14/03/2010 Author: Elana Margulies

Raising assets in arizona

Following a year of strong returns, expectations of hedge fund inflows in 2010 are high. Last week, HFMWeek visited Arizona to talk to investors at one of the year's first cap intro events

A stranger returned in 2009. After a year of absence, performance came back into the life of the hedge fund sector, only to be ignored by newly cynical investors. For most of these, cash remained king. The stranger promised double-digit returns and transparency, but all proved insufficient to pries money from the sidelines. Last year, according to data provider HFR, investors forsook the sector to the tune of $131bn, with only a late-Q4 rally keeping total redemptions below the $200bn mark.

Fortunately, the winter surge appears to be a sustainable one. In the first months of 2010, HFMWeek has already revealed the arrival of neophyte investors, in the form of large US pension funds. Last week, at one of 2010’s first cap intro events, it was the turn of smaller investors to express an interest, with emerging managers in particularly high demand.

This attention on relatively new hedge funds was a key theme of the Lighthouse Prime Services' Annual Desert Classic Kick Off event, held at the Four Seasons Resort in Scottsdale, Arizona. The conference attracted over 50 delegates, roughly divided between managers and investors. Allocators, including family offices, funds of hedge funds (FoHFs), wealth managers and managed account platforms, were searching for portfolios of less than $200m under management, mainly in long/short equity strategies and merger arbitrage offerings.

Steven Simmons, managing director and head of prime services sales at Lighthouse Prime Services, said the investors, who flew in from all over the US to come to Arizona, wanted to see talented stock pickers and portfolio managers, who can “play deals the right way”.

“The investors want to see there is a human element in the stock-picking process and that there is a team behind it,” he said.

Dennis Ford, CEO of research specialist Brighton House Associates – Lighthouse recently struck a partnership deal with the Boston-based business to boost its capital-introduction capabilities – who gave the event’s keynote address, agreed that this year investors have expressed more interest in smaller funds. In 2010, more than half of the hedge fund mandates from Brighton House's own investor bases have been for portfolios of less than $200m.

Family offices at the event were typically interested in allocating to 75m funds, with long/short equity being the most popular, and sector-focused funds, including healthcare and energy strategies, also topping the list. So far this year, US and Asia family offices have been more aggressive in allocating to hedge funds than European ones, who are returning to alternatives at a slower rate.

While emerging managers are in, and long/short remains a perennial pick, CTAs seemed to be out of favour. One Michigan-based $10m FoHF manager, who primarily allocates to global macro strategies, expressed an interest in diversifying, in favour of deploying capital to other investment opportunities.

Putting strategy considerations aside, fund track records still topped all other credentials for investors at the conference, with a solid infrastructure also high on the list of must-haves for allocators. Long gone are the days where two employees ran a hedge fund from someone's apartment. regardless of a fund's size, investors want to be assured that all firms have designated employees running the business aspects of the hedge fund, and have a solid administrator and auditor in place. The stranger may be back, but this time he clearly needs a back-office in tow.