Hedge fund start-ups higher calibre
The calibre of hedge fund start-ups is improving as is AuM although the number of launches is still shy of 2007 levels, the director and head of the European hedge fund consulting group at Deutsche Bank Prime Services has said.
“We have seen a lot of prop desks spin out of investment banks and some of these new businesses are raising anywhere between $250 million and $1 billion in the first six months. However, we do not have as much supply as 2007, which in itself was a record year,” said Chris Farkas of Deutsche Bank, speaking on a panel at the Hedge Fund Start-Up Forum 2012 in London.
Hedge Fund Research’s Market Microstructure Industry Report said there were 304 new launches in the first quarter of 2012 (the highest quarterly total since the fourth quarter of 2007) with AuM reaching a new record of $2.13 trillion. Hedge Fund Research’s chairman Ken Heinz said at the time this was attributable to investment banks spinning out their prop desks. Investment banks are required to shed their prop desks under the Volcker Rule although implementation of this rule is expected to be delayed.
The last two years has seen several high profile spin-outs in anticipation of the Volcker Rule. One of the most high profile launches was Morgan Sze, a former prop trader at Goldman Sachs, who launched Azentus Capital, a multi-strategy fund in Hong Kong. The fund has since hard closed to investors at $2 billion.
However, one expert said the reality was somewhat different, adding most launches nowadays were incredibly nimble and rarely in excess of $50 million. He said the standard launch was probably managing between $10 million and $20 million AuM.
Farkas said spin-outs were polarised between the “big guns which comprised of entire teams leaving banks and hedge funds setting up with maybe two or three individuals.” He said the latter were struggling to attract seed capital or prove their track record at investment banks.
Investment banks rarely provide audited track records of their former traders turned hedge fund managers to potential investors, which can often be a stumbling block for operational due diligence teams. “However, if these spin-outs are big enough, some banks may compromise and provide a track record to investors. But this is unlikely to happen for two or three man shops,” commented Farkas.
Other panellists warned spin-outs about the operational challenges of going at it alone. “Investment banks provide traders with an institutional infrastructure and operational framework. At a hedge fund, this is not the case. The two main challenges for newly launched hedge funds are building up an operational infrastructure and business development including sales and marketing. Managers have to ensure their operations are solid before they start marketing to investors,” said Jeroen Tielman, CEO at ImQubator (IMQ), the €250 million Amsterdam-based seeding platform backed by the Dutch pension plan APG.