What a novel idea. The asset management arm of giant insurer AIG is forming a partnership with a hedge fund investment group to seed emerging hedge funds.

AIG Investments is teaming up with Larch Lane Advisors, an alternative investment affiliate of UK-based Old Mutual Asset Management, to invest between USD50m and USD200m with hedge fund start-ups, teams of traders leaving established management groups and more mature hedge funds that need restructuring.

Larch Lane chief executive Mark Jurish says: 'Talented investors are leaving large hedge funds to start their own businesses, but many of them have not been able to reach their capital targets. The current supply/demand imbalance for start-up hedge fund capital represents the best seeding opportunity I've ever seen.'

There is no doubt that the fast pace of hedge fund asset growth has slowed. The credit crunch and liquidity squeeze has put a dampener on hedge funds in recent months and some managers have gone out of business. At the same time, many executives have left their firms to set up hedge funds on their own.

While larger managers have weathered the storm, smaller and start-up firms are struggling to attract investors. For some of them, AIG's seed money might just prove to be the key - for start-ups to develop, and for AIG to benefit from the outsized returns that studies show early-stage managers deliver. Other large players should follow AIG's example and step up to the mark.