Hedge fund launches to rise, but smaller

Date: Thursday, October 15, 2009
Author: Reuters.com

The pace of hedge fund launches is taking off after a year-long slumber, but the incoming class of start-ups is finding it tougher to beat out established giants and lure money from investors still scarred by last year's turmoil.

As recently as four or five years ago, star traders could hang a shingle and instantly attract $1 billion from crowds of investors. But last fall's market meltdown left investors strapped for cash and wary of the hedge fund model; launches slowed to a crawl.

Now, as markets revive and traders see an opportunity to be their own boss, Wall Street's largest prime brokers expect a spate of start-ups in the next year -- just a lot smaller.

"It's a promising environment for new hedge funds," said Alex Ehrlich, the former UBS prime brokerage chief who took over as global head of Morgan Stanley's (MS.N) prime services business last month. "Money is coming in from seasoned investors, many of whom are preparing to redeploy capital."

A few weeks ago, Morgan Stanley hosted its largest ever capital introduction conference for fund managers and investors. It's a positive signal even if the meetings took place in suburban Rye, New York, and not Morgan Stanley's traditional venue in Florida's Palm Beach.

Still, times have changed. Even the most talented traders and managers will have to accept that $100 million is the new $1 billion when it comes to fund-raising.

"The number of start-up proposals that come by our desk each week is consistent with what we saw in earlier times, but the amount of capital they're starting with is much smaller," Goldman Sachs Group (GS.N) global co-head of global securities services John Willian said. "Very few funds will have over $1 billion at their launch."

NEW CROP

Fund managers are in a more "normalized" environment, UBS AG (UBSN.VX) U.S. prime brokerage chief John Laub said. They have to be satisfied with $50 million, even if the same managers might have attracted nine figures in boom times.

One key reason is that young guns are competing for investment dollars with established fund managers with long track records.

"Some of the biggest funds were closed to investors for a long time, but after last year's downturn they reopened and people took advantage," Laub said.

So even as hundreds of managers scour the Street for money, almost no one is hitting their original fund-raising targets, said Louis Lebedin, co-head of JPMorgan Chase & Co's (JPM.N) prime brokerage.

"On average, we're seeing clients raise roughly half of what they achieved historically," he said.

According to Hedge Fund Research, start-up activity peaked at 2,073 new funds in 2005 -- an average of one every four hours. That sank to 659 last year as investors pulled out record amounts of cash and 1,471 funds were liquidated.

As recently as the first half of 2009, liquidations outnumbered launches 2-to-1. Now Wall Street's top prime brokerage executives tell Reuters they are gearing up to win their share of a new wave of funds.

Overall, investors have been most interested in funds that invest in easily traded securities, such as long-short equity funds. Clients are also clamoring for Asia-focused funds and credit funds targeting debt at highly distressed prices.

Most of the new crop will be led by traders and portfolio managers departing other hedge funds. Tony Chedraoui of Deephaven Capital Management started Tyrus Capital in London with about $500 million. Philippe Peress, formerly of Fortress Investment Group (FIG.N), started Harness Investment Group.

More recently, Atticus Capital's Ed Bosek and Noam Ohana began work on Beacon Light Capital LLC as Atticus founder Timothy Barakett liquidates two of his funds. Former Citadel Investment Group manager Ervin Shindell is starting RoundKeep Capital Advisors with three other ex-employees.

Wall Street firms also remain a launching pad. Among the biggest start-ups this year was Roc Capital Management, which former Deutsche Bank global arbitrage head Arvind Raghunathan opened for business with $1 billion.

(Reporting by Joseph A. Giannone; editing by John Wallace)