Goldman Sachs is muscling into an area dominated by Blackstone Group LP, namely, bankrolling those who seek to start a hedge fund. According to a story from Bloomberg, Goldman has been trying to attract investors for a “seeder” fund, which provides startup capital to new hedge funds in return for percentage of their fees.

This follows on the heels of Blackstone, which reportedly raised $2.4 billion for its second seeder fund.  Other firms such as Reservoir Capital Group, Larch Lane Advisors LLC and PineBridge Investments LLC are also seeding new funds. Post-financial crisis, even the top fund managers and traders who are trying to launch their own hedge funds are finding it tough slogging. But a firm backed by capital from respected institution such as Goldman or Blackstone may have an edge in attracting new investors.

Nevertheless, it’s still a risky proposition. Roughly half of the 100 or so firms that were in the business of financing startups prior to 2008 have cut back on their seeding or left the industry, according to Alexis Graham, co-founder of Acceleration Capital Group.

Seeder funds generally invest from $100 to $150 million in a new hedge fund to help the manager begin trading. In return, the seeder fund gets between 15 to 25 percent of the hedge fund’s fees, out of the 2 percent of assets that funds take in from their management fees.

However, this seed capital is often locked up in the hedge fund for anywhere from three to five years, when the initial investors can get their capital back. The seeding funds retain their ownership stake until it’s bought out by the hedge fund or a third party.

Blackstone, the world’s largest private-equity firm, started its first seeder fund in 2007 with $1.1 billion, and took stakes in eight managers. While one of the hedge funds failed in 2008, the company’s seeder portfolio has returned roughly 50 percent since inception, according to investors. The remaining hedge funds collectively manage $7 billion, and three of them are larger than $1 billion. This includes Senrigan Capital Group Ltd., run by ex- Citadel LLC trader Nick Taylor in Hong Kong.

You can read more about the challenges facing seeder funds and some of the standouts in this category by checking out the Bloomberg article.

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