Investment teams that have spun out from other firms are the most widely used type of emerging manager funds amongst institutional investors in hedge funds. 75% of all institutional investors either already use spin-offs or will consider doing so in the next 12 months. These hedge fund managers are attractive to investors because they have proven experience which they are able to take to their own funds. This is appealing to institutional investors which can then carry out due diligence on the track record at their previous funds as well as gaining access to some of the additional returns associated with emerging managers.
First-time management teams are also commonly used with 59% of institutional investors utilising such teams. A further 12% of institutional investors will consider first-time funds in the next 12 months. The past 12 months have proved to be a litmus test for emerging funds: many funds were unable to cope with the redemption requests and deleveraging of the industry and disappeared completely in 2008 and early 2009. However those funds which emerged from the market contraction with better than average performances are very attractive to the institutional market today. Many investors have used the turbulence of the past 12-18 months to assess emerging fund managers. The start-up funds which did well over 2008 and 2009 will appeal to institutional investors as the potential top performing fund managers of the 2010 and beyond.
Seeding hedge funds remains a relatively niche activity by institutional investors. It has been a difficult two years in terms of the seeding of funds; many seed investors lost capital as start-up funds collapsed following market turbulence and as a result many seeders put this part of their business on hold. However now that the volatility in the market is more manageable, and new managers are now looking to launch new funds (caused in part as a result of a glut of managers in the market due to firm closures in 2008) has resulted in a revival of the seeding industry. For example the seeding unit of London-based funds of funds FRM, FRM Capital Advisors, made new seed investments in October 2009, including its first seed investment in an Asian hedge fund. In addition Blackstone is expected to launch a second seeding platform in early 2010 – a follow on vehicle from its first seeding fund – the Blackstone Strategic Alliance Fund. The provision of seed capital remains largely the domain of funds of hedge funds and dedicated incubation platforms, with institutional investors preferring to access emerging managers as early, rather than the first, investors in a fund.
For more information on institutional investors in hedge funds, please see Preqin's Hedge Investor Profiles.