Alternative Market Briefing

Seeding and incubating emerging LatAm hedge fund managers, Seeding Trends

Friday, October 26, 2007

Matthias Knab reports from Miami: Simon Irish, Head of Manager Selection North America, Man Global Strategies says the needs of a start-up hedge fund manager are broadly said three-fold: getting seed and working capital as well as distribution. When looking at the U.S. hedge fund market, Irish observed that the seed phase of a hedge fund has changed considerably. $25m is not enough any more to launch a hedge fund; Irish calls this the "$100m problem". Linked to this would be the "10% problem": FoFs do not take a "concentration risk" by owning over 10% assets in a fund, which for a small fund ($25m) leaves only space for $2.5m allocation. This, in turn, is not enough to justify the due diligence spent on such a small allocation. One solution is looking for a strategic investor to help out.

Potential capital providers:

FoFs have a seeding business, typically a non-core activity

Multi-strategy hedge funds

Private equity firms: more activity but surprisingly small compared with size of PE

Dedicated HF seeders

Family offices: still active but much less dominant compared to 90s

Investment banks: conflict of interest will hinder activity; also investment banks have grown "too big" to be interested. Classic seeding is like a three-year hedge fund loan plus long-term interest in the business. The seeder provides all services on day-one.

Seeding trends Barrier of entries are going up. The "$100m problem" w......................

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