By James Williams, news editor, Hedgeweek – Seeding hedge funds has picked up in popularity over the last 12 months at a time when new managers looking to raise capital has become notoriously difficult. Unless, that is, you happen to have worked on the prop desk at Goldman Sachs or in one of the world’s high-profile multi-billion dollar hedge funds.
So it perhaps comes as no surprise that leading European seeding platforms like Amsterdam-based IMQubator are staying one step ahead of the pack by developing relationships outside of Europe to source the next wave of talent.
Earlier this year, IMQubator announced that it had teamed up with Hong Kong-based Synergy Fund Management in a joint venture to identify and seed the next wave of Asian emerging managers. IMQubator was founded by Jereon Tielman in 2009 with EUR250million in seed money from Dutch pension fund Stichting Pensioenfonds ABP. It currently has nine funds in its stable. Each manager receives a seed ticket of EUR25million with IMQubator taking a 25 per cent equity stake in the management company.
Synergy Fund Management was established in Hong Kong two years ago by Eliza Lau (pictured), the former CEO and CIO of SAIL Advisors; one of Asia’s biggest FoHF firms. Together, the two firms hope to mutually benefit from sourcing talent in what is a truly East-meets-West partnership.
It’s a shrewd move. Institutional investors are keen to commit to emerging talents in FoFs; a point that is certainly not lost on firms like GSAM, who are turning away from directly investing in hedge funds and benefiting indirectly from fees gained on the total AUM of each fund it seeds in addition to the trading business each fund generates for the firm’s brokerage division. Last year it raised USD600million in assets to invest in a portfolio of between eight and 10 start-ups. That’s a healthy chunk of change for any new manager to launch with, albeit at the expense of giving up a percentage of equity in the business.
The competition to seed is therefore hotting up, but speaking with Hedgeweek about the JV, Synergy’s Lau is more than confident about the opportunities appearing on the radar.
“Synergy is in the business of looking for hidden jewels. When Jereon heard about us he knew what a good match we could be for each other. His team has experience in the European market, we have expertise in Asia so it works well,” explains Lau, confirming that discussions first started with IMQubator last year.
Indeed, Lau’s Synergy Asia Fund is a multi-strategy FoHFs with a tilt towards emerging managers. It launched on 1 September 2010 and currently invests in 11 regional managers. The advantage to this seeding partnership with IMQ is that Synergy themselves can then invest in seeded managers and bring them into the portfolio, helping the manager grow even further.
Says Lau: “Quite often I find that the sweet spot is the first few years when a manager is willing to take risks carefully and produce quality returns, to set up the fund with his own money invested into it. That takes courage and hard work, but you need to get it right – that’s the window of opportunity when you actually get strong performance and risk-adjusted returns. ”There have been numerous industry studies that suggest smaller, emerging managers can generate more alpha than their bigger brothers. A February 2012 article in BusinessWeek quoted Ben Funk, head of research at London-based FoHFs firm Liongate Capital Management LLP as saying: “It makes a lot of sense to invest in the speedboats over the oil tankers.”
Lau’s role is very much an advisory one; sourcing the managers and identifying the best ones for IMQ to consider seeding, conducting due diligence and, ultimately, to monitor them on an on-going basis. Lau’s experience at running money for mutual funds, as well as hedge funds and FoHFs in Hong Kong means that Synergy has an extensive database of emerging managers.
“We have a couple of hundred names on our database which we’ve screened to around 20 names and with whom we’re doing a lot of on-site due diligence,” says Lau. “We sit down with managers to understand the strategy, how they want to build out. With all the new talent coming out of China, it’s exciting for us – these are talented managers who no one has yet tapped into and who are looking to set up offshore structures and offices in Hong Kong (in addition to their domestic funds in China) and allow foreign investors to participate through their offshore vehicle and invest in China’s domestic market.”
Lau confirms that a lot of managers come to Synergy beforehand to ask what international investors are looking for, what fund structure they should be setting up – this is particularly true of Chinese managers who are perhaps less familiar at dealing with global investors than Hong Kong or Singaporean managers.
“That’s the sweet spot; when managers most need your help. We’ve been able to offer managers advice and direct them to the right investors and service providers. In return, we invest in them,” says Lau.
It’s precisely that on-the-ground expertise that IMQubator is looking to leverage in its JV with Synergy. Speaking to Hedgeweek recently about the partnership, Tielman said: “We did it because we see more emerging managers coming to market in Asia and we see increased interest in Asian institutions gaining exposure to emerging managers.”
Although part of IMQ’s plans to expand its seeding platform (most of the managers it seeds are based in Amsterdam and operate out of the same building), Tielman and his team recognize that Asian managers need to operate on the ground in Asia. The level of risk control and transparency has improved in recent times to mitigate operational risk, and besides, Synergy will themselves provide constant monitoring.
The Synergy Asia Fund follows a pan-Asian remit although Lau admits close to 40 per cent of the portfolio is composed of Hong Kong/China managers. Of the 20 names Synergy has already screened for potential seeding, some of the most promising are China-based managers trading soft commodities.
“You can go long and short commodities in China (easier than shorting stocks which are still limited in number) and arbitrage with commodities on overseas exchanges like Chicago’s Board of Exchange to hedge out volatility, which makes the strategy really attractive. We’re in discussions with a few of these managers right now.”
Of course, there are plenty of other firms trying to steal a march and seed the next best manager. In March 2012, Ascalon Capital Managers, a unit of Australia’s Westpac Banking Corp, seeded Hong Kong-based Athos Capital in exchange for a 35 per cent equity stake. In February this year, Wuzhu Partners, a pan-Asia long/short equity fund, was backed by Hong Kong-based hedge fund seeder Samena Asia Managers. So there’s no shortage of opportunities.
Chuak Chan, COO of Ascalon Capital Managers (Asia) Ltd, told Hedgeweek via email that in addition to seeing individuals and teams spinning out from prop desks, longer established funds and funds that have terminated, Ascalon was also seeing people from outside the region looking to set up in Hong Kong or Singapore. Said Chan: “Access to start-up capital and early investors remains a challenging space for a lot of managers seeking to start up. This opens up opportunities for us to work with high quality managers. We are planning to partner with both new and more established managers over the next couple of years.”
Although they might be brilliant traders, a lot of these guys don’t necessarily know how to set up and manage a business. “They’re used to sitting in front of a Bloomberg screen, trading. If you ask them to set up the back office, get all the appropriate auditing, administration and legal side of the business ready; that’s a completely different skill-set. Many of them have also never even had to deal with investors before. We guide them on what investors are looking for so they won’t find the manager risky when viewing them, that they basically have a global-standard infrastructure in place,” explains Lau.
The seeding route certainly seems a compelling reason for new managers to consider. This isn’t something that Synergy are about to engage in right now according to Lau, although she admits they might consider it in the future.
With respect to the platform itself, there are two ways a manager might grow: Firstly by receiving seed capital from IMQ themselves; secondly, by receiving acceleration capital from Synergy and joining the firm’s portfolio of hedge funds.
In addition, Synergy also run customized portfolios for certain institutional investors looking for non-commingled products and greater control over their assets. “It’s an ideal platform: we can help these managers find seed capital, we can help them to accelerate and we can also introduce them to other investors if they prove to be particularly successful,” says Lau.
In essence, this isn’t about seeding per se but about establishing a clearly defined fast track to growth.
“The best talent recognises that it’s not just about seeding: they see the bigger picture in terms of how they might grow. They don’t have to spend as much time on marketing and can really focus on the investment side and deliver good quality returns,” adds Lau.
For seeding opportunities to work, Ascalon’s Chan says there needs to be mutual trust. Although vital, it’s not all about picking the best managers with demonstrable track records. “We prefer managers who have a good understanding of broader business issues as we can be much more effective in helping them build a best-in-class business if they recognise that success cannot be achieved by investment process alone,” notes Chan. He also points out the need to identify liquid strategies that don’t compete with the firm’s existing partners and having a strong “commercially viable” investment strategy as key factors when assessing seeding opportunities.
Lau hopes that at least two managers will be seeded this year – one of which will probably be a China-based manager. “It’s a good time to get into China. The talent coming out of there is exciting and we’re optimistic. As I said to Jereon, the window of opportunity is short, as it is now. Once a manager sets up and builds traction they don’t need you. The sweet spot is when they’re still uncertain.”
