LONDON, April 17 (Reuters) - The old picture of the hedge fund start-up as two traders and a terminal at a posh London address looks ever more dated as the risky financial environment makes jobs at bigger firms a safer bet.
A tough year for hedge funds and new bank regulations mean there is no shortage of traders looking to move on - just the sort who might once have started small funds.
But it takes more than ambition for would-be hedge fund managers to get the $100 million or so needed for a chance of success in a maturing industry with a more competitive landscape.
"A lot are going to established firms instead," said Jeff Holland, co-founder of fund of funds firm Liongate Capital.
"One large U.S. hedge fund manager picked up two heads of high yield trading at Deutsche Bank, who may very well have gone and set up their own fund if conditions had been easier."
While big-name traders such as Thierry Lucas, whose Portland Hill fund is set to launch in London this quarter, and Guillaume Rambourg, who set up Verrazzano Capital in Paris last year, can attract investors, other aspiring managers find it tougher.
To found a start-up, managers need enough to cover costs and attract big investors wary of the smaller firms.
But only 17 percent of investors were ready to provide the seed capital that new funds need in 2011 compared to 53 percent in 2002, according to a survey by Deutsche Bank.
Even those that do provide seed capital avoid the 2 percent management fees that funds traditionally charge. They also often demand a large slice of a fund's future revenues, making growth much less profitable than it once was.
It marks a reversal from a decade ago, when a couple of traders could set up in London's West End and hope to grow into a multi-billion dollar firm using any of the varied and complex range of strategies that hedge funds are free to employ.
It also shows how big-name firms such as Brevan Howard, Winton or BlueCrest have come to dominate the industry.
"We're working with extremely well-known teams who are looking to slot into existing firms," said James Orme-Smith, co-head of prime brokerage sales for the region at Bank of America Merrill Lynch. "They're happy to take economic share, as opposed to starting up on their own fund with 100 percent."
With both the banking and hedge fund industries under pressure, fund managers and bank traders alike are on the move.
The average hedge fund lost around five percent last year according to U.S. group Hedge Fund Research. Losses have left many firms at below the level at which they can earn the performance fees they need to keep hold of staff.
Meanwhile, bonuses in the banking industry have shrunk or disappeared. New restrictions, such as those on proprietary trading, are forcing traders to look for jobs outside banks.
They are all potential recruits for hedge funds - but these days as employees rather than ambitious managers of start-ups.
Even some fund managers are trading in their independence. Last year Brian Singer, founder of macro hedge fund boutique Singer Partners, opted to join global asset manager William Blair & Company.
"The superstars will go and set up on their own, although even for them this is becoming more difficult, but we are having a lot of conversations with high quality people below that," said the Chief Investment Officer of one London-based hedge fund who did not want to be identified.
According to Citi research in January, only 15 percent of the money in funds smaller than $100 million is in those less than two years old. No historical comparison was given.
The cost of running a hedge fund has increased just at the moment when performance has dropped off.
Institutional investors such as pension funds and insurance companies, who increasingly dominate the industry, want to invest in funds with chief compliance officers and chief financial officers plus staff to reconcile and process trades.
Meanwhile, office rents have soared in London districts such as Mayfair and St James's where funds want to be based to get the best access to clients.
Sara Malak, co-founder of The Alpha Co-operative, which provides services for start-up hedge funds, said the pressures were driving some managers to move to bigger firms, simply trade their own capital, or leave the industry altogether.
"One manager with more than 20 years experience told us, 'I was thinking about starting a hedge fund but I'm not going to, it's too much of a hassle'," she said.