Dow Kim, a 10-year veteran of Merrill Lynch who left the bank in May 2007, is to go ahead with his hedge fund, Diamond Lake, which he plans to roll out in April. Kim was co-president of Merrill’s global markets and investment banking division, and is largely blamed for the losses in the bank’s fixed-income and mortgages businesses despite leaving before the full extent of exposure came to light.
The bank had intended to invest in Kim’s fund but in August reneged on the promise. Since then Kim has been raising money for Diamond Lake and expects the fund to launch with $650 million to $1 billion – about a third the size of its initially reported target. Although it is perhaps understandable that Kim’s fund may be finding it harder to raise capital, it is not alone in this. Other managers keen to start up and take advantage of opportunities afforded by the volatile markets are also struggling. Jefferies Group, for example, recently announced that it was reducing assets in its US hedge fund seeding programme by 20% amid losses. MFS Investment Management also stopped its hedge fund seeding programme in January, just four months after launch, citing declining interest.
Not everyone is pessimistic about seeding. FRM, a $14 billion fund of hedge funds, for example, set up a seeding business in January and Blackstone is rumoured to be revisiting seeding.
Victor Park, industry expert consultant on hedge fund start-ups, says he thinks the market is moving towards institutional seeding. "It makes incredible sense for a fund of hedge funds to become a seeder," he says. "The chances are a fund of hedge funds would allocate some money in any event to an impressive start-up. By acting in part as a seeder, the fund of hedge funds can better monetize its position by requesting a percentage of the business for kicking off the firm with the initial monies as well as perhaps additional monies over time." Park points out that by combining a seeding fund with a fund of hedge funds, the former can act as performance kicker to overall returns. Despite a growing number of start-ups, only a very small proportion launch with more than $50 million. For these funds, seeders, which can offer infrastructure, Wall Street research and access to company management as well as capital raising, can be of significant benefit and worth the give-up in equity says Park.
