Hedge Fund Funding: Here Is Your Cash/Chance

As assets begin to rumble back non-traditional seeder funds
begin the hunt for emerging managers.
One of the complaints about seeders by emerging funds seeking “seed”
capital during 2009 has been that they have been too greedy in
negotiating partnership terms with managers looking for assets. For
New York-based firm Absolute Fund Advisors (AFA) which is looking to
allocate upwards of $50m to emerging managers, owning a stake in the
firm is not the primary goal nor are they looking for discounted fees.

“We are willing to be the first institutional investors in a fund, and
are not looking for an equity stake or discounted fees,” explained
Founder Jason Konior.

The firm, which has the backing of a large fund of funds, has
structured their model around controlling the risk associated with
investing in emerging managers. AFA requires all fund managers to put
up their own contribution, which the firm then matches on a 9 to 1
ratio (i.e. a manager puts up $1m and AFA contributes $9m). In turn,
managers do not charge AFA management fees, but are given an incentive
fee rate of 50%.

“The reason we have the 50% incentive fee is because we are not
assuming risk,” explained Konior.

Losses are taken out of the manager’s capital, and AFA has a backstop
of a 9% drawdown, upon which they have the option to liquidate the
portfolio. “We are providing managers an opportunity to run their
strategy with Institutional Funding hence enhancing the fund’s
marketability and exposure,” he said.

Although AFA sources many of the managers it reviews from other seed
firms that it has relationships with, the funds it is currently
concentrating on are liquid equity and options strategies (i.e.,
long/short, statistical arbitrage, volatility arbitrage and systematic
trades).

 

you would have to be pretty desperate to take that deal.

 

So, if you make money, you make 50% but if you lose, you lose 100% ???

 

Better to play options or futures with your own money than this deal.

 

The other side of that coin is that if you are making money, but just need more of it to trade, this could work.

It makes sense really - if you are profitable then all you need is more $$$ to trade. That's what they are supplying.

Probably not the greatest deal, but it's a deal nonetheless.

 

if u had 10 mil and were never risking more than 10%,this would be a way to get 10 times the leverage with only risking 10% of your own capital, which you might do on a daily basis anyway,so for the larger trader who wants to make a killing and retire on this next big down move,its a great deal if the firm is still solvent at that point,it depends a lot on when you could withdraw. It also allows the bigger money behind this firm a way to find traders to hire on commission instead of the big bonuses they are paying now,they could also piggyback on their best traders

 

Guaranteed capital has been around for years. I see it has masked leverage. All leverage is dangerous, but moreso when it is hidden like this. If you're making money, do you really need more leverage?

 

Model sugessted here is not the hedge fund, its the prop trading model i.e. assume all the risk and use their money for leverage.

 

This is a horrible business deal. You have to be a sucker to take this one. Let's see you take all the risk and they take none. Not an equitable business relationship.

 

F*** stupid crap like that.

If you take no risk, then demand maybe 10-30% of profit.

50% ?

How about 100% up your @ss?