EisnerAmper’s 2016 Alternative Investment Summit Panel 3: Hedge Funds
Given that approximately one-third of hedge fund managers are over 60 years-old, according to published reports, and nearing retirement, the industry is going through a transitional phase, making room for talented emerging managers to shine. However, the majority of emerging managers continue to find it extremely challenging to raise capital, hence teaming with strategic partners to provide the anchor capital needed to build a successful business. The final panel of our recent Alternative Investment Summit focused on hedge funds and featured a discussion of seed and acceleration capital. Our esteemed panelists imparted advice to attendees on what emerging managers should consider when starting a fund and seeking strategic capital.
A theme amongst panelists was finding a manager who understands that investing and managing a business are 2 completely different things and, furthermore, finding a manager who equally acknowledges their needs on the business side. Seeders are well-positioned to help managers with the business components of their fund including operations, marketing and research support. A manager needs to know what value proposition they are looking for from a strategic partner – is it solely capital? Or are they looking for the additional value-add services that some, not all, seeders provide?
It is a challenge to differentiate yourself and adequately explain to allocators what your competitive advantage is. The current market is saturated with funds with varying degrees of talent and new managers need to determine (and ultimately communicate) what it is they do that creates value to the marketplace and why does the market need their fund?”
The relationship between a seeder and a manager can be similar to a marriage, and the process to choose the right partner can be extensive. Some of the common credentials that seeders look for are a portfolio manager’s pedigree, their ability to perform throughout all market cycles, the risk management process, and lastly, their eagerness to grow their business. Most importantly, seeders want to understand a managers’ investment process and what the manager is doing, how they’re doing it, and the thought that goes into each of their portfolio decisions. Seeders also review prior track records to determine if managers can make money over the long term. They look for deep, extensive experience that can also be quantified, as well as how much of the managers’ own net worth is invested in their strategy.
There is a reverse interview process as well, as managers seek to match their business needs with the correct seeder; evaluating the level of involvement and control they are comfortable with. Seeders vary in regards to rules surrounding drawdowns, commitment periods, investment strategies and whether or not they allow for co-investors. Managers should assess what type of interest, revenue or equity share they desire the seeder to have and when in the funds’ life cycle is most advantageous to get a seeder involved based on their strategy. It is equally important for the manager to perform due diligence on the seeder as vice versa: This is a long term partnership.
EisnerAmper would like to thank the panelists for their time and insights:
- Nick Vamvakas, Investcorp
- Don Rogers, Stride Capital
- William Turchyn, Mariner GroupMichael Dubin, Silvercrest Asset Management Group (moderator)