Seeding essential going forward as barriers for hedge fund entry rise, says Citi Prime Finance exec
Seeding is to become increasingly instrumental as the barriers to entry for hedge funds become ever higher, the US head of business advisory services at Citi Prime Finance, has said.
“Running an institutional standard business does not come without its challenges and managers with Assets under Management (AuM) under $400 million or $500 million are going to have an uphill battle in the long term. I believe seeding will be instrumental going forward to help managers create an institutional standard business, and we are already seeing a huge number of seeding platforms take a more proactive approach,” said Sandy Kaul of Citi.
A February 2012 Citi Prime Finance white paper on early stage managers highlighted seeders are no longer viewed as capital providers of last resort, but rather a vote of confidence in a manager’s investment and operational prowess. Approximately 80% of hedge funds polled by consultancy firm Rothstein Kass in April 2012 said seeding would be critical to a successful launch this year.
“Seeding is instrumental because there are so many impediments to success nowadays. Investors expect institutional infrastructure while managers must have top quality compliance programmes to ensure they abide by all of the regulation coming their way. We are seeing a lot of pressure on smaller hedge funds in this high cost environment,” said Kaul.
Others, however, are not so sure seeding will be that significant. Speaking earlier in the year with COOConnect, several experts said seed deals were very far and few between, while accelerator funds had become very prolific of late and were offering managers more favourable terms in exchange for investment.
The number of seed deals has fallen dramatically since the crisis. J.P Morgan’s Capital Introductions Group survey of investors revealed 68% of respondents would not provide seed capital. Meanwhile, the Citi Prime Finance survey stressed managers often had up to 100 meetings with different allocators to secure just two or four investments.
Written by Owen Dickson