Hedge fund closures have been outnumbering launches the last couple of years, and the pandemic caused by the novel coronavirus will only speed up that trend.
With allocators' portfolios hit hard and the markets as choppy as they have ever been, both hedge-fund investors and money managers looking to start their own fund are slow to dive into something new right now.
"People's perspectives are about 12 inches in front of them at this point," said Andrew Saunders, president of Castle Hill Capital Partners and head of the firm's capital introduction services.
"Conversations that have been percolating for months have ground to halt, and it makes sense."
Despite the uphill battle to launch a fund now, there have been well-pedigreed investors who have announced their intentions to go it alone. Business Insider has reported on Viking's former co-CIO Ben Jacobs readying a new firm called Anomaly Capital to launch in the second half of 2020, and former Citadel healthcare portfolio manager Prashanth Jayaram is building out a fund called Tri Locum Partners for later this year.
Industry publications like Hedge Fund Alert have also reported on new-funds-in-progress like Man Group's former head of North American equities John Gisondi's new firm and Balyasny energy investor Christian Zann's start-up. LinkedIn shows that former Ziff Capital Partners CIO Gary Stern started Eagle Health Investments in January, and former Senator partner Michael Simanovsky announced his new firm, Cambiar Asset Management, in February. Stern and Simanovsky did not respond to requests for comment.
But these new managers have many layers of obstacles in their way to raise money and attract talent, none more pressing than the novel coronavirus pandemic, which has canceled capital introduction conferences put on by banks' prime brokerages and sent unemployment claims skyrocketing — making those with a stable position think twice before leaving for a start-up.
In addition, well-followed funds like Seth Klarman's Baupost Group and D.E. Shaw have re-opened to capital, and Citadel is raising money for a new relative-value fund. Money managers offering liquid alternatives products also foresee an opening into investors' portfolios, possibly at the expense of hedge funds, due to the liquidity benefits offered by ETFs or mutual funds.
"It certainly doesn't hurt to have certain types of liquid products in your portfolio that can help dampen or weather these types of markets," said Chris Hempstead, who was recently hired by New York Life Investment Management to build out the pipeline of institutional investors for the firm's liquid alternatives ETF line, IndexIQ.
"Our cautious estimate is that demand will remain in-line" with expectations, with the hopes it will accelerate in the institutional channel.
Saunders said that the slowdown means adding "six months" to whatever a new manager's expectations were for starting. One investor, who asked to speak on the condition of anonymity because he doesn't know when he will put all of his investors' capital to work yet, was set to start trading at the beginning of the month but held out because of the shakiness of the market.
He has now begun to slowly build positions, but is still not all-in, and is grateful for not starting a couple weeks ago. "Better to be lucky than good," the person said.
At Chicago-based hedge-fund seeder Borealis Strategic Capital, business has slowed down, but is still in the range of what the five-person investment firm would consider normal, managing director Scott Schweighauser said. Since the firm started working remotely last Monday, they've held "a dozen or so" intro calls with prospective managers.
The firm isn't shying away from backing new managers right now, thanks to a review they did of performance figures following the 2008 housing crisis. The firm found that newly launched managers' returns "were pretty promising" mostly because they had "unencumbered" portfolios that could shift quickly if needed.
"We're more eager to get money put to work," Schweighauser said.
Borealis is closing to signing a seed deal with a distressed credit fund manager that planned to launch October 1. Now, the firm is trying to get the manager to push the start date up a month or two, with the expectations opportunities are coming for that strategy.
"We are guardedly optimistic."