COVID-19: Considerations for Alternative Investment Funds: Hedge Fund Launches

Prior to the unprecedented COVID-19 pandemic, many hedge fund managers had plans to launch new funds in the coming quarter. A number are still going to debut their offerings, whether to take advantage of the markets or because they had capital already lined up. However, other new launches have -- or recent launches would have -- opted to hold off, given the challenges of capital raising virtually and coordinating all the various service providers needed to make it happen.  

Hickory Lane Capital Management, a New York-based hedge fund founded by Josh Pearl, is one manager on track to launch its flagship long/short equity strategy July 1 despite the coronavirus, and was able to land a seed from an institutional investor prior to the pandemic.

“We were fortunate to find an amazing long-term strategic investor earlier this year,” he said. “We are also fortunate to have an amazing line-up of service providers who have been nothing short of incredible, including our prime brokers Goldman Sachs and Credit Suisse who have been in touch with us on a daily basis; Savitt Partners, owner of our new office space who moved mountains to complete the build-out on schedule; and finally, ACE IT Solutions who helped us tremendously from an infrastructure perspective.”

Hickory Lane is a fundamentals-based equity asset manager that employs a multi-disciplinary approach to generate strong risk-adjusted returns on longs and shorts. The firm’s differentiated strategy is centered on long-term bottom-up investing while overlaying top-down analysis, and rigorous risk management and tactical shorting. Hickory Lane approaches investing from a balance sheet perspective, ensuring an understanding of how the capital structure affects equity value.  Prior to starting Hickory Lane, Pearl spent nine years at Brahman Capital, as well as eight years in investment banking. He is also the co-author of Investment Banking: Valuation, LBOs, M&A, and IPOs and The Little Book of Investing Like the Pros.

Tailor Ridge Capital, a Morristown, NJ-based manager that lends money to developers and investors in residential real estate, is another manager that had plans to launch May 1 before COVID-19 and still intends to go ahead with the launch but might delay it 30 or 60 days.

“There are two variables that matter: fundraising, but we can make a case, and that we are at the peak of uncertainty given the market volatility but a lot of what is to come depends on the timing of the virus peaking, the policies enacted in D.C. along with the real economy,” said Christopher Johnson, Managing Partner. “It will also be advantageous to launch in this cycle because most of our competitors will still be recovering from the fallout. I’m confident we could put a small amount of money to work even today, i.e., right now.  We will certainly be able to put meaningful sums to work as we move past peak uncertainty, regardless of whether we get a V-shaped recovery or a distressed cycle; we’ll just have different types of borrowers.”

Alternatively, EisnerAmper has heard of one Los Angeles-based hedge fund based that launched two years ago that would have postponed their launch if they planned to during COVID-19 because of the difficulties of capital raising virtually.

“There is a lot of face-to-face contact in fundraising and investors generally don’t like to allocate without an in-person meeting,” he said. “When funds start targeting institutional investors and allocators conduct their operational due diligence, they want to meet the managers in-person they are investing in and see their actual office space.”

He added: “Also, coordinating the system we have in place for our service providers from the lawyer to the fund administrator to the accountant and, finally, the prime broker all coming together would have been much more difficult in this environment.”

One independent New York-based third-party marketer told EisnerAmper that a new hedge fund manager launching a new fund is always challenging in any environment but especially so in the current environment of remote working and market volatility.

“Introductions to allocators, even those who are opportunistic, are more difficult and will take longer,” he said. “These launches (late stage) are possible today if the prep work has been done and there is a written agreement with the allocator and the capital is available.”

He added: “Existing managers (track record/assets under management/team) launching new funds may have an easier task provided they are institutional quality, have a record of success in transitional/volatile markets and offer a new strategy that is durable and sustainable. These offerings maybe be directed to new and existing investors who know and trust the manager.”