During my trip to Chicago had an occasion to compare notes with Dow Jones. Our view on the hedge fund marketing environment quoted below.
For Startup Hedge Funds, Investors Proving Hard To Come By
By Jacob Bunge
Dow Jones News Service
23 June 2009
CHICAGO (Dow Jones)–The gyrating financial markets have proven difficult for even the most experienced alternative-investment managers to navigate over the last year, but startup hedge funds and commodity trading advisors now confront an even tougher challenge: convincing investors to entrust them with their money.
In the wake of 2008 – the hedge fund industry’s worst year on record – fledgling funds face gun-shy investors and tougher competition for the assets that are available, amid a fickle market that has made it tough to put up the numbers that made hedge funds famous. Adding to the problem are the effects of the Bernard Madoff scandal.
“It’s an uphill battle,” said Andrew Saunders, managing director of Hedge Connection, a New York-based company that helps new managers secure investments.
The financial crisis has hobbled an industry that once touted double-digit returns year after year, with hedge fund benchmarks down approximately 20% in 2008 – better than stocks but little comfort to investors who were paying management fees and sometimes had to wait weeks to withdraw their money.
Performance has come back this year, but after slashing hedge funds’ total assets under management from $1.9 trillion to an estimated $1.3 trillion currently, institutional investors and high-net-worth individuals are proving reluctant to jump back into the pool.
Restoring investor confidence is top-of-mind as the hedge fund industry gathers for the annual Managed Funds Association Forum in Chicago this week, looking to rebuild an image tarnished by disgraced manager Bernard Madoff and hedge funds’ general failure to protect investor capital through last fall’s crisis.
If you’re a so-called “emerging manager” with a track record of three years or less, securing new investment is even harder.
“No question, the last year has been a challenging allocation environment for all, with redemptions and people pulling money back onto the sidelines,” said Eric Brown, managing partner of Telos Investment Partners, based in Seattle and launched in April 2008.
Telos’ fixed-income and equity-focused strategies made money last year, but Brown said he has encountered investors still reeling from “shell shock,” especially wary of complex mathematics and derivatives.
Brown said he’s pitching Telos, which uses pattern-recognition software to direct investments, as a “new approach” to fundamentals-driven stock investing.
This is one of the advantages that new managers have, according to Hedge Connection’s Saunders: coming to market with a portfolio unblemished by contentious issues like gates and side pockets that have rankled hedge fund investors.
But the wave of investor redemptions last year has seen funds that were long closed to investments, including vehicles managed by veterans Steven Cohen and John Paulson, reopen to new investment, intensifying the overall competition for assets, said Saunders.
Michael Cuddehe, co-founder of Denver-based Seven Trust Global Advisors, said his firm has had more luck securing allocations from individual investors than big institutional investors, as funds of hedge funds and other institutions continue to work through the fallout from 2008 losses.
“A lot of those [investors] have taken major hits,” said Cuddehe. “They’re still licking their wounds, reorganizing, and not making major distributions.”
Seven Trust, which opened to outside investment last summer, targets low-risk trades in managed futures, a highly liquid strategy that helped the firm return 10% each of the last two years.
Despite a far better-than-average track record, Cuddehe said he continues to find the fundraising environment “grim.”
“For whatever reason, people are not opening their checkbooks yet,” he said.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; firstname.lastname@example.org [ 06-23-09 1327ET ]