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Hedge-Fund Startups Sprout as Roc Gathers $1 Billion

Date: Tuesday, June 16, 2009
Author: Saijel Kishan and Katherine Burton, Bloomberg

Arvind Raghunathan, former head of Deutsche Bank AG’s global arbitrage business, will open his new hedge-fund firm next month with more than $1 billion, a sign that investors are trickling back after record losses last year.

Roc Capital Management LP’s assets will include $500 million in a separate account from Deutsche Bank, according to people familiar with the New York-based firm, who asked not to be identified because the information is private. It’s the largest hedge-fund startup this year, one of at least eight expected to raise more than $250 million each, according to brokers who provide credit and lend securities to managers.

The ventures are being set up by executives who left banks that scaled back trading to conserve capital, or hedge funds whose 2008 losses will limit bonuses for at least another year. Investors see them as an opportunity to get in early with the next George Soros or Paul Tudor Jones, who have outperformed rivals for most of their careers.

“In the past month we have started to see family offices and institutions request information about high-quality launches,” said Emma Sugarman, head of U.S. capital introductions at BNP Paribas SA in New York. “These groups tell us they are looking for the next generation of talent.”

Fear Subsides

The expectation of money coming in is spurring traders to open their own shops. Jayesh Punater, chief executive officer of New York-based Gravitas Technology, which provides systems and consulting services to financial firms, said he met with 19 new hedge funds in the first three months of the year, and more than that this quarter.

“The fear seems to be over,” after last year’s average loss of about 20 percent, he said. “There’s a lot of money sitting on the sidelines and waiting to be allocated.”

Tony Chedraoui, a former portfolio manager at Deephaven Capital Management, is starting London-based Tyrus Capital LLP in October with at least $500 million, according to two people familiar with the matter.

Chedraoui managed about $1.5 billion at Deephaven, including its $500 million European event fund, the only fund that Deephaven didn’t sell to St. Francis, Wisconsin-based hedge fund firm Stark & Roth Inc. in January when it closed. Money from the European fund was returned to clients, most of whom are likely to invest in Chedraoui’s London-based fund, the people said.

Performance Improves

Raising $100 million for a new hedge fund that will wager on hyperinflation as a result of government stimulus measures, would be a “good” amount, said Jerry Haworth, co-founder of 36 South Investment Managers Ltd., whose Black Swan Fund gained 234 percent in 2008. The firm will be marketing the fund in the next three months.

Money is beginning to flow into funds as performance rebounds this year, with returns averaging 9.8 percent through May, according to index published by Chicago-based Hedge Fund Research Inc. The industry had net inflows of $1.5 billion in May, the first gain in 10 months, Singapore-based Eurekahedge Pte said.

Roc Capital is starting with more than 20 employees. The group lost 1 percent last year, beating most quantitative funds, which posted an average loss of 23 percent in 2008, according to Hedge Fund Research. Quant funds use computer models to select investments.

Josh Berkowitz, Marcel Kasumovich and three partners started Woodbine Capital Advisors LP, a global macro fund that trades stocks, bonds, currencies and commodities, in January with about $180 million after leaving Soros Fund Management LLC. They will be running about $700 million by July, according to people familiar with the New York-based firm.

Executives at the firms all declined to comment, as did Michele Allison, a New York-based spokeswoman for Deutsche Bank.

Talent Emerges

While more money is coming into the industry after two quarters of outflows, established managers are the largest beneficiaries.

“Nearly every established fund is now open for investment, including some that were previously hard closed for years, so there is a tremendous competition for capital,” said Charlotte Burkeman, New York-based global head of capital introduction at UBS AG.

Neil Paragiri, a New York-based managing director at Harcourt Investment Consulting AG, which invests about $4 billion of client money in hedge funds, said he’s meeting new managers and is seeing “strong” talent emerging from the proprietary desks of investments banks.

“It’s a good opportunity for them to start a new fund now given the dislocation in the markets, especially for distressed debt and equity strategies,” he said.

Track Record

A Deutsche Bank survey in March found investors were more reluctant to invest in new hedge funds, yet more than 30 percent were willing to consider startups run by managers with a verifiable track record from their former employers.

To attract money, new funds are being more investor friendly than industry veterans, said Vineet Kapur, managing director and head of U.S. capital introductions at Morgan Stanley in New York.

Management fees for new stock funds are tending toward 1.5 percent of assets, rather than the traditional 2 percent. The new funds are making it easier for investors to pull their money, and aren’t including clauses in their documents that let them limit withdrawals or create sub-portfolios for hard-to-sell assets.

“There’s an entrepreneurial spirit emerging out of the ashes following the fallout in the fourth quarter,” said Philippe Peress, a former Fortress Investment Group LLC portfolio manager who is starting his own hedge fund, Harness Investment Group in London.

Below is a list of some of the hedge funds that plan to open this year.

Founders            Firm                Start*    Amount Raised

A. Raghunathan Roc Capital July $1.2 billion
Tony Chedraoui Tyrus Capital October +$500 million

Josh Berkowitz Woodbine Capital January $180 million
Marcel Kasumovich

Boaz Weinstein Saba Capital August $160 million**
Stephen Jamison Jamison Capital April +$150 million
Hari Kumar LionRock Capital June $75 million
Nick Taylor Senrigan Capital September $50 million

Philippe Peress Harness Investment July-Aug. $50 million
Jonathan Ratcliffe

Shafiq Karmali Cypress Lane August NA
Pav Sethi Gladius Investment June NA

Gentry Beach Vollero Beach June NA
Rob Vollero

Edwin Wong SSG Capital April NA

Andrew Gale Cavenagh Capital June NA
Lee Ka Shao

*Scheduled start date
**As of June 1
NA - Not available
Source: Bloomberg News

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net