Seed investors return to start-up hedge funds

MONACO Thu Jun 17, 2010 5:12am EDT

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MONACO (Reuters) - Sovereign wealth funds and pension funds are backing start-up or small hedge funds again, said FRM Capital Advisors, bucking a trend seen since the credit crisis for clients to favour the perceived safety of big funds.

Patric de Gentile-Williams, chief operating officer of hedge fund seeding specialist FRM, said his portfolios have raised a net $70 million (£47.8 million) so far this year -- after raising "very little" in 2009 -- and he expects further commitments.

Total assets stand at about $360 million.

"Investors are allocating to this space," he said in an interview on the sidelines of the GAIM hedge fund conference here. "We're seeing the most sophisticated investors look at this space.

"It (the $70 million) is the first part of what we expect to be a series of capital raisings. It's a very strong pipeline. Conversations will, I think, lead somewhere, whereas last year conversations were about maintenance of (relationships)."

Investors were happy to back start-up or small-scale hedge funds during the industry's pre-credit crisis boom -- when high-earning traders would leave a bank and set up on their own -- in the hope of unearthing a talented manager.

However, following the downturn and a number of blow-ups and frauds in the industry, investors have preferred to stick with bigger funds, which they often regard as safer or having better risk management.

De Gentile-Williams said investors such as sovereign wealth funds, large pension funds, family offices and some insurance funds were looking at committing between 5 and 10 percent of their hedge fund allocations via fund managers such as FRM and other firms.

"It's pension funds with large hedge fund portfolios, saying 'it's clearly part of the hedge fund space, we should have an allocation of 5-10 percent to start-ups, seeding and young managers'," he said.

"We've seen some competitors spring up. Very large institutions are getting their own program run by a specialist manager.

Seed investors give money to start-up or small-scale managers in return for a share of the fund's revenues in the future or a stake in the management company.

De Gentile-Williams also said over the past year he had increased the average size of investments he is making with small-scale managers to around $50 million from around $40 million.

"We were doing 40s, now we're doing 50s. It allows managers to grow faster."

(Editing by Jon Loades-Carter)

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