"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."
-Charles Dickens, A Tale of Two Cities, English novelist (1812-1870)
When we look back to 2010 hedge fund start ups, will we be quoting Charles Dickens? Despite the enormous challenge of raising investor capital in this post-Madoff environment, many other aspects of starting a hedge fund have rarely been more favorable. The pool of available talent (both front and back office) is wide and deep and can be accessed at a lower cost than just a few years ago. The Volcker rule is pushing entire teams out of investment banks and many are looking for a new home. Service providers (administrators, prime brokers, attorneys and accountants) are hungry for business and agreeing to take on newer and smaller firms just to get their foot in the door. Real estate is more plentiful and less costly and lessors are willing to cut better deals. There is a lot of available space already built out which saves precious dollars for new hedge fund managers. Technology is also more readily available and cost-effective when accessed through a hosted (ASP) environment.
Looking forward, allocators (pension funds, life insurers, endowments, etc.) have made promises to their constituents which they will not be able to cover in a low interest rate/return enviroment and will need to seek out the higher returns that alternative investments are known for. I have seen some commentary forecasting a 2-3X increase in AUM for the alternatives industry over the next 20 years. Firms starting up now will have a chance to build a track record in advance of the coming needs. Speaking of needs, while it is clear that the largest hedge funds are attracting the lion's share of the assets currently being allocated, I am hearing an increased din of unhappiness with the largest firms. Feedback along the lines of the larger firms are too correlated with the markets (and each other) and that returns have decreased as AUM increased. This has lead many investors to seek out newer and smaller firms with good pedigrees.
We will not know for some time whether 2010 was such a great year to start up, but as the saying goes, "You have to be in it to win it".
George Roeck, Chief Operating Officer & Chief Financial Officer, Charter Bridge Capital Management LP
Executive Board Member, HFBOA