Decomposing FoHF returns
Where and when funds of hedge funds add and lose value
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14/07/2010
Editor's view: 15 July 2010
Seeding has rapidly become the invisible man of the hedge fund sector. Difficult to pin down, frequently illusory and, perhaps, even mythical. Managers might be back on their feet but the sector’s seeders – capable of kick-starting businesses before the crash – have not returned.
If the reason for their initial disappearance is all too apparent, the fact that an industry rich with potential still lacks backers is more confusing. Many funds – even the big-name launches – that once eschewed deals in favour of operational independence are actively looking for help via strategic partnerships and ‘seed’ deals.
The current hunger for start-up cash is palpable. A number of recent launch stories in the pages of HFMWeek have read like classified ads, with managers careful to detail funds by strategy type, fee structure and the fact that they are definitely open to overtures from seeders. Unfortunately, these ‘ads’ are seldom answered.
The tenor of the times has changed. Large players like Man have temporarily closed down seeding businesses, turning their attention to more liquid opportunities. Banks that once dashed to gain equity stakes in funds have pulled backed, as prop desks downsize and Volcker looms on the horizon. Fund of hedge funds, effusive seeders before the crisis, are too moribund to pile on risk.
Yet among this scarcity of start-up capital, a smaller, better seeding industry is developing. Survivors like FRM’s FCA and Larch Lane, formerly part of AIG, have managed to raise capital in 2010 and are readying to deploy. New entrants are also hovering – pensions funds and, increasingly, family offices who see taking a stake in funds as a way of guaranteeing transparency and swerving the risk of 2008.
With the ability to pick real talent and force better revenue and equity-share deals, these firms are investing capital at an interesting and opportunity-packed juncture. To many managers, active seeders still remain invisible, but to the best launches, and emerging talent, the initial investment of 2010 could well come via this route.
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