It Takes A Village to Raise A Hedge Fund
| May 28th, 2012 | Filed under: Alpha Strategies, Hedge Fund Industry Trends, Today's Post | By: Guest |
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By Diane Harrison
One of the hardest things to achieve is to be groundbreaking. Yet groundbreaking is what it takes to succeed today in the hedge fund industry. The competition is so fierce for both money and investment resources that only an exceptional few have a legitimate chance of making the leap from supporting cast member to headliner.
There are new rules in formation not only as regards the regulatory landscape, which will affect most hedge funds and investors, but also concern operational issues, which will impact corporate governance of funds both large and small. Reflecting on perspectives from the past leads to some notable observations about the future of the hedge fund industry’s business development.
No man is an island, entire of itself; every man is a piece of the continent, a part of the main. —John Donne
Being an investment star is not enough in itself. Today’s investors demand a complete organization to ensure that they aren’t signing on with a star whose light might diminish and leave them in the dark, so to speak. It takes a concerted effort and a cast of excellence to create the next generation of hedge fund talent. In short, it takes a village to elevate a unique idea into an established presence.
The mass of men lead quiet lives of desperation. —Henry David Thoreau
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The latest asset flows data certainly seems to support the above views that only the larger funds are attracting new AUM. Average fund size is now around $234m which should generate revenue of $8-10m ( Assuming 2:20 and +10% performance). But performances have been far lower than this leaving most funds with revenues around half of that which as the author points out is barely enough to keep the lights on. Moreover, fully 50% of all funds of funds remain below their high water marks and are also not allocating except for the top 50 or so by AUM. The consolidation currently underway in Funds of Funds ( Man – FRM ) is also going to pose the equivalent of a TBTF problem for those mega FoF with AUM > 10bn or so. Less than 4% of all funds have more than $1bn in AUM so large Funds of Funds are restricted to a universe of only around 400 or so of the same funds unless they are willing to hold more than 10% of an individual funds AUM. Based on the historic data it seems that Institutional investors are prepared to forgo returns that are 20 – 40% higher (200 – 400bp p.a) from Emerging Managers in exchange for the assumed peace of mind and reduced business risk that the larger funds provide. SEE http://www.scribd.com/peter_urbani/d/93883691-Do-Emerging-Managers-Add-Value-Mar-2012
It seems to me that if most of the hedge funds are leading quiet lives of desperation, than the industry is turning into something similar to books, music, websites, etc. where the the top 20% get 80%+ of the business. Does this mean that the successful models will be able to scale up from a volume perspective, while strategies that require one to “run silent” will never amount to much?
EDITED:
I think having a small fund can support a life much better than “quiet desperation.” It’s true that success really requires not just being great a management funds but being excellent at running a fund management business. They are often different skills so require a talented team approach.
If you enjoy the work and process then doing it and improving it makes you happy. Your asset base may be below your goal but if it is adequate to fund the business and provide a modest income it’s a success in my book. The key is to never stop innovating and improving the process while you continue to market and look for additional investment capital. In time it will come and during that period you can achieve strong results (often with your own capital too) and improve your game.
If it really is quiet desperation then it’s no wonder those funds are ultimately headed for closure.