HEDGE FUND SEEDING
Institutional investors continue to increase their hedge fund allocations to capitalize on the attractive risk, return and diversification benefits compared to traditional investments. Over time, forward-thinking investors have also increasingly recognized that a particular niche of the hedge fund space – hedge fund seeding – offers an exceptional opportunity to benefit not just from attractive risk adjusted investment returns, but also from the hedge fund industry’s growth as well, via an economic participation in the revenue generated by the seeded hedge funds.
In the aftermath of 2008’s market upheaval, the barriers to entry for new hedge fund managers are higher than ever, including a sufficient asset base to cover organizational and ongoing expenses as well as attract institutional investors. As a result, in our opinion, the quality of new hedge funds seeking seed/strategic capital is significantly higher than in the past and is creating a market environment extremely attractive for Seeders.
Providing early-stage capital typically entitles Seeders to an economic participation in the seeded hedge fund’s revenue stream as well as other advantages, including position level transparency and active monitoring of risk and operational exposures, which can be highly beneficial to the manager and to investors providing the seed/strategic capital. Further, Seeders often obtain investment capacity rights to increase their investment capital at preferential terms which can be quite valuable for successful seeded hedge funds.
A hedge fund seeding strategy may achieve a higher rate of return than an investment in a fund of hedge funds or a direct investment in a hedge fund due to the economic participation in the seeded hedge fund’s revenue stream. It is important to note that in Pine Street’s Seeding Arrangements, the participation in the seeded fund’s revenue stream is allocated to the investors in the seeding vehicle.
A hedge fund seeding vehicle is particularly appealing to investors who desire: 1. higher potential returns than provided by a typical hedge fund portfolio; 2. greater transparency than is typically provided by traditional hedge fund investment; 3. actively monitored investment and risk guidelines, via position/trade level transparency; 4. interesting co-investment opportunities; 5. pre-negotiated additional investment capacity rights with managers who demonstrate the ability to generate diversified sources of alpha; and 6. the ability to capitalize on the hedge fund industry’s growth prospects.