Hedge fund start-ups, the engine driving industry’s creative renewal, forced to adapt

Jan 26th, 2009 | Filed under: Editor's Pick, Today's Post | By:
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Hedge fund seeding is back in the news this week. But unlike a year ago, the news is not all that good.  Small funds, which were once coddled by their prime brokers, then were recipients of meaty seed investments from “incubators” now face a harsher environment where bigger players might either support them or eat them.  But it still seems that the creative renewal so important to the hedge fund industry will thrive in one form or another.

Enlightened Self-Interest

You don’t have to be a financial rocket scientist to figure out that prime brokers are interested in their hedge fund clients’ success.  More assets under management for them equals more trading, lending and stock loans for them.  This is why prime brokers have always been champions of “cap intro” events – a proto-seeding activity.

But enlightened self-interest wasn’t the only thing driving the growth of early hedge fund seeding.  Many investors in these early stage hedge funds also did well.  In fact, research showed time and time again that smaller, newer funds did better than older ones.  While some argued that this was a mirage caused by “backfill bias” in hedge fund databases, there was considerable interest in emerging managers for most of this decade.

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