Banking

Investors are craving ‘young and hungry’ portfolio managers— and new hedge funds are launching to reap the rewards

  • Launches in Q2 outpaced liquidations for the third quarter in a row, according to Hedge Fund Research.
  • New launches this year include spin-offs from PointState, Soros, Blue Ridge, and more.
  • “There’s much more appetite, much more interest in new launches,” said one industry expert.

Despite assets growing, the number of hedge funds has been shrinking for several years now. 

Every year since 2014 there have been more fund managers calling it quits than joining the fray. According to Hedge Fund Research, in 2018 and 2019, there was a combined net loss of more than 350 hedge funds, concentrating more assets with the biggest managers.

Then a global pandemic hit, and hedge funds — for the most part — did their jobs. Macro managers, stock-pickers, and distress players all were able to make money last year. And those who invest in hedge funds took notice.

Starting in July 2020, there have been three consecutive quarters where more funds were launched than were liquidated — an impressive stat since fundraising meetings and conferences ground to a halt during the throes of the pandemic. 

Advances in the digital due diligence process helped managers launch during the lockdown, but many allocators were waiting until they could travel and meet in person for writing the check, said Tom Kehoe, the global head of research and communications for trade group Alternative Investment Management Association. 

“The biggest hurdle is getting the deal done,” he said. 

Thanks to vaccine rollouts and the industry’s impressive performance, new managers have flooded onto the scene to start the year. The industry welcomed nearly 200 new funds in the first quarter, the most in a single quarter since 2017, according to HFR.

Names include former WorldQuant executive Alexander Chernyy’s quant fund Red Cedar and PointState executive Zachary Kurz’s Pinnbrook Capital, while other pedigreed money managers have announced their intentions to start their own shops, like Soros quant John Holloway and former Blue Ridge managing director Eric Wong.

“It’s definitely been a good time to launch,” said Brian Guzman, managing partner of boutique law firm Guzman Advisory Partners, which works with asset managers and allocators.

“There’s much more appetite, much more interest in new launches,” he said. “You want the young, hungry emerging manager with their head in the game.”

Time for the little guys to shine

Young managers with smaller pools of assets traditionally don’t catch the eye of large institutional allocators, but with creative structures like special purpose vehicles, endowments are starting to look at a broad set of funds.

“Endowments are now looking at smaller emerging managers because their books are so unique,” said Rich Passer, a partner at three-year-old hedge fund 1 Main Capital. “Five years ago, endowments wouldn’t touch $10 million funds.” 

Now, with many of the largest stock-picking funds concentrating on the same half-dozen tech names, small managers with books like $10 million 1 Main Capital are getting attention. 

Guzman said these big investors still require a three-year track record, but see the value in investing with a founder who “isn’t spending months of the year on a $50 million yacht in the south of France.”

And investors are requiring top returns now that the industry has had such a good run. According to BNY Mellon’s Pershing unit, a majority of investors went from requiring returns between 8% and 9.9% to make an investment last fall to 10% to 15.9% this year.

Funds are trying to juice returns to meet this, according to note a from Morgan Stanley’s prime brokerage group, which found that net leverage is close to its highest point since 2010.

Just this year, 1 Main has added roughly 25 LPs, mostly high net-worth investors, said founder Yaron Naymark. The fund is now having conversations with endowments and funds-of-funds. Its portfolio includes names like KKR and Alphabet, but also Naked Wines, RCI Hospitality, and Wayfair.  

The fund is up nearly 40% for the first half of the year, quadrupling the average hedge fund return of roughly 10%.

“I don’t want to raise billions and billions,” Naymark said.

At $200 million, he said, he’d stop fundraising.

“The bigger you get the harder it is to produce great returns,”  he said.

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