits from a sufficiently large pool of assets to sustain its operations. Over the medium term, the manager has the opportunity ......................

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