In an industry routinely associated with unsavory headlines as exemplified by this recent headline in Forbes: “A Spider Web of Hedge Fund and Forex Ponzi Fraud,” it is important to remember that no barrel lacks the occasional rotten apple. The hedge fund industry is no more defined by these unsavory characters than law enforcement professionals are defined by the random “dirty cop.” In fact, hedge funds are doing the work of angels! Angel investors that is.
Hedge Funds Embody Transformation
The most definitive attribute describing hedge funds and hedge fund managers might well be innovative. Hedge funds did not enjoy the best of times in 2012. Lackluster performance in comparison to equity indices has, once again, prompted hedge funds to turn to unconventional strategies, customized solutions and structural changes in pursuit of alpha.
Outside the Box
Once the turf of angel investors and venture capitalists, start-up funding is attracting the interest of the hedge fund industry. Hedge funds have invested in such notable start-ups as SurveyMonkey LLC, HubSpot, Inc., Evernote Corp. and Box Inc. At least one New York based hedge fund has opened an office in Silicon Valley, suggesting that this strategy may gain traction in the industry. Just as the lines have blurred between hedge fun and private equity firms, we may see venture capital firms lose those demarcations as well.
What This Means in Terms of Jobs
Investing in closely held start-ups requires negotiating valuations with founders, salary negotiations, marketing and growth strategies, and garnering the trust of the start-up community. If hedge funds expect to make inroads as they compete with the traditional venture capital firms and angel investors, it follows that any existing vacuums with regard to expertise will need to be filled. This most certainly opens the door to those with experience in funding closely held start-ups.
Tech Start-ups Will Be the Focal Point
Tech start-ups are singularly attractive to hedge fund managers for three reasons:
- Short exits to IPO’s
- Shorter lead times to an initial public offering also bring gains to the hedge fund in a shorter time frame, which is arguably a favorable scenario for the fund.
- Established public technology firms are acquiring start-ups in record numbers for a variety of reasons that range from aqui-hiring, to patent rights, to quashing troublesome competition. Regardless of motive, acquisitions on this scale are a risk-mitigating factor for any potential investor and this fact is not lost on hedge fund managers.
- All time low start-up costs
- The rise of open-source development platforms such as Ruby & PHP have reduced technology company start-up costs dramatically in the last decade enhancing the “reward” segment of the risk versus reward equation. Smaller, early investments, yield results similar to the large dollar investments of a decade earlier.
While it may be somewhat precocious to suggest that hedge funds will move into start-ups in any major way, the history of hedge fund activity in this arena portends a significant potential for those with the appropriate skill set and start-up funding experience to see employment opportunities arise in the hedge fund industry.