Morgan Stanley today announced the launch of a second hedge fund vehicle that will be capitalized at $300 mm, looking to seed hedge funds. With the growth of assets flocking to hedge funds, it isn't surprising to hear this news. Although, I'm bullish on hedge fund seeders, I'm not so bullish on bulge bracket banks launching startup funds.
I've posted previously a few times on my friends over at SkyBridge Capital and their hedge fund seeder. The only thing better than running a successful hedge fund is seeding a handful of successful ones. It turns out that what makes seeding a hedge fund successful is not necessarily just finding good managers, but it also means finding lots of money that is looking to get access to those top managers.
When I talk about fund raising by a hedge fund seeder, I am not talking about raising 10 to 20 mm to seed a manager and then building up assets as that manager becomes successful. A great hedge fund seeder will seed a fund with a good chunk of change and then immediately go out and raise 100 to 200 mm within 6 months to a year.
If you are well connected and have a team with lots of experience like the guys at SkyBridge, you can do this. If you are an investment bank like Morgan Stanley with lots of rich accounts and a strong salesforce to push a product, you might be able to do this. But if your investors don't have deep pockets (Morgan Stanley has an investment minimum of 100k for this fund) then your keg will be dry soon.
Perhaps this gets to the underlying objective of an investor in a hedge fund seeder. An investor in a hedge fund seeder ideally should be someone who is looking to gain rights of access to top managers. Yeah you will make money on your seed investment, but what you are really looking for is a way to put a very large amount of money to work to get strong returns year after year. If you invest in a seeder, then for a relatively small investment you will have eyes and ears looking for the top managers and you will gain rights of access to those successful managers.
I'm sure for most of us with a few hundred million in the bank, this is a problem we contemplate everyday. But for those of you with more than modest means who have considered the hedge fund category, the above discussion really highlights the appropriate purpose of investing in a hedge fund seeder.
As with most categories in private equity, I would always prefer to put my money with a small boutique firm with deep expertise, than the bulge bracket bank.
