Warn potential clients about screaming kids. Clean up your house. Don’t forget to shave. These are the rules for wooing clients to a new hedge fund while in a coronavirus lockdown.
As if starting a hedge fund wasn’t tough already, this year it’s going to be even harder. At least 10 firms opened on April 1, with more slated for this year. Most will begin with substantially less money than their founders were expecting before the world came to a standstill, according to people involved in fundraising.
“If you’re launching with north of $100 million that’s considered a good size in this marketplace, and anything above $500 million is considered an outlier,” said Barsam Lakani, head of prime brokerage sales at Jefferies. That compares with last year, when a handful of funds started with more than $1 billion.
For much of the past decade, raising money has been a slog. The industry faced ridicule for high fees and low returns, and clients were more likely to pull money than to add. Now startups also have to deal with much of the world under quarantine, and a global recession or worse, creating the least welcoming money-raising environment in years.
It’s a grim picture borne out by recent data on fund flows. The industry saw clients withdraw a net $33 billion in the first quarter, the most in more than a decade and 1% of total hedge fund assets, according to Hedge Fund Research.
While managers said the recent market volatility — and the fact that funds for the most part outperformed the market — makes them more relevant than ever, the obstacles to starting have only multiplied.
On-site due diligence is impossible with travel restrictions in place, and there’s also competition from established firms that are opening to cash for the first time in years. And some investors are more focused on dealing with their current money-losing investments than looking for new opportunities.
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The rewards for the men — and they’re all men — are notable, especially given only a third of the top 15 managers on the list beat the S&P 500.
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Just 15% have incorporated ESG in their strategies, according to a report.
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Macro funds, which invest in broad global trends, had the biggest disparity.
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“We would never make an investment based on videoconferencing only. Face-to-face is absolutely necessary in our process,” said Dariush Aryeh, chief investment officer of Geneva-based Fundana’s fund of funds, echoing the view of his peers. That means he probably won’t give money to anyone he hasn’t met until his team can safely travel again.
Some new managers said that having investors stuck at home might help them get noticed.
Morgan Stanley switched from a live to a virtual capital introduction event and ended up with nearly triple the number of investors the firm originally planned, according to people familiar with the gathering.
Joshua Pearl, who’s launching his Hickory Lane Capital Management in July, said he has benefited from people being quarantined.
“I’ve emailed chief investment officers of foundations and endowments directly and I’ve gotten instant responses,” he said. Previously, he might have had to deal with more people and not immediately heard back.
Some managers are bringing forward their start dates to take advantage of depressed prices, even if it means launching with less money under management, prime brokers said.
Shawn Badlani, who already has the backing of some family offices for his San Francisco-based activist firm Honest Capital, hasn’t decided if he’ll launch immediately or wait until he can pull in some larger institutional investors. In the meantime, he’s learned the best way to video-conference with potential clients.
“No one wants to see your messy house or the kids running around in the background,” he said. “You just try to do it in a quiet, nice-looking corner and make sure you’ve shaved.”
Newcomers also face a challenge from well-known firms, including Seth Klarman’s Baupost and D.E. Shaw, that are raising money to buy battered assets. They’ve claimed cash that might have gone to startups, attracting at least $10 billion in late March and early April.
In such circumstance, those best positioned to raise the most money are traders from well-known firms who were at a high enough level to know investors, according to investors and bankers. These include ex-Viking Global Investors co-CIO Ben Jacobs’s Anomaly Capital, Soroban Capital Partners co-founder Gaurav Kapadia’s XN and former Tiger Global Management partner Neeraj Chandra’s Untitled Investments, which launched this month.
The holdings in these top-performers “are companies that will be replaced, from a performance standpoint, over the next decade,” an expert says.
The founder of one new firm, who asked not to be named, says he hasn’t changed his start date and still has the key investors he signed up before the virus struck. He’s encouraged that even though March was quiet for money raising, in recent weeks he’s had incoming calls from potential clients.
Cloud technology allows his team to work from both coasts, but the process hasn’t been without its challenges, from slower response times getting onboarded with brokers to dealing with his own children. Remote learning leaves them with lots of free time, and he’s found himself warning potential investors on calls that they might hear crying or screaming.
For David Storper, who’s raising money for his 5P Capital Management, Zoom sessions have allowed him to get to know his potential investors better through their home libraries — an insight he wouldn’t have gained in pre-virus days.
“Some were the usual titles that you might expect, others were probably staged,” he said. “A few piqued my interest and I’ve added them to my reading list. But the Jackie Collins book, that was a bit of a surprise.”
Other launches slated for this year include:
- Ex-Light Street Capital Management’s Jay Kahn is gearing up Flight Deck Capital.
- Aaron Weitman, who spent 15 years at Appaloosa Management, is starting CastleKnight Management in July with at least $100 million from investors, including his former boss and uncle, David Tepper, people said. He has hired some staff over the past couple weeks.
- David Tiomkin, previously co-portfolio manager at Aurelius Capital Management, is opening credit fund Catalur Capital Management next month.
- Three other Viking alumni are starting their own firms: Grant Wonders is launching a technology-focused fund, Brennan Diaz is starting Fernbridge Capital Management and Stephen Mykijewycz is opening Masterton Capital Management
- The managers either declined to comment or didn’t return messages seeking comment about their fundraisings.
