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Hedge Fund Seeding

The hedge fund industry changes rapidly from one year to the next. If you are trying to secure hedge fund seed capital you may be wondering what the current environment is for receiving seed capital. In the following video recorded in Monaco, I speak about how the hedge fund seed capital industry has evolved in the last twenty-four months.

Video Transcript/SummaryThe strategies and tips provided within this video module include:

  1. There used to be many more large hedge fund seeders, now there is about half of the hedge fund seeders than existed pre-financial crisis.
  2. Typically, most hedge fund seed deals are for $10-30 million.
  3. Hedge fund managers have less room to negotiate than they used to have because there are no longer multiple offers presented to a manager and the fund is considered lucky to receive one or more.
  4. Each seed provider typically invests in 2-4 managers a year so it’s very competitive.
  5. The hedge fund team is still the most important focus for hedge fund seeders.
  6. There are diverse business models in the hedge fund seeding industry today, some will ask more than others such as requiring you to move to their location or investing your own equity.  
Transcript of Hedge Fund Seeding

Hello, this is Richard Wilson and today I’m going to talk to you about the state of the seed capital industry. I just finished listening to a panel of 5 hedge fund seeders. I’ve also been helping an institutional investor find emerging managers to invest in. And I thought I could update you guys on how the industry is going, what’s changed and really what it looks like for those seeking seed capital. There used to be around a hundred seeders out there mostly backed by big banks. Nowadays, there’s 20 to 30 well-known ones, maybe 5 or 10 that are kind of hiding in their shadows at the industry but there’s really about one-third and one-half of the amount of seeders that there were pre 2008 crisis.

Typically now most seed deals are for $10M to $30M and the seeders are asking for more than they used to and really the managers don’t have any room to negotiate because they’re lucky if they can get one or two seeding deals, where in the past some managers would get 5 or 10 seeding deal options, then you kind of pick and choose and pick people against each other and get a great seeding deal out of it.

Next, typically each seed provider will only seed 2 to 4 hedge fund managers a year. It’s very rare for them to put $50M or $100M then, usually like I said, it’s $10M to $30M and they’ll only work with 2 to 4 managers a year, so they’re pretty selective and it’s very hard to get a seed capital right now.

Team is still the number one deciding factor when people are getting seeded. That’s been my experience and the experience of the institutional investor I’ve worked with. It’s been the experience of family offices I worked with. That’s also been the experience of these seeders I just listened to on the panel. The team you have and their deep experience related to your investment strategy is a number one thing that people are going to look at more than anything else regardless of what strategy you have. So getting a great team in place is going to give you more bank for your buck than doing anything else while starting up your hedge fund.

The last tip here is just that there’s diverse business models in the seeding business right now. Some of the seeders would force the person getting seeded to move to a place like Amsterdam or London or some place in Switzerland. Other seeders will want you to put up risk capital so they’ll match $1M with $9M of their own so you can get up to $10M very quickly. Other seeders will want equity ownership in your company or in your fund. Others will want to feed breaks plus equity. The options are really very diverse. But it’s not really your option as a fund manager, it’s really the seeder’s option and you really don’t have much negotiation power. You’re basically turning down the offer if you try to negotiate more than just a little bit with them.

So I hope this update on the state of the seed capital industry is helpful if you are searching for a seed capital. This is Richard Wilson coming to you from Nice, France and I’ll see you again soon.

In my hedge fund career, I have helped new and emerging hedge funds get seeded and I have also assisted an institutional investor in seeding a hedge fund.  If you are an emerging hedge fund manager or looking to start your own hedge fund, I hope that this video provides you with a better idea of the current hedge fund seed capital environment.  

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