Today’s market poses a difficult fund raising environment across all hedge funds.
Executive search firm, Russell Reynolds Associates (RRA) recently hosted an industry event, examining the current state of play for hedge funds.
Hedge funds are seeing a continued trend towards more capital inflows as a whole; estimated at $2.25 trillion by year-end, according to the firm. Ninety percent of flows went to managers with more than 5 billion in assets.
“It’s arguably, the most challenging fund raising environment,” said Lynn Tidd, managing director at Russell Reynolds Associates. Tidd specializes in the recruitment space for hedge funds, private equity funds and other alternative firms. “People need to have a different approach today, to get above the noise. Whether you sit in the front office, in an investment role, or in a back office role, you will interface investors.”
Tidd noted that she recruits for the larger, established hedge fund community.
“Investors are encouraged today to invest broadly, not just within hedge funds. The L.P. community is a lot more cautious about where they place alternative strategies,” she said. “It might be a year or two before allocations come, whereas, in the past, it might have been three to six months.”
The next generations of hedge fund managers are also coming to market with the help of the hedge fund seeding community. Nearly 300 new hedge funds launched in the first of quarter of 2011; launch rate of 3.3 percent, according to a statement from the RRA event.
“Hedge funds will succeed if they produce more than alpha, and run like a true business…it’s the professionalization and institutionalization process,” Tidd told Markets Media. “You need much more than operational capital to launch; it’s more than just traders, and portfolio managers that contribute to the business structure.”
Apart from attracting seeders, hedge funds today are still employing traditional methods of capital raising, noted Tidd. Such methods include the use of “friends and family” money to build track records, and eventually branching out to three to five institutions.
“My take away from the trends that came out of the event is around succession planning,” Tidd said. “It’s a question of if these hedge founders have passed on a good legacy to the next generation of leadership.”
The “next generation” of hedge fund leader will also be across the gamut, versus past eras of hedge fund management—which largely came from proprietary traders smoked out by financial regulation on banks.
Of the trend to go from prop trader to hedge fund manager, Tidd remarked the phenomenon is “played out. There’s no one left considering regulatory schemes have already forced people to jump ship.”