LONDON (Reuters) - Early-stage investors in hedge funds should not be too greedy when negotiating with start-ups or it may hit their own investment, warns Man Investments, which this week agreed a short-term deal with an Asian start-up fund.
Net outflows of $300 billion (183 billion pounds) between October and June, and the closure of the seeding operations of some banks, specialist funds and large hedge funds, have tipped the balance in favour of investors willing to back small funds.
Some seed investors now say conditions are fantastic for their strategy, allowing them good access to the best funds, often on favourable terms or by committing less capital.
But using that clout can backfire if investors take so great a share of revenue that it hits a manager’s profits or ability to grow, said Hans Hurschler, head of Hedge Fund Ventures at Man Investments (EMG.L).
Tying a manager into an onerous deal of 15 or 20 years rather than a couple of years, can also be counter-productive, Hurschler told Reuters in an interview.
His firm’s RMF Global Emerging Managers fund has invested $50 million in the Hong Kong-based Minerva Macro fund, run by Stanley Ku.
Man will take a share of revenues from the firm and the deal will last only “a couple of years”.
“You don’t want loan shark deals. If you take too much, he (the manager) will not be able to break even and he won’t be able to grow his business,” he told Reuters.
“It doesn’t make sense when times are difficult to impose terms that are beneficial to you and compromise the manager’s possibility to survive,” said Hurschler.
Seeders typically invest capital in a start-up hedge fund to help it get off the ground, and they may take a share of revenues or a stake in the business, but the bulk of their returns tend to come from the performance of the fund.
“Now seeders go with high quality start-ups, people with a track record,” said Hurschler.
“You give larger chunks of money. A manager doesn’t want people who in 15 or 20 years are taking money from (him). Today’s deals are limited in time. They’re not like private equity deals, they’re like a loan.”
Ku founded the Hong Kong office of Fortress Investment Group and ran $750 million for Fortress’s Drawbridge Global Macro fund, said a statement from Man Investments, part of the world’s biggest listed hedge fund firm Man Group (EMG.L).