It is going to be increasingly common that the biggest and the best hedge fund launches are backed by seed capital

Gerhard (Gary) Anderson, a partner at US law firm Seward & Kissel, shares his thoughts and outlook for the hedge fund seeding landscape. He was part of the team who drafted the Seed Transaction Deal Points study. The study shows that, in seed deals between 2014 and 2018, the alignment between seeders and managers has improved in various areas such as more working capital support, seed capital lock-up periods, and liquidity rights for seeders in case of harmful events.

Opalesque: The study shows that in observed seed deals between 2014 and 2018, the alignment between seeders and managers has improved. Do you think there is room for further improvements, and in which areas? Gary Anderson: The best way to look at it is by framing the key drivers of alignment into two pockets. In one are changes in "degree" and in the other are changes in "kind". Opalesque: What about changes in degree? Gary Anderson: In respect of changes in degree, one can certainly imagine enhancement and alignment coming from seeders bearing a greater amount of working capital - so, instead of, for example, the economic effect of $2m, it is $3m. You can also see the lockup becoming longer or a hard-lock for a couple of years followed by a soft-lock (e.g., where one has to pay a penalty of 3 or 4% of the assets to redeem early). Also, when seeders do redeem their money, particularly in a stressed situation, the redemption could roll into ordinary liquidity versus accelerated liquidity. There is still some price-discovery needed to reach an equilibrium in the market place for these types of terms, as seeders and managers head towards something that is really more of a partnership with strong alignment, as opposed to a relationship that, historically, had been more of a passive ownership stake weighted to the benefit of the seeders.

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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.