- Advertisement -
- Advertisement -

Related

Hedge Fund Seeding: A White Paper

Latest Report

- Advertisement -

The environment for hedge fund seeding and acceleration looks increasingly attractive relative to the low yields available from traditional investments. For those with a multi-year investment horizon, seeding or acceleration capital investments can help investors to decrease hedge fund investment costs and enhance returns by directly participating in a greater proportion of the industry economics.

The industry investor base has changed materially since the global financial crisis, with a significant increase in institutional investors and consultants focused on larger funds. The introduction of regulatory restrictions on global banks investing in hedge funds and a decline in the number of fund of hedge funds has resulted in a scarcity of dedicated seed capital providers, particularly in mid-size transactions.

There continues to be a strong pipeline of high quality talent, often second generation managers with hedge fund experience attracted to the still high margins available in the industry. At the same time, increasing institutional minimum asset size requirements and escalating regulatory, compliance and operating costs have increased the barriers to entry and therefore increased the attractiveness and value of seed capital.

There is significant academic evidence to suggest that on average emerging managers outperform. Investors have found recent returns from larger established managers to be disappointing. At the same time, some larger managers are closed or have returned capital to investors recently, including a number of high profile family office conversions. Increasingly institutional allocators are looking at emerging managers, but these funds require a minimum asset base to be investable. As a result, there are a number of potentially lower risk acceleration capital opportunities with pedigree managers who are managing funds already.

The strong growth in alternative UCITS products in Europe is also expanding the opportunity set, for those seed investors who have experience in liquid alternatives, to partner with established managers to launch new funds.

Hedge fund seeding can provide annuity excess returns over and above investing directly into hedge funds or via a fund of funds portfolio, due to direct participation in the gross management and performance fee revenues received by the underlying managers. Additional benefits such as fee discounts, capacity and co-investment rights are also typically negotiated.

Revenue share interests provide positive convexity to a portfolio, and benefit from netting, unlike fund of fund portfolios, in that revenue streams are received independent of other portfolio funds’ performance.

In a low yield environment, the revenue share participation could make up almost half of the return over the life of a seed investment, if the right managers and strategies are selected. In a portfolio with a target IRR of 12%-15%, we estimate that this could equate to a 5-7% contribution, assuming a 7.5-10X average AUM base relative to the initial investment made.

In this paper Tages Capital explores some of the industry trends relevant to seeding, illustrate the potential economics available to seed investors and provide some background on the Tages approach to structuring a seed transaction.

The White Paper can be accessed here: Hedge Fund Seeding – Enhancing Returns in a Low Yield Environment

Picture © Lightspring—shutterstock

Subscribe to HedgeBrev, HedgeNordic’s weekly newsletter, and never miss the latest news!

Our newsletter is sent once a week, every Friday.

HedgeNordic Editorial Team
HedgeNordic Editorial Team
This article was written, or published, by the HedgeNordic editorial team.

Latest Articles

From Running Laps to Running Capital: Ex-Taiga Analyst at DNB

After nine years as an analyst at equity long/short hedge fund Taiga Fund, Øystein Kvaerner has joined DNB Asset Management to launch a new...

Nordic Hedge Funds Wrap Up Strong Third Quarter

Nordic hedge funds continued their strong run of performance since May, advancing an additional 1.7 percent on average in September – the industry’s second-best...

DNB’s Stable Alpha Goes DACH

DNB Asset Management has managed its in-house multi-manager, multi-strategy fund platform since early 2020. After a period of muted performance in its early years,...

Opportunities Lie Beneath Aggregate Credit Spreads

Credit spreads across the United States and Europe have tightened to historically low levels, leaving limited reward for simply holding long credit positions. This...

European Alternative Investments Conference 2025

More than 200 practitioners, academics and thought leaders met in Copenhagen for the second European Alternative Investments Conference, hosted by Finansforeningen, CFA Society Denmark...

Playing ‘Moneyball’ for Investors

Having managed the opportunistic hedge fund Pensum Global Opportunities under the Pensum Asset Management umbrella since 2022, Sector co-founder Peter Andersland has now established...

Allocator Interviews

In-Depth: High Yield

Voices

Request for Proposal

- Advertisement -
HedgeNordic
Privacy Overview

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.