Hedge fund investors aren’t giving up just yet.
At least six new hedge funds are on track to start with at least $1 billion this year, according to data compiled by Bloomberg, after eight firms started with a 10-figure sum last year. The industry hasn’t seen this many mega-startups since 2005, when 13 funds raised a combined $19 billion.
Frustrated with the mediocre performance of some of the industry’s old guard, investors hoping for higher returns are writing checks to a handful of new funds, including one run by Brevan Howard Asset Management veteran Chris Rokos and another headed by ex-Elliott Management Corp. star Didric Cederholm.
“Most hedge funds aren’t any good, but if you can identify talent early, when they are hungry, you have the potential to generate outsized performance,” said Adam Blitz, chief investment officer at Evanston Capital Management, which invests $5.4 billion in these private partnerships.
These new managers are beneficiaries of the poor performance of some established multi-billion-dollar firms, such as John Paulson’s Paulson & Co., Carlyle Group LP’s Claren Road Asset Management and Mason Capital Management––which have either lost money or failed to make any over the last three years––and the generally sluggish returns for the industry overall.
Fund Performance
Hedge funds on average climbed 4.6 percent annually over the past three years, according to data compiled by Bloomberg. That’s about three times the return of U.S. government debt yet far below the 18 percent gain of the Standard & Poor’s 500 Index.
At least one large investor, the California Public Employees’ Retirement System, said it would exit its hedge fund investments, citing the costs and complexity.
The University of Texas Investment Management Co., which oversees money for the U.S.’s second largest university endowment, is one of the biggest backers of the new startups. It already has about $2 billion invested with what it calls “next generation” firms “with the objective of sustaining top-decile performance for years to come,” Bruce Zimmerman, the endowment’s chief executive officer, wrote in an annual report published late last year. He didn’t return calls seeking additional comment on his new investments.
The new breed of managers tends to be seasoned professionals who have worked for years at larger firms, where they were proven money makers. They have been able to raise large amounts by getting big commitments from a few investors, mostly without having to give up any part of the equity in their firms to do so.