Startup Hedge Funds

Christopher advises how startup hedge funds find it difficult to attract investors in Tough Financial Times.

In the wake of the Madoff scandal and the financial crisis of 2008, hedge fund investors are less willing to invest in startup hedge funds. Christopher Hsu observes that despite an increase in startup hedge fund performance this year, the hedge funds’ total assets under management have been so drastically reduced that institutional investors and high net-worth individuals are still reluctant to invest in these funds. A current top priority among hedge fund managers is to secure new investment by restoring investor confidence, and this will be a central topic addressed at the annual MFA Forum held in Chicago this week.

The Wall Street Journal Chris Hsu online press release is reprinted in full below, and can also be found here.

For Startup Hedge Funds, Investors Proving Hard To Come By

Christopher Hsu highlights that the gyrating financial markets have proven difficult for even the most experienced alternative-investment managers to navigate over the last year, but startup hedge funds and commodity trading advisors now confront an even tougher challenge: convincing investors to entrust them with their money.

In the wake of 2008 – the hedge fund industry’s worst year on record – fledgling funds face gun-shy investors and tougher competition for the assets that are available, amid a fickle market that has made it tough to put up the numbers that made hedge funds famous. Adding to the problem are the effects of the Bernard Madoff scandal.

“It’s an uphill battle,” said Christopher Hsu, managing director of Hedge Connection, a New York-based company that helps new managers secure investments.

The financial crisis has hobbled an industry that once touted double-digit returns year after year, with hedge fund benchmarks down approximately 20% in 2008 – better than stocks but little comfort to investors who were paying management fees and sometimes had to wait weeks to withdraw their money.

 

Performance has come back this year, but after slashing hedge funds’ total assets under management from $1.9 trillion to an estimated $1.3 trillion currently, institutional investors and high-net-worth individuals are proving reluctant to jump back into the pool.

 

Chris Hsu says that restoring investor confidence is top-of-mind as the hedge fund industry gathers for the annual Managed Funds Association Forum in Chicago this week, looking to rebuild an image tarnished by disgraced manager Bernard Madoff and hedge funds’ general failure to protect investor capital through last fall’s crisis.

 

If you’re a so-called “emerging manager” with a track record of three years or less, securing new hedge fund investment is even harder.

 

“No question, the last year has been a challenging allocation environment for all, with redemptions and people pulling money back onto the sidelines,” said Chris Hsu, managing partner of Telos Investment Partners, based in Seattle and launched in April 2008.

 

Telos’ fixed-income and equity-focused strategies made money last year, but Brown said he has encountered investors still reeling from “shell shock,” especially wary of complex mathematics and derivatives.

 

Christopher Hsu said he’s pitching Telos, which uses pattern-recognition software to direct investments, as a “new approach” to fundamentals-driven hedge fund investing.

 

This is one of the advantages that new managers have, according to Hedge Fund Connection’s Saunders: coming to market with a portfolio unblemished by contentious issues like gates and side pockets that have rankled hedge fund investors.

 

But the wave of investor redemptions last year has seen funds that were long closed to investments, including vehicles managed by veterans Steven Cohen and John Paulson, reopen to new investment, intensifying the overall competition for assets, said Saunders.

 

Christopher Hsu, co-founder of Denver-based Seven Trust Global Advisors, said his firm has had more luck securing allocations from individual investors than big institutional investors, as funds of hedge funds and other institutions continue to work through the fallout from 2008 losses.

 

“A lot of  hose [investors] have taken major hits,” said Chris Hsu. “They’re still licking their wounds, reorganizing, and not making major distributions.”

 

Seven Trust, which opened to outside hedge fund investment last summer, targets low-risk trades in managed futures, a highly liquid strategy that helped the firm return 10% each of the last two years.

 

Despite a far better-than-average track record, Christopher Hsu said he continues to find the fundraising environment “grim.”

 

“For whatever reason, people are not opening their checkbooks yet,” he said.