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Industry Updates

Seeders FRM believe positive hedge fund seeding environment set to continue in 2011

Monday, February 14, 2011

Patric de Gentile Williams
Opalesque Industry Update – Comment from Patric de Gentile-Williams, COO, FRM Capital Advisors (FCA) Quality of hedge fund managers seeking seeding capital will continue to improve, which, in turn, improves investors’ potential returns. Higher cost of launching a hedge fund today means that a strategic investor is becoming critical for a successful launch.There are signs that investors are increasing their allocations to hedge funds with AUMs, which is good news for seeding vehicles.

Expectations for 2011
We expect the number and quality of managers seeking seed capital to continue to improve in 2011. The wave of proprietary traders spinning out on their own as a result of regulatory changes will increase the talent pool at the top end of the quality spectrum. With markets stabilising, we also believe that more people already in the hedge fund industry will have the confidence to launch their own funds.

The higher cost of launching a hedge fund today means that a strategic investor has become a critical element for a successful launch. Strategic investors, of which seeders are a major type, give new funds a solid foundation from which to launch and grow. A credible day one investor provides validation that encourages other investors to conduct their own evaluations.

Starting and running a successful and independent hedge fund continues to be an ambition for many of the most talented investors. Many ‘new’ hedge funds are teams who have worked together for years and have proven success in running money and controlling risk. These teams, as well as established teams who want to continue with the same strategy in a new construct, are attractive to seeders.

FCA’s approach
Our approach to investments is entirely talent-driven. However, top-down considerations of portfolio diversification, likely future investor appetite for a strategy and risk characteristics for proposed funds also impact the manager selection process.

We look for managers who demonstrate the ambition, skills and determination required to run and grow their own businesses and achieve institutional-quality standards. Scalability of the strategy, the manager’s marketing skills and perceived business acumen will also contribute to any decision.

We will continue to avoid more illiquid strategies and we stay away from directional strategies, which can create volatile performance.

Outlook for hedge fund seeding
If the hedge fund industry continues to produce similar returns to recent years and the appetite for hedge funds continues, the prospects for seeding are excellent. Well structured, smaller funds run by established teams are set to benefit. There are signs that investors are increasing allocations to hedge funds and diversifying away from the mega-size multi-strategy funds. Seeding funds give investors the opportunity to participate not only in the returns of high quality managers, but also to benefit financially from their growth through revenue share arrangements. Our models suggest that the incremental return from revenue-shares can double the potential returns. With the quality of managers seeking seed capital improving, this, in turn, improves investors’ potential returns.

We are confident that 2011 will bring more outstanding managers, enabling us to give investors exposure to a diversified portfolio of growing funds with exciting strategies. (Press release)

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