Hedge fund launch-closure ratio “heavily skewed the wrong way”, says Sandbar CEO James Orme-Smith

Man in a maze

The number of hedge fund launches compared with closures is “heavily skewed the wrong way”, says James Orme-Smith, CEO of Sandbar Asset Management, but he indicated that emerging managers can still overcome the sizeable barriers to entry.

“For anyone to start their own hedge fund, capital has become the oxygen more than anything else, and has become even more important than it ever was,” Orme-Smith said during the concluding panel of this year’s Hedgeweek LIVE Europe summit.

The session – which explored the fundraising outlook for 2021 - did not shy away from the huge challenges that loom over emerging and start-up hedge funds.

But the discussion also struck a cautiously optimistic tone, as panellists acknowledged the “substantial changes” that businesses have undergone as a result of the coronavirus pandemic, and explored the creative methods that fund managers are using to forge new relationships in the era of restricted travel and social distancing.

While the hedge fund industry “has been struggling” over the past several years, panel moderator Ron Biscardi, CEO and co-founder of iConnections, noted that “a crisis like this is what hedge funds are designed to protect from and deal with.”

For newer managers, “the fact that you can’t travel, you can’t meet investors, makes it difficult to create a new pipeline of potential clients,” said Jonas Mårtenson, founder and director at Stockholm-based Resscapital AB.

He conceded that Scandinavia has been a “difficult climate” for hedge funds in recent years, with a number of larger, well-established names closing down.

“They’ve basically run out of steam, having been up and running for a number of years,” Mårtenson observed. “The same is probably true for a number of European markets.”

Echoing Mårtenson’s comments, Orme-Smith said barriers to entry – both in terms of start-up costs, and the ability to raise even close to break-even capital in the early days – are much tougher now. The problem has been compounded by what he called “the near-death experience of funds of hedge funds” in Europe.

“Effectively, the underlying allocators, the consultants, pension funds, and insurance companies now don’t go via intermediaries. They go direct,” he said. “The market in that space has been replaced by the multi-PM platforms, where assets keep on growing, the hiring is incessant, and their returns have been really good and better, arguably, than fund of hedge funds ever were.”

Monel Amin, founder and CEO of DiligenceVault in New York, said emerging managers faced headwinds early on during the pandemic, but added that since then “people have started to mobilise”, through the use of technology, connections and other creative means.

“Back in March and April, most people were just being very cautious, focusing on their existing relationships.”

She said most investors were very risk averse to making a new allocation with a new manager without having an in-person or on-site meeting, whether it was to a large fund or an emerging manager.

“Fast forward a number of months, people are realising that this is not going away. It’s not a temporary thing, so you cannot put new allocations on hold forever,” she added.  “The risk of inaction or even staying in a sub-optimal investment is a big risk factor.”

Citing research showing the average time from the first meeting to an investment is more than a year, Orme-Smith urged patience and a trust in processes, and for start-up hedge funds to follow best practices.

Sandbar Asset Management's AUM has grown from USD200 million in August 2019 to USD2.1 billion currently.

“Investors want to see a combination of a longer track, some time to observe a strategy and how it behaves in various different conditions, and to get to know you bit better and see the data. It takes time,” he said. “But when it inflects it can really inflect.”