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Starting a hedge fund in the aftermath of Lehman

The landscape has radically changed over the past four years, even though the number of launches once again started to increase in 2011. In 2007 there was a peak in the number of new hedge funds that were launched, with 1200 new funds created all over the world....

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Although 2011’s figures have not yet been completed, the results are the most positive they have been since the September 2008 fall of Lehman Brothers, which was preceded by months of anxiety in the markets. However, there has been a slowdown from last autumn, which could continue into 2012, leading, much later, to the establishment of a new record number of launches.

Global Macro Hedge Funds stand for 35% of all new funds launched in the second and third quarter

According to Hedge Funds Research, the number of new hedge funds decreased from 280 to 265 between the second and third quarter of 2011, showing, however, that the third quarter of 2011 was still better than that of 2010.

Launching a hedge fund: reputation first!

Although capital requirements are much more important now than they were a dozen years ago, it is reputation which is all important...

In its detailed report, HFR revealed an acceleration in the creation of global macro hedge funds: these represent 35% of all new funds which were launched in the second and third quarter"
This trend is directly linked to the European political-economic context. Crisis management by Heads of State, often criticised as being unpredictable and irrational, is resulting in hedge funds turning more to global macro strategies.

The Global Head of Hedge Funds at Aberdeen Asset Management in London, Andrew McCafferey told Next Finance: "Because so many things have changed in the past four years, the levels of capital requirement are much higher, even from the perspective of administrative requirements. In order to launch a new hedge fund, one almost needs a type of "testimonial" for the investor, as it is now more imperative to demonstrate transparency than before, particularly in report backs for example. And throughout their growth, in order to best serve institutional investors, hedge funds must be backed by ultra-competent staff of a much superior caliber than what was necessary four years ago."

The other major type of new funds are equity funds, which represent the same proportion as global macro funds (39%). But the groups of equity hedge funds, already established, represent, in total, half of all funds, as opposed to global macros which represent 21.6%. This confirms the strong tendency towards macros.

Another trend in new hedge funds is the significantly reduced structure of management fees from those fees charged before the collapse of Lehman Bothers. According to Hedge Fund Research, the average management fees of hedge funds launched between mid 2010 and mid 2011 fell to 1,58%. As for the fees linked to premiums, they dropped to 17.04%.

In order to launch hedge funds, there are some key issues that should be covered, such as a solid network, important capital resources and a long term business plan
Andrew McCafferey, Global Head of Hedge funds, Aberdeen AM

New regulatory requirements have also enabled hedge funds to trust multi-card external service providers which offer accounting, legal and brokerage services.

According to Andrew MCafferey, new hedge funds of today are far superior to those which were launched in the mid 2000’s. They are often run by "managers or traders who are already completely successful in their fields, and are looking to create their own funds" The most recent example of this is: Phillippe Gougenheim, who has just left Unigestion in order to launch his own fund.

It remains to be seen if the time is right, even with perfect credentials ...."the market is divided," he says. "Some see only the gradual phasing out of cash, whilst others believe, on the contrary, that this will create new opportunities, with less people chasing the same business."

What advise can be given to those who want to attempt this adventure? "I would say that there are some key issues like a solid network, important capital resources and a long term business plan. The person who creates a hedge fund must also be sure of a good reporting system constructed around a team of extremely credible managers which will allow the business to evolve with maximum efficiency and most of all, be capable of attracting more capital."

Johann Harscoët , January 2012

Article also available in : English EN | français FR

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