Road to hedge fund riches is rockier now

BOSTON, May 27 (Reuters) - Starting a hedge fund was long considered the road to riches for money managers, but the path has become much rockier in the last months.

"It is materially harder to start a hedge fund today than it was two or five years ago," said David Bailin, who heads Bank of America Corp's alternative investments group, which invests with roughly 100 hedge fund managers.

A few years ago, when wealthy investors wrote checks more easily, their enthusiasm helped assets in the loosely regulated hedge fund industry double to $1.8 trillion in three years. In the boom days, an Ivy League degree plus a stint at a prominent Wall Street investment bank were often thought to be the main ingredients for a successful new fund launch.

Eric Mindich, a former Goldman Sachs partner with a degree from Harvard, raised $3 billion in 2004. Two years later, Jack Meyer, who earned an MBA from Harvard and quadrupled the university's endowment to $26 billion in 15 years, eclipsed him with a new industry record -- his own $6 billion hedge fund.

But times have changed, thanks to the credit crisis, economic slowdown and worst-ever hedge fund industry returns at the start of 2008, hedge managers, investors and lawyers said.

"The appetite for hedge funds is slowing just as supply (of potential fund managers) is increasing, and that means the days of raising capital from your basement or your garage have passed," said Lawrence Glazer, a managing partner at Mayflower Advisors, which helps clients select hedge funds.

Even big names with impressive resumes are having a harder time raising money.

Dow Kim, a former co-head of investment banking at Merrill Lynch & Co Inc, failed to get the financing he expected, people familiar with his plans said. A number of Goldman Sachs Group Inc employees are also in the throes of trying to set up funds, a person familiar with their plans said, asking not to be named because of the sensitive nature of the matter.

While it is hard to say exactly when it became tougher to launch a hedge fund, poor returns plus high-profile collapses have complicated the outlook for hedge fund investments, which had become famous for promising strong returns in all markets.

Data from BarclayHedge showed hedge funds lost 4.4 percent in the first quarter of 2008.

Wealthy investors, long the backbone for hedge funds, have appeared to pull back.

Flows of new money into hedge funds, which started to shrivel last year, dropped off dramatically during the first three months of the year, data from Hedge Fund Research show. Investors sent $16.4 billion, roughly half the $30.4 billion they added in the fourth quarter and far less than the $60.2 billion added in the first quarter of 2007.

"We are seeing a flight to larger, more established hedge funds," said Ron Geffner, a partner at law firm Sadis & Goldberg which works with many new managers. "It is all about perceived security, and as a result it is a lot tougher to get money these days," Geffner said.

At the same time, Wall Street's financial troubles and subsequent heavy layoffs have swelled the pool of potential fund managers, ratcheting up the race for money even more.

Pickier investors are no longer content with prestigious academic credentials and the names Goldman Sachs or Morgan Stanley stamped on a resume. "The number one, number two, and number three things that anyone who wants to start a fund has to have had is direct responsibility for a profit and loss statement," said Bank of America's Bailin.

A legal department, a compliance officer, a tested risk management program and a few portfolio managers are must-haves for start-up funds these days, managers and investors agreed.

All this makes it more costly to start a fund, investors said, noting this is why they now calculate that a new fund has to have $250 million to $500 million in starting capital to have a reasonable chance at success.

"The guys with $10 million, $20 million or $30 million are dying a slow death," said Brad Alford, founder of Alpha Capital Management, an advisory firm that invests in hedge funds.

Ironically even the mutual fund industry is making it more difficult for would-be hedge fund managers, siphoning off capital to newly launched 130/30 funds offered by powerhouse firms like JP Morgan Chase & Co and UBS AG.

A 130/30 fund is a mutual funds that can use techniques employed at hedge funds, such as selling a portion of its portfolio short, betting stock prices will go down.

"These funds are eating into my business because the fees are lower and they have marketing operations that are already in place and can sell these portfolios. I don't have that," said a Boston-based hedge fund manager who asked not to be named, as he considered his future plans. (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick)