Institutional Investor's Alpha Magazine - November 2008 - (Page 40)

Hedge Fund Seeding $1 billion Fusion fund of funds and move the assets to its Discovery seeding and PioneerPath Capital incubation platforms, launched in January 2007. After spending 20 years running equity-trading businesses in the U.S. and Europe at Salomon Brothers, Citigroup and BankAmerica Corp., Peter Forlenza in mid-2007 was more than ready to start his own hedge fund. He was optimistic about his prospects at ﬁrst, having just exited a ﬁve-year stint as head of global equities at BofA in early 2007. Forlenza set up a New York ofﬁce for his budding global macro hedge fund, Outpost Investment Group, in early 2008 with his own money and some from his partners. By mid-2008, with no sign of additional investors and feeling increasingly frustrated, Forlenza turned to seeding ﬁrms, a source he would never have considered during the heyday of hedge funds. “Two years ago the market was different — and it’s unlikely we would have considered a partner,” asserts Forlenza, who made pitches to six seeding ﬁrms before sealing a deal with SkyBridge Capital. “They are a seeder and a thirdparty marketer and an advisory service,” he says in explaining why he thinks Skybridge is a good ﬁt for his ﬁrm. SkyBridge’s seeding model is based largely on marketing. “The hedge fund manager is getting branding and risk management,” says Anthony Scaramucci, who founded SkyBridge in 2005. “We then go into the market with a very aggressive early-stage marketing plan.” The firm’s marquee names don’t hurt: co–managing partner Prince, best known as the COO who helped Eric Mindich raise $3.5 billion in 2004 to launch New York–based Eton Park Capital Management, and senior adviser Frank Meyer, who in 1990 seeded Kenneth Grifﬁn, founder of now– $18 billion Citadel. SkyBridge raised $500 million from its initial investors, using that money to seed eight managers, including Forlenza. It raised an additional $1.4 billion in total assets under management before this fall’s market crash, which drove the ﬁrm’s asset value down to $1.56 billion as of September 30. But the accompanying credit crunch offers SkyBridge an opportunity: The number of hungry hedge fund managers exceeds the amount of available capital, so SkyBridge can structure better terms for itself. The economics of seeding are compelling for the seed ﬁrm — and for its investors — especially if one subscribes to the theory that most hedge fund managers perform best in their early years. But even those who question whether small managers deliver better performance than their larger, more established peers admit that seed ﬁrms have an inherent advantage over traditional funds of hedge funds. Investors in Capital Z, for example, report that the ﬁrm earns 300 to 400 basis points more per year than it would if it were a pure fund of funds, thanks to its cut of the proﬁts from its equity stakes in the underlying managers. Capital Z has taken equity stakes in 17 managers representing a total of $12.8 billion; today 11 managers remain on board, with a combined $7 billion in assets. One of the ﬁrm’s most successful start-ups, Pass- Capital Z Asset Management CEO Christy Wood will invest up to $50 million with a new manager. their start while at Ziff, including Och-Ziff; Dallas-based HBK Investments; and Ellington Management Group in Old Greenwich, Connecticut. By 2000, 3,900 hedge funds ran a collective $500 billion in assets, according to HFR, and seeder ﬁrms had begun to proliferate. Two years earlier, Laurence Cheng had opened New York–based Capital Z Asset Management, a private equity firm dedicated to seeding new hedge funds. That same year, Swiss alternative investment house RMF Investment Management had established its hedge fund–seeding business. (In 2002, RMF was purchased by London-based Man Group, which also had a seeding platform.) Mark Jurish set up Larch Lane Advisors in Rye Brook, New York, in 1999. In 2002, Tarrant and Ted Seides launched Protégé Partners. To get off the ground, Tarrant had reached out to Robert Boldt, then CEO of the University of Texas Investment Management Co., which manages the university’s endowment funds, whom Tarrant had known when Boldt was a senior investment ofﬁcer at the California Public Employees’ Retirement System. Boldt was looking for ways to invest in the often richer, early returns of emerging hedge funds and to get guaranteed future access to them in return. He gave Tarrant $175 million in seed money to launch Protégé. In a sign that seeding is beginning to take center stage once again, Chicago-based hedge fund Citadel Investment Group announced in late October that it would close its 40 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

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

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.