Brett Hellerman, co-founder of Clinton Group, discusses the emerging manager seeding fund he has launched with MassMutual Insurance.
Hellerman was a co-founder of Clinton Group in 1991 and left the firm in 1997 to found Norfolk Management Group. Norfolk Management Group is also the sole owner of Norfolk Markets, a broker/dealer that has been active in the marketing of alternative investments to the institutional community for the past 8 years.
Hellerman is the CEO of Norfolk Management Group, LLC and is also the CEO of the new joint venture, Wood Creek Capital Management.
HW: What is the background to the launch of the joint venture?
BH: Wood Creek Capital Management was founded in August 2005 as a joint venture between Norfolk Management Group, LLC and MassMutual Insurance company.
HW: What are your launch products?
BH: Coinciding with the launch of Wood Creek Capital Management is the close of Wood Creek Venture Fund, which was formed to develop the next generation of emerging alternative asset managers. Both Norfolk Management and MassMutual are investors in the Wood Creek Venture Fund.
The Fund's mandate is to find and seed managers in the niche alternative space; the fund will focus on managers that are active outside of traditional financial securities markets.
Wood Creek Venture Fund has adequate capital to meet any emerging manager's operating and investment capital needs. Capital allocations to each manager will depend on the manager's stage of development, the strategy's capital requirements and other factors to be determined on a case by case basis. The Venture Fund is closed.
HW: What is your investment process?
BH: Our investment process is a bottom up approach. We are searching for managers that we believe will present the Venture Fund's investors with the highest probability of outstanding absolute returns. The Venture Fund does not have target asset allocations. Rather it will consider any investment strategy outside of traditional financial securities arbitrage. Wood Creek seeks to be an active partner as well as an investor and we view our role as that of a venture capitalist rather than a "hedge fund hotel"; Wood Creek will provide operating support and expertise to its manager investments as well as capital.
HW: How many managers will you seed?
BH: We anticipate that over the next several years Wood Creek Venture Fund will make 7-10 seed investments.
HW: What are your criteria for removing managers from the fund?
BH: We are not hiring or firing managers in this fund. We will make as many investments as possible provided the economics of seeding a manager are compelling.
HW: What trends do you foresee this year?
BH: We expect to see a continuation of the following existing trends over the next four months:
• Challenging return environment for financial arbitrage strategies;
• Accelerating closure of struggling funds;
• Moderating growth in asset flows into the hedge fund sector;
• Increasing convergence between hedge funds and private equity;
• And strong investor demand for new investment products/strategies.
HW: Some funds of funds have complained that managers are not taking
enough risks in the current environment - what are your views on this,
and on risk in general?
BH: Hedge Fund managers react to financial incentives; they are generally an economically rational bunch. If managers are not taking risks it is because investors have allowed a scenario where managers feel the risk/return tradeoff of taking lower (or less) risk(s) is more compelling than taking larger (or more) risk(s). This may be a function of the structure of asset manager fees (proportion of management fees to incentive fees), a function of the opportunity set available to them, or some combination of the two.
HW: What makes a hedge fund manager special enough for you to select
BH: Three things:
• First, they must have the expertise and credentials that will attract investors.
• Second, the manager will be a willing strategic partner with the vision to build an asset management company, not just manage a hedge fund.
• Third, the individual must be a competent business person, not just a hedge fund manager.
HW: Are investors' expectations moving upwards and how do you deal with
BH: Our products are for an institutional audience. Institutional investors' expectations are always changing and many investors' expectations often lag the reality of the investment environment. This is a function of how these institutions are structured rather than their capabilities. At this point we do not see any systematic change in investors' expectations. Overall, however, we believe that alternative investors are maturing rapidly.
HW: Are you planning any further launches this year?
BH: We have no additional product launches planned for 2005.
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