Investor confidence in larger hedge funds has seemingly
waned over the years, with reports of lack of returns
and big investment scandals leading to a slew of
hedge fund redemptions.
With most industry participants expecting repeat volatility and
downward trends from last year, it seems that the outlook for
substantial and stable returns in 2012 would be unlikely
However, one area that might be promising for the coming year
is for smaller start-up hedge funds, despite the last few years
being difficult for such fledglings.
The turmoil of the financial crisis persuaded many investors
that they were safer investing their money in more established
funds perceived islands of stability in the
Faith in larger funds was not unwarranted at the time
more than 15% of hedge funds closed in 2008 yet
only one of these, Madoff feeder fund Fairfield Sentry, managed
assets of more than $5 billion.
Yet of course confidence waned further in hedge funds after the
Bernard Madoff investment scandal broke in December 2008, when
it was revealed that it was a Ponzi scheme.
The third quarter of 2011 saw an increase in the rate of
redemptions year-on-year and quarter-on-quarter. Man Group, the
worlds largest hedge-fund manager, reported that $2.6
billion was pulled from funds it owns in the third quarter of
2011. However, research from data-vendor BarclayHedge, released
on Tuesday, indicates that November saw an increase in industry
assets the first such increase in five months.
Start-up funds can be bolstered by the assistance of seeding
funds: funds that contribute capital to smaller hedge funds
allowing them to expand.
Jeroen Tielman, CEO of seeding fund IMQubator, is convinced
that 2012 will be a strong year for these smaller funds,
particularly those bolstered with the assistance of a seeding
fund and we may see a reversal of the trend towards
investment in larger funds.
During the crisis, investors flocked to the big funds
as a safe haven, says Tielman. "Theyve now realised
this isnt really the case."
Part of the attractiveness of these newer funds for
investors is that fund managers need to perform strongly and
consistently. Unlike more established funds, start-ups might
not have the accrued goodwill of investors necessary to weather
a bad patch; underperformance early on runs the risk of
establishing a negative reputation that will be hard to
Start-ups tend to offer a healthy premium thats
attractive to investors, says Tielman. "And after all,
you only get one chance to set up a brand so theres a
real incentive to deliver results."
Start-ups of any kind are often seen as risky, and this is just
as true in the context of hedge funds the lack of a
proven record can, rightly, make investors cautious. However,
Tielman contends that the risks seen in start-ups are often
illusory. Individuals starting up their own hedge funds tend to
be experienced fund managers who have decided to strike out
from another fund, rather than newcomers to the field.
Start-ups are no more risky on the investment and
risk-management side; they tend to be experienced investors,"
says Tielman. "The lack of experience is only on the
operational side. Most emerging fund failures stem from
operations problems, or failures in sales and marketing. We
provide funds with support on these fronts, protecting them
Indeed, aside from mitigating the problems that may be
experienced specifically by start-ups, Tielman believes the
structure given to a start-up in the seeding process can help
it avoid criticisms that are levelled at hedge funds of all
Specifically, Tielman feels that the structure imposed by
his fund will create hedge funds that are more investor
friendly. Hedge funds suffer criticism for being opaque to
investors but since start-ups dont have the ingrained
habits found in larger funds, these concerns can be dealt with
Tielman is hopeful that the next generation of hedge
funds will represent a correction of the balance between
manager and investor.
We demand transparency from the outset," says
Tielman. "Since we work with new funds, we can put in
place the proper structures for transparent operation, without
having to remove a pre-existing system. We can make sure that
the proper balance between managers and investors is there from
Marketing firm and consultancy Agecroft Partners released a
report on Tuesday indicating that it expects 2012 to
be a strong year for hedge funds, predicting $100 billion in
net inflows for the coming year. This would mark the highest
inflows since 2007. In particular, Agecroft targets small- and
medium-sized firms as potential beneficiaries of these inflows,
indicating investor concern over diluted alpha and investor
risk in larger funds.
Tielmans views are coloured with the opinion that all
hedge funds big and small are not being paid the
attention they deserve from investors. While some may be
concerned about the ability of fund managers to deliver added
value to investors, it is possible that skilled fund managers
could take advantage of the volatile conditions projected for
Hedge funds are under-represented in most
investors portfolios," says Tielman. "They deserve a 20%
to 25% allocation but are rarely given this. As a skill-based
asset class, hedge funds are particularly well suited for
investors in turbulent times like now.