Conditions Ripe For Hedge Fund Seed Investors…

Investors able to provide seed capital for hedge funds are set to enjoy the most favourable conditions in years due to an abundance of talented start-ups and a lack of competing capital.

According to a report by Reuters, at a time when volatile markets, poor returns and scarcity of capital might be expected to discourage hedge fund start-ups, some managers are setting up on their own. Some of these are traders coming out of troubled investment banks, or out of larger hedge funds that have run into difficulties, who see excellent opportunities thrown up by market volatility as a result of the credit crisis.

However, attracting assets is hard in an industry that is favouring larger hedge funds for their perceived security and where the bar below which some investors will not look at a fund can be between $100 million and $1 billion. Such a combination favours providers of seed capital.

Seed investors - funds of hedge funds, institutions or sovereign wealth funds - provide start-up assets, usually tens of millions of dollars, to small funds eager to get up and running. They aim to make their returns by negotiating a share of the fund's revenue over a certain period or they may take a stake in the fund firm as well, allowing it to share in its profits.

While seeding can often be a tough business, because the best hedge funds do not require assets, conditions suggest now is an opportune time to negotiate a deal. New seeding funds are being lined up to take advantage.

"It is a good time to consider seeding start-ups," said Mark Brady, a partner at law firm Eversheds, who specializes in alternative investments. "When the investment climate is less certain, there is a tendency for investment capital to follow a brand rather than merely performance, and this can make for tough going for a lot of the start-ups looking to raise money."

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