It can take years for a hedge fund to get a check from the most sophisticated investors, and one billionaire founder thinks that's unfair to smaller managers
- Hedge-fund investors like university endowments and foundations require managers to take a years-long selling approach, and that's ramping up pressure on new launches hoping to make it.
- The more institutional approach has made it hard for new managers to get traction in an increasingly competitive industry, according to billionaire Jamie Dinan, who has run York Capital for nearly 30 years.
- "It's really not fair," he said at a conference in Miami last week.
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Of the more than 450 hedge funds Goldman Sachs' prime brokerage team has helped launch over the last decade, half of them have closed. Of the ones that have closed, a majority were shut down in the first three years.
But the industry's most sophisticated investors, like endowments, pensions, and foundations, require years of back-and-forth before they decide to invest in a new manager - when a multi-million-dollar check could mean the difference between shutting down and staying open.
"This is a very long sales process," said Ron Biscardi, the chief executive of Context Capital Partners, which connects family offices and hedge funds.
"People are not going to write 10, 20, 30 million-dollar checks immediately."
It's another example of the increasing institutionalization of the hedge-fund space, driven by the industry's investor base. One billionaire investor thinks it has gone too far.
"It's really not fair," said Jamie Dinan, founder of York Capital Management, at the Context Summits conference in Miami last week.
"It's hard to get traction now" as a small manager, he said.
When Dinan founded York nearly 30 years ago, he said, he "wouldn't have checked any boxes" that the big investors require before giving millions to a new manager. That include things like quality service providers, a long track record, and a thought-out data strategy.
"The only box they had to check was 'do I think this guy is going to make money,'" York said. "You could stand out" 30 years ago.
On a panel discussion at Context, representatives from endowments and foundations confirmed the long sales process, but insisted they had good reason for it. The number of hedge funds has exploded over the last 15 years, and investors became hyper-alert after the Madoff Ponzi scheme.
"The dating process is years-long," said Brooke Jones, the director of investments for the Carnegie Corporation.
One hedge fund manager who launched in 2015 told Business Insider that it took four years of constant meetings and communication with one large endowment before they got a check.
The years-long sale leans heavily on the qualitative review, since a good number of managers can make it through the quantitative screening now.
"It takes a long time to get to know someone," said Donna Snider, managing director of the $4 billion Kresge Foundation, and it is not going to happen in "an hour-and-a-half-long meeting when everyone is on their best behavior." She even warned managers at the conference that she and other investors are keeping an eye on them at the bar at night.
What this change means is that hedge funds need to prioritize marketing early on if they want to survive, Biscardi said. Too many funds can't survive their first three years because they are not able to raise sufficient capital to keep the lights on.
"To be a good successful manager now, you have to be good at [marketing] too," he said.
Biscardi echoed a point Dinan had made to drive that idea home: "Money no longer finds you if you're making good returns."