- Advertisement -
- Advertisement -

Related

Hedge Fund Seeding: A White Paper

Industry 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

Rising Adoption of Quantitative Investment Strategies Among Nordic Investors

From a high-level perspective, there is a clear trend of increasing adoption of quantitative investment strategies (QIS) among Nordic institutional investors, either through the...

EU Plans Stress Test for Hedge Funds and Non-Bank Firms

European regulators are planning a stress test to identify vulnerabilities beyond the traditional banking sector, focusing on less regulated entities such as hedge funds,...

ALCUR Fonder Continues Hiring Spree

Following two earlier additions this year, ALCUR Fonder continues to expand its portfolio management team at a notable pace. The Stockholm-based hedge fund boutique...

Nordic Private Markets Modernize with Data-Centric Trade Lifecycle Automation

By Anders Stengaard Jensen at Indus Valley Partner: In recent years, asset managers in Nordic countries have accelerated efforts to modernize trade operations, particularly...

Norwegian Hedge Fund Industry Sees Major Boost with New Launch

The Swedish and Danish hedge fund industries remain closely matched in size, with Denmark recently edging ahead of Sweden. While still less than half...

Atlant Funds Hold Up in May Despite Mistimed Market Call

Macroeconomic and market forecasts are notoriously difficult, even for experienced hedge fund managers. What matters more than being right, however, is ensuring that incorrect...

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.