Pedigree, More Than Ever, Crucial to Startup Success

Date: Thursday, April 2, 2009
Author: HFN Daily Report

Starting a hedge fund is a tall order in this inhospitable market. But Pav Sethi has that something extra going for him: pedigree.

As the founder of startup Gladius Investment Group, Sethi, 36, can boast a recent stint with industry powerhouse Citadel Investment Group, where he headed volatility trading. Prior to that, he worked at Morgan Stanley and JD Capital.

Gladius is set to roll out in the spring. Sethi, out hustling up capital, was not able to be reached at his Chicago home.

The thick of the financial crisis is not an ideal time to set up shop, but entrepreneurial spirit is alive and well in the asset class. And even if the era of the multibillion-dollar launch that birthed Eton Park Capital Management or Old Lane is over, having a name with marquee value is still a factor in attracting capital-a polarizing factor, in fact.

A recent Deutsche Bank review concluded that, despite woeful hedge fund performance in 2008, investor demand is still high. Funds-of-funds inflow has slowed, and seeding has remained consistent. SkyBridge Capital, a New York hedge fund incubator, has, for example, continued to build out its business. But in general, the immediate prognosis is not promising. In a time of diminished expectation for the hedge fund industry, a big namedropper is in better shape to get a foothold in what has become an uphill battle to start a hedge fund.

So far in 2009, Soros Fund Management veteran Joshua Berkowitz, ex-Tudor Investment Corp. portfolio manager James Pallotta, onetime Moore Capital Management bigwig Christopher Pia, and Paulson & Co. insider Paolo Pelligrini have all headed out on their own. The team that managed the macro hedge fund at Goldman Sachs, who Tuesday retired, according to the company, are 50% likely to launch their own hedge fund, according to an observer. Like Sethi, each can trade on the name of their former employer in order to get their foot in the prospective door.

Contrast that with 2008, when a touted startup from ex-Merrill Lynch & Co. higher-up Dow Kim bottomed out before it could place a single trade. Yes, Diamond Lake Capital Management was tainted when Kim was outed as a progenitor of the subprime mortgage fiasco, but Kim had assembled an all-star team and, with his $1 billion target launch size, he was not asking for the moon. The fact is Philip Duff was right when in July he surmised that most people going into the hedge fund business in 2008 would fail. The market, even for a career Wall Streeter like Kim, was gone.

But even though investor demand has resurfaced in 2009, it is still no cakewalk.

"It has been brutal," said John Zhang, who left U.S. Trust to co-found macro hedge fund Frontera Management, set to launch in the second quarter. "This is a very challenging environment."

Good thing he can point to his track record at U.S. Trust.