Hedge Fund Startups Bolstered by Funds of Funds

November 28, 2011

Investor appetite is growing for a new generation of smaller, more nimble hedge fund startups that may be able to deliver outsized returns. And many of these new funds, such as Edoma Partners, set up by former Goldman employees, have been oversubscribed within months of opening, reports the Financial Times.

It’s a risky play, but tempting for those disappointed with the less-than-stellar returns posted by some of the larger, more established hedge funds. However, the article points out that there’s a safer, though more expensive way to gain access to these potentially hot new managers, through fund of funds that specifically invest in startups.

“Picking new managers is an expert job, it’s for people who have industry-specific knowledge and aggressive risk appetite,” says Robin Bowie, chairman of Dexion Capital, which manages a London-listed fund of hedge funds.

Funds of hedge funds charge a double layer of management fees, but can provide access to some of the most successful new hedge fund startups, such as BH Global and Dexion Absolute.

One example is HSBC’s Next Generation fund, which requires a minimum investment of £2.5m (U.S. $3.87m). Initial investors can only access their money with 65 days’ notice, and those who do so in the first 12 months face an exit penalty of 5 per cent.

HSBC’s Next Generation fund targets future stars of the industry, many of whom are protégées of some of the most successful existing funds, or former members of big investment banks. HSBC analysts select a group of 10 to 15 of the most promising new managers from about 100 new funds.

Among those that HSBC has identified as rising stars are: Denjoy Integral, set up by Frederic Denjoy, one of the youngest partners at Brevan Howard; Apson Global, an equity fund started in June by alumni of Deephaven Capital Management; and Avantium, founded by a team of former Deutsche Bank employees.

Several of the funds identified by HSBC were featured in Hedge Fund Manager Week’s “20 for 2012″ issue as being among the most promising new crop of hedge fund startups.

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