Smaller Hedge Funds Are Attracting Investors

Emerging hedge funds are attracting interest from pension fund investors such as the California Public Employees' Retirement System (CalPERS) and the New Jersey Division of Investment.  Smaller hedge funds that manage less than $50 million returned 13.1% annually for the last 15 years through 2010.  Compare this figure with an 11.62% return for funds with more than $1 billion in assets under management and 10.23% return for the HFRI Fund Weighted Composite Index.  Pension funds are also mimicking the hedge fund of funds business model by seeding these new funds and getting a share of their profits.  So, they are getting investment returns and participating in the incentive fees.  Seeders invest for the long term and usually have a two to three year lockup on their capital.

The largest hedge funds receive about 90% of the investment dollars.  Many investors are worried about capacity issues as they swell in assets under management.  After 2010, the more successful funds have recovered from the credit crisis and are closing their funds to new investors.

Some firms that specialize in seeding fund of funds and investing in emerging funds are Busara Advisors, Reservoir Capital Management, Protege Partners, Blackstone Alternative Asset Management and Larch Lane Advisors.

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