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Who is Providing Seed Capital to the Hedge Fund Industry? – December 2014

by Michael Brown

  • 18 Dec 2014
  • HF

Preqin’s Hedge Fund Investor Profiles online service currently tracks 449 investors who invest, or will consider investing, seed capital in hedge funds. Securing early stage funding is critical for new hedge fund managers, as they face intense competition in an increasingly competitive marketplace. This blog will look at investors who are considering providing seed capital to hedge funds and those who have seeded funds in the past.

Fund of hedge funds managers make up the largest proportion (40%) of this group. Family offices and endowment plans represent 11% and 10% respectively. Public pension funds and foundations also have a significant presence, each representing 6%. Seed investors come from all investor types, showing that all can see the potential advantages of seeding funds, which include fund ownership, favourable fee negotiations and early access to the next generation of hedge funds. The table below shows the leading investor types in this group by their average year of first investment in the asset class. Overall, they appear to have a considerable number of years’ experience in the asset class. Accordingly, they have amassed a wealth of knowledge and expertise in the industry that enables them to select suitable fund managers to seed. Private wealth leads this trend, making their first investment (on average) in 1999. 

Long/short equity is the most preferred strategy targeted by this group of investors, being utilized by 75% of seed investors. Additionally, over half are known to invest in diversified and macro strategies, adopted by 54% and 51% of seed investors respectively. Multi-strategy (45%), event driven and long/short credit (each accounting for 42%) are also preferred by some seed capital investors. Managed futures/CTA (35%) and distressed funds (34%) also feature to a significant degree.

One example of a firm for which seeding is a key part of its investment strategy is Prophecy Asset Management, a New York-based fund of hedge funds manager. The firm recently announced it was investing approximately $100m in 12 fledgling hedge fund operations. It typically allocates capital to emerging managers that execute niche, uncorrelated absolute return strategies, primarily in global equities, favouring mostly long/short equity strategies.

For the current start-up hedge fund manager, increased compliance in the industry and increased competition has raised the barriers to entry considerably. While the fundraising environment is tough for those looking for seed capital, there are investors attracted to this type of investment opportunity. Preqin’s Hedge Fund Investor Profiles database shows that this group are expected to make at least 195 new allocations to the hedge fund space during the next 12 months. With a clear and continued interest from the marketplace, the outlook for those managers seeking to launch new hedge fund vehicles looks likely to remain positive as we move forward into 2015.

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