Editor’s Letter – Issue 124

July 2017

HAMLIN LOVELL

In this issue, we showcase the AIMA/GPP Emerging Manager Survey 2017, Alive and Kicking, which reveals that the climate for starting a hedge fund is far more constructive than is perceived in some quarters. The long-term trend of asset inflows into hedge funds has resumed this year after the brief hiatus seen in 2016. And the 2016 EY Global Hedge Fund and Investor Survey found investors allocating 14% of their hedge fund portfolios to “emerging” hedge funds, defined as those less than three years old.

Granted, regulation has increased costs, and MiFID may add yet more expense, but not to an insurmountable degree. Outsourcing and technology can mitigate the regulatory burden, in many cases. Claims that funds cannot survive with less than $200 or $300 million are too sweeping and general. The AIMA/GPP survey identified an average breakeven point of $86 million. This varies by strategy, with global macro – where median headcounts are higher – having the highest at $136 million while credit had the lowest at $76 million.

Headlines suggesting low launch activity are often making mountains out of molehills, by reading far too much into small fluctuations in numbers that should probably be viewed as spurious “noise” in a statistical sense. HFR tracked 712 new fund launches in the year ending in 1Q 2017 and by any standard this signifies a dynamic industry.

Just as the hedge fund industry sees hundreds of firms and funds opening and closing each year, the hedge fund seeding space has seen musical chairs, with certain players retreating while others advance. Some of those who have walked away were arguably rather marginal players anyway. What is most significant is that the world’s largest alternative asset managers, such as Blackstone, remain active. Preqin surveys confirm that the largest institutional investors, pension funds and endowments, are also seeding hedge funds. The largest and most prolific seeders are not labelled as such but are other hedge fund managers, such as Tiger Management, Maverick Capital, Meritage Group, Dymon Asia Capital, and family office related vehicles such as Jacob Rothschild’s RIT.  

In UCITS seeding, Tages Capital and Old Mutual are important actors while multiple UCITS platforms including Aquila’s Alceda, Lyxor, Montlake, Deutsche, and Goldman Sachs may help to gather early stage funding.

The potential growth trajectory for venture capitalists who pick a real winner is as spectacular as ever. Our biennial Tomorrow’s Titans surveys, in association with EY, highlights many launches and has identified managers who started with tens or hundreds of millions, and now run billions. In any industry, a healthy Schumpeterian process of “creative destruction” requires departures as well as arrivals. The fact that 1,000 or so funds shut each year helps to make space for new entrants, who are often doing something different and innovative. Cryptocurrency fund launches seem to be the flavour of the month this summer.