20/04/2011 Author: Will Wainewright

Experience counts

Launches are on the up, and the current raft is dominated by new ventures from both veteran hedge fund managers and investment bank prop desk traders setting up on their own. But what part does a manager's background play in convincing investors to part with capital?

Last week's news that former Gartmore fund managers Roger Guy and Guillaume Rambourg are reportedly starting their own hedge fund will have enthused many, but surprised few. The trend of second- and third-generation hedge fund veterans going it alone is not a new one, though such launches have recently been fighting for space with a new generation of managers fleeing the prop desks of big investment banks to launch their own. The birth last month of Azentus Capital, from former Goldman Sachs man Morgan Sze, was just the latest.

It has led to an interesting dichotomy in the launch sphere. Stephen Burke, group director at hedge fund consultant the IMS Group, says this resurgence is the result of these two trends. "The launchers are people who have already achieved significant investment returns, either in a previous fund or in a proprietary role." But in the notoriously unforgiving hedge fund industry, past performance is no guarantee of future returns. With this in mind, HFMWeek examined whether the background of managers currently starting funds affects their chances of success.

Michael Goodman, founder of Long Ridge Partners, a New York-based recruitment firm, previously told HFMWeek that some in the industry question the calibre of these prop desk refugees. "Many fund managers don't believe prop traders are as skilled in risk management or idea generation," he said. But that view is not shared by all. "Historically, a lot of people who started hedge funds did come from prop desk roles, and as a consequence they have built and grown successful businesses," says IMS Group's Burke.

However, it is undoubtedly true that hedge fund veterans will benefit from more immediate experience of the industry than ex-prop traders. "People on the proprietary trading desks are used to a different environment so they need to learn to adapt to certain changes," says Patric de Gentile-Williams, COO at seeder FRM Capital Advisors. "The transition is not totally seamless for them. Likewise, people coming out of the industry have a much clearer idea of what the environment is going to be like."

Despite this, de Gentile-Williams notes the obvious truth that background is not a definitive guide to future performance. "It's a very case-by-case situation. There are some truly exceptional capital-committers hidden away in some of the proprietary trading desks who will do a very good job." In terms of the strategies of launches, long/short equity continues to trend, while event-driven and, particularly among prop teams, global macro are also in vogue.

As with all launches, the defining initial test will be the ability of fund managers to sell their story to investors and raise capital. Both backgrounds may benefit in this regard. David Butler, founding member at consultants Kinetic Partners, points out that ex-prop teams can be bankrolled by their former banks. "They often have, but not always, some seeding from the bank and that's important to them in terms of building systems and infrastructure before going to investors." Hedge fund veterans will need help from previously loyal investors if they are to compete. "Some of them will struggle. Some of them have a clear following from their previous job and on that basis they're comfortable," Butler adds.

Andrew Baker, chief executive of the Alternative Investment Management Association (Aima), issued a warning last week, saying the capital-raising environment remains tough for those who did not possess an "unimpeachable track record." However, two industry sources countered this, telling HFMWeek the capital flows were a little better than last year. Caution is required, though, and Burke adds that the increasingly institutional nature of the investor-base means fewer investors will be interested in taking first-mover risks on a particular manager.

Whatever your background, satisfying investors remains key, particularly as the standards they expect of funds have never been higher. Butler thinks this is what makes initial capital inflows so important: "Investors want managers with more infrastructure, so if managers can build that, it stands them in good stead."

"The standards required by investors today are really fundamentally different from the standards required seven or eight years ago," adds de Gentile-Williams. "Any launch today needs to have a very strong story in terms of an investment thesis, a robust and repeatable process and a team of people who have worked together and can point to a demonstrable track record."

Sources say the trends of hedge fund veterans starting again and prop deskers striking out show no sign of letting up - indeed the latter is just beginning. "We're expecting to see an increasing number of substantial launches," says Burke. "But as always, the true test is whether they can get investors excited about their ability to deliver alpha."Last week's news that former Gartmore fund managers Roger Guy and Guillaume Rambourg are reportedly starting their own hedge fund will have enthused many, but surprised few. The trend of second- and third-generation hedge fund veterans going it alone is not a new one, though such launches have recently been fighting for space with a new generation of managers fleeing the prop desks of big investment banks to launch their own. The birth last month of Azentus Capital, from former Goldman Sachs man Morgan Sze, was just the latest.

It has led to an interesting dichotomy in the launch sphere. Stephen Burke, group director at hedge fund consultant the IMS Group, says this resurgence is the result of these two trends. "The launchers are people who have already achieved significant investment returns, either in a previous fund or in a proprietary role." But in the notoriously unforgiving hedge fund industry, past performance is no guarantee of future returns. With this in mind, HFMWeek examined whether the background of managers currently starting funds affects their chances of success.

Michael Goodman, founder of Long Ridge Partners, a New York-based recruitment firm, previously told HFMWeek that some in the industry question the calibre of these prop desk refugees. "Many fund managers don't believe prop traders are as skilled in risk management or idea generation," he said. But that view is not shared by all. "Historically, a lot of people who started hedge funds did come from prop desk roles, and as a consequence they have built and grown successful businesses," says IMS Group's Burke.

However, it is undoubtedly true that hedge fund veterans will benefit from more immediate experience of the industry than ex-prop traders. "People on the proprietary trading desks are used to a different environment so they need to learn to adapt to certain changes," says Patric de Gentile-Williams, COO at seeder FRM Capital Advisors. "The transition is not totally seamless for them. Likewise, people coming out of the industry have a much clearer idea of what the environment is going to be like."

Despite this, de Gentile-Williams notes the obvious truth that background is not a definitive guide to future performance. "It's a very case-by-case situation. There are some truly exceptional capital-committers hidden away in some of the proprietary trading desks who will do a very good job." In terms of the strategies of launches, long/short equity continues to trend, while event-driven and, particularly among prop teams, global macro are also in vogue.

As with all launches, the defining initial test will be the ability of fund managers to sell their story to investors and raise capital. Both backgrounds may benefit in this regard. David Butler, founding member at consultants Kinetic Partners, points out that ex-prop teams can be bankrolled by their former banks. "They often have, but not always, some seeding from the bank and that's important to them in terms of building systems and infrastructure before going to investors." Hedge fund veterans will need help from previously loyal investors if they are to compete. "Some of them will struggle. Some of them have a clear following from their previous job and on that basis they're comfortable," Butler adds.

Andrew Baker, chief executive of the Alternative Investment Management Association (Aima), issued a warning last week, saying the capital-raising environment remains tough for those who did not possess an "unimpeachable track record." However, two industry sources countered this, telling HFMWeek the capital flows were a little better than last year. Caution is required, though, and Burke adds that the increasingly institutional nature of the investor-base means fewer investors will be interested in taking first-mover risks on a particular manager.

Whatever your background, satisfying investors remains key, particularly as the standards they expect of funds have never been higher. Butler thinks this is what makes initial capital inflows so important: "Investors want managers with more infrastructure, so if managers can build that, it stands them in good stead."

"The standards required by investors today are really fundamentally different from the standards required seven or eight years ago," adds de Gentile-Williams. "Any launch today needs to have a very strong story in terms of an investment thesis, a robust and repeatable process and a team of people who have worked together and can point to a demonstrable track record."

Sources say the trends of hedge fund veterans starting again and prop deskers striking out show no sign of letting up - indeed the latter is just beginning. "We're expecting to see an increasing number of substantial launches," says Burke. "But as always, the true test is whether they can get investors excited about their ability to deliver alpha."

PREPARING TO LAUNCH
new funds in the offing from hedge fund and prop desk veterans

Azentus Capital, former Goldman Sachs prop trader Morgan Sze's new hedge fund, was founded in February.

Pierre Henri-Flamand and Eric Mandelblatt, also formerly of Goldman Sachs's prop desk, launched funds at the end of last year. Henri-Flamand's Edoma Capital raised almost $2bn from investors.

Fund managers Roger Guy and Guillaume Rambourg are the latest heavyweight hedge fund veterans rumoured to be starting a new fund.

Carl Huttenlocher quit Highbridge Capital, the hedge fund sponsors, this year to set up his own Asia-focused fund.

Other big guns reportedly planning launches include Edouard Salet, former manager at Deephaven Capital.