Over 80% of hedge fund start-ups say securing allocator capital is the biggest barrier they face, as new Hedgeweek research unearths a nervousness about the current capital raising environment.
• Four in five emerging managers say capital raising is their biggest challenge – and one in two say it is harder than 12 months ago
• New hedge fund launches are suffering delays as a result, with market uncertainty denting confidence among managers and investors alike
• Amid ongoing industry institutionalisation, seed capital is becoming increasingly critical to hedge fund start-ups’ success
Over 80% of hedge fund start-ups say securing allocator capital is the biggest barrier they face, as new Hedgeweek research unearths a nervousness about the current capital raising environment.
In a global survey of hedge fund managers of all sizes, 64% of respondents said attracting investor flows is the single biggest challenge that emerging and start-up managers face. But among emerging managers themselves – defined as those with AuM under $250 million and track records of under five years – that number was even higher, at 82%, suggesting capital-raising for start-ups is a bigger barrier than the rest of the industry realises.
The finding forms part of Hedgeweek’s latest Insight Report, The Next Generation: How emerging managers are adapting to the new hedge fund landscape, which examines how smaller hedge fund firms are grappling with an increasingly tricky launch environment.
The report also found that close to half (47%) of emerging hedge fund managers believe the capital-raising environment is harder compared to this time 12 months ago. Just one in four (26%) said the fundraising conditions are now easier.
Research participants said renewed market upheaval and fresh geopolitical turbulence is clouding the launch environment, denting confidence among both managers and investors following the pandemic.
That uncertainty is translating into delays: difficulties in securing initial investor money means prospective start-ups are taking longer to roll-out. Launches are being pushed back by a month or a quarter, while managers who can open with $100 million or so of their own money may initially opt to launch as a family office before securing more capital to formally roll out.
Bloomberg data meanwhile indicates that equity long/short launches as a proportion of all hedge fund launches is at its lowest level in more than two years.
Seed capital is now seen as critical during the launch period, as greater investor scrutiny fuels increased institutionalisation and professionalisation within the hedge fund management sphere.
“A few years ago, it felt like we saw more people who were willing to launch a fund that was well below the viable size, knowing they either weren’t going to make money initially or were subsidising it for a while,” says Lucian Firth, partner at Simmons & Simmons in London.
“Now, though, because of that uncertainty, more managers want to get a seed deal in place before they will launch. They want to have a seeder, or at least some decent amount of committed capital, before they will the start.”
Wayne Yu, CEO and chief investment officer at BCK Capital in New York says: “In terms of the emerging manager environment, it’s definitely a changing landscape – I think at this point it’s very difficult to launch a fund without some strong initial backing – launching with a big partner is a stamp of approval.”
Key implication | Emerging managers: Capital-raising remains a major hurdle for emerging and start-up hedge funds, a challenge that has become even harder over the past 12 months, despite the easing of lockdown restrictions. Securing seed funding from an initial investor could help smooth the often-tricky launch process.
