Investors Revisit Start-Up HFs

(June 24, 2010) — Sovereign wealth funds and pensions are starting to return to small hedge funds again, according to FRM Capital Advisors.

The return reflects a shift away from clients favoring the supposed safety of bigger funds following the credit crisis, Reuters reported, as investors have often regarded them as safer or having better risk management than start-up or small-scale hedge funds.

Chief operating officer of hedge fund seeding specialist FRM, Patric de Gentile-Williams, told Reuters that his portfolios have raised a net $70 million far this year — after raising “very little” in 2009 — and he expects the uptick to continue with additional commitments.

“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% to start-ups, seeding and young managers’,” he said to Reuters, adding that 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’ve seen some competitors spring up. Very large institutions are getting their own program run by a specialist manager.”

Separately, a survey by US researchers Preqin of 50 institutional investors worldwide indicates hedge funds are continuing to face problems raising capital more than a year after the credit crisis. According to the research, only one in every 60 proposals by hedge funds to institutional investors results in investment.

“Institutional investors have invested more heavily in hedge funds over the tail end of 2009 and into 2010 following a difficult fund raising period after the credit crisis,” said Amy Bensted, hedge fund data manager at Preqin. “The institutional sector of the hedge fund market has become more important in the wake of the market tumult, as these investors have stuck to the asset class in much greater numbers than the high-net-worth sector. Marketing to institutional investors requires a different approach, and knowledge of an institution’s preferences and how they prefer to source funds is essential in gaining consideration for new vehicles.”