Institutional Investor's Alpha Magazine - November 2008 - (Page 37)

Strategies Hedge Fund Seeding The A wake hen Dow Kim left his job in May 2007 as co-president of global markets and investment banking at Merrill Lynch & Co. to open a New York–based hedge fund, his timing could have been better. Expecting to raise $500 million to $1 billion in day-one money from Merrill — and hundreds of millions more from other investors — Kim quickly staffed up in anticipation of launching Diamond Lake Investment Group from Goldman, Sachs & Co.’s hedge fund hotel at 900 Third Avenue. He shunned hedge fund seeders — ﬁrms that dole out start-up capital to new hedge funds in exchange for a piece of equity or revenue — believing that no-stringsattached money would be plentiful. Within months, Kim’s plan began to sour. Merrill announced in October 2007 that it was taking an $8.4 billion write-down on losses in the mortgage and fixed-income departments that had been under Kim’s supervision, and the ﬁrm withdrew its commitment to help start Diamond Lake. Kim’s other suitors pulled out too. By June of this year, with his projected start-up capital having evaporated, Kim resorted to knocking on the Early Birds Are By Frances Denmark Known for being among the first to find talent in down markets, hedge fund seeder firms are striking deals now. doors of the very ﬁrms he had once rejected: hedge fund seeders. But they turned him down. “The absolute amount of money he was looking for and the cost of his business were too big for us to consider,” says Hugh Lamle, president of M.D. Sass, a New York private equity ﬁrm that specializes in seeding start-ups. Lamle says the ﬁrm declined the request even though Kim seemed fully prepared to grant M.D. Sass an equity stake. The ﬁrm, which has been seeding alternative-investment managers since 1985, limits its commitments to $50 million apiece. But even ﬁrms that supply more capital — up to $200 million — said no to Kim, according to executives at other seeder ﬁrms he approached. Kim is not alone. Indeed, renowned hedge fund managers are ﬁnding it all but impossible to get a hedge fund off the ground these days. A few months after Greg Coffey announced in April that he was leaving GLG Partners, a $17.3 billion London hedge fund ﬁrm, to start his own fund, Coffey seemed to scale back his dreams. He opted instead to become co–chief investment ofﬁcer at Moore Capital Management, the $20 billion hedge fund firm NOVEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 37

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - November 2008

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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