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New Managers April 2012

The Analytical View
Outlook for the hedge fund seeding industry

 

Rescuer funds

Many hedge fund investors require a hedge fund to have a minimum of $100m in AuM before they will consider investing in them. This is when seeder and accelerator funds come in. "Seeders/Accelerators agree to invest a large amount of assets into the hedge fund and, in return, they receive both [or either] the performance generated by the fund on their investment and a quasi-equity position in the firm, usually by sharing in the revenues on all assets of the fund," explains Agecroft Partners, a hedge fund marketer, in an article. "Seeders can generate significant returns if they pick a fund that performs well and significantly grows its asset base."

In a recent special report called "Start-Ups, Seeders and Strategic Stakes," Infovest21 delves into the trends underway in the seeding community as well as the outlook for 2012. Infovest21 is an information services company for the hedge fund industry.

According to Infovest21's report, half of the firms that seeded start-ups before 2008 have either left the industry or reduced the amount of seeding. The main challenges that seeders face are poor performance of seeded funds; strategies that are too crowded to raise money; short track records; the "Frontpoint experience" (which put into question the platform business model if one participant has a problem (in this case an insider trading investigation) that endangers the whole platform); and state regulations.

Goldman Sachs' Petershill is an example of a seeder having to deal with major challenges. The Petershill fund, founded in 2007 with $1bn, took minority investments in about 15 hedge funds, but many of them performed poorly or blew up. Goldman is now trying to sell the fund. Infovest notes the following new developments and outlooks for the hedge fund seeding industry:

1. Few large deals......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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