Latest crop of hedge fund startups brings a difference

Updated with correction

The quality of hedge fund startups has improved dramatically in the past 18 months as successful portfolio managers with strong track records left mature firms to strike out on their own.

These newly minted entrepreneurs tend to be older, more experienced and have more personal wealth than founders of most of the hedge fund firms launched earlier in the decade.

“These people are different: They have already made $100 million, $500 million or almost $1 billion of their own money. They are starting with several hundred million of their own money as investments in their funds,” said Afsaneh M. Beschloss, president and CEO of hedge funds-of-funds manager The Rock Creek Group LP, Washington.

“These are not itsy-bitsy funds. (They have) strong back offices,” Ms. Beschloss said, stressing “it's no longer that (the) old, established (hedge funds) were the best and the new ones are risky. Both can be good; both can be risky.”

Ms. Beschloss made her comments during a presentation about the hedge fund industry to the board of trustees of the $132.4 billion Teacher Retirement System of Texas, Austin, earlier this summer, a webcast of the meeting showed.

The 2015 class of hedge fund startups started by experienced portfolio managers and traders is well on its way to attracting significant assets. Among those that have leaped into the billion-dollar range so far this year:

• Thunderbird Partners LLP was launched in May by David J. Fear, managing partner and chief investment officer, and manages $1.7 billion, according to the August update of the firm's Securities and Exchange Commission ADV filing. Mr. Fear was president of ZBI Europe LLC, the London office of family office Ziff Brothers Investments LLC, which closed its hedge fund business.

• Folger Hill Asset Management LP is the brainchild of Solomon “Sol” Kumin, CEO, and the former chief operating officer of now-shuttered S.A.C. Capital Advisors LP. The company started trading in March and managed $1.2 billion as of June 30, according to data provided by the firm for Pensions & Investments' annual hedge fund survey.

• Lion Point Capital LP began managing assets in April and manages $950 million, its ADV showed. The firm was founded by Carl D.M. Cederholm, CIO, who was a senior portfolio manager at Elliott Management Corp., and James B. Freeman, head of research, who was a senior analyst at Perry Corp.

That combination of experience, track record and money in these midsize launches is attractive to institutional investors, creating a popular group of new-old hedge fund companies, observers noted.

Launch sizes for new, well-pedigreed hedge fund firms are between $500 million and $1 billion or more. That's a bigger pot than most portfolio managers who spun out between late 2008 through early 2014 could attract, sources stressed.

“Some of these firms are startups only in the technical sense,” because their founders and investment teams garnered so much experience at well-established, successful companies, said Craig Bergstrom, managing partner and CIO of hedge funds-of-funds specialist Corbin Capital Partners LP, New York.

“These new hedge fund firms have observable blue-chip pedigrees. They seem far more like grown-up firms than is typical of a lot of the teams that are spinning out of companies with mediocre track records,” Mr. Bergstrom said, adding “they offer investors a comfortable middle zone.”

The lure of experienced teams with good long-term track records is high for institutional investors, enough so that “these firms can command not just the market, but also more onerous terms” such as higher fees and longer lockups, Mr. Bergstrom stressed.

Despite contractual and financial terms that might be less than ideal for some institutional investors, the allure has remained strong for 2014 vintage startup hedge fund companies, many of which have enjoyed healthy asset growth.

• Hitchwood Capital Management LP was launched July 1, 2014, by James Crichton, CEO and CIO, after Scout Capital Management LLC, a firm he co-founded, closed earlier in the year. Hitchwood Capital managed $2.8 billion as of June 30, according to P&I survey data.

• Darsana Capital Partners LP, founded on Jan. 1, 2014, by veteran Eton Park Capital Management LP portfolio manager Anand K. Desai, managing partner reported $2.5 billion in assets as of Dec. 31, according to the firm's ADV.

• Finepoint Capital LP, founded by former The Baupost Group LLC portfolio manager Herbert Wagner, managed $2.1 billion as of Dec. 31, according to the firm's ADV.

• Three Bays Capital LP was launched on Jan. 1, 2014, with about $500 million by Matthew K. Sidman, managing partner and CIO. Mr. Sidman was a senior portfolio manager at Highfields Capital Management LP. Three Bays' assets totaled $1.8 billion as of June 30, P&I data showed.

One eagerly anticipated 2015 hedge fund startup that already seems to be commanding a good deal of attention is Rokos Capital Management LLP. The firm, which has not filed an ADV form yet, is the new venture of Christopher Rokos, a co-founder of Brevan Howard Asset Management LLP. Mr. Rokos' team is rumored to have about $3 billion under management lined up for when they start trading in the fourth quarter.

Industry attention also is on Scott Bessent, CIO of Soros Fund Management LLC, who will leave at the end of this year to start Key Square Group, taking with him $2 billion from the Soros family office.

Few hedge fund executives walk out of their current gig with a big investment from their former employer, but a number of new hedge fund companies get help from prominent early investors.

Folger Hill Asset Management, Boston, was looking for a capital partner because “we needed critical mass,” Mr. Kumin said.

“We could have set up shop with a few hundred million (dollars) and over time, money would have come, but in order to be able to compete with other hedge funds to hire the best possible talent, we needed to find a partner,” he added.

The firm had quite a few suitors, but the best fit was holding company Leucadia National Corp., which invested $400 million in Folger Hill and took an ownership stake, Mr. Kumin said. He declined to give the size of Leucadia's stake.

Quadratic Capital Management LLC, Greenwich, Conn., also had a crucial first investor.

Ramius LLC was the firm's first “anchor investor,” with a $100 million seed investment and a robust investment and business services platform that Quadratic could use, said Nancy Davis, Quadratic's founder, managing partner and CIO.

“We needed both the seed capital and Ramius' infrastructure,” said Ms. Davis, because Quadratic had “an extreme barrier to entry” before it could launch its strategy: The firm trades institutional over-the-counter securities and needed $100 million to secure International Swaps and Derivatives Association documents. Ramius' allocation allowed Quadratic to begin trading on May 1.

Ramius' infrastructure support is important because Ms. Davis and her investment team “spend all of our time on investments.”

In May, Quadratic received $50 million with the promise of another $50 million from the $45.8 billion the Illinois Teachers' Retirement System, Springfield. As of mid-September, the firm's assets under management totaled $400 million.

Bloomberg contributed to this story.