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What Are The Asset Allocators Looking For in A Start-up Fund (Part I)

One of the key issues a start-up fund faces is capital raising.  What are the asset allocators looking for in a start-up fund, along with another 1000+ similar funds?

Over the past few weeks, I attended two educational sessions that addressed this question. One was hosted by the 100 Women in Hedge Funds where Jane Buchan, CEO of Pacific Alternative Asset Management Company, LLC (PAAMCO), gave a fantastic speech.  The other one was hosted by Pillsbury and Jefferies with five speakers from different organizations, including a director from ICG Advisors that focuses on small fund managers and a partner from Albourne America LLC, an independent advisory firm that has over 180 hedge fund clients.

In this first part, I will share my notes from the 100WHF session.  

Jane shared insights gained during her 22 years in the industry, including how the early days were different from now, the challenges in establishing PAAMCO and growing it to over $16 billion assets under management and her outlook for the next decade in hedge fund investing. 

Jane mentioned the importance of the fund infrastructure, and one of the questions the audience raised is: for a start-up fund, how important it is to the prospective investors whether the infrastructure is up to the par?  This questions is very sensible since most start-up funds are cost sensitive and building the best practice takes money, significant amount of money comparing to the initial AUM.

Jane answered it in a simple and direct way: the investors won’t invest in a fund because it has a stellar operating team, especially if the fund is a start-up. What Jane does typically, is to get a copy of the prior month broker statement of the fund, and ask the fund manager how certain stocks were picked, what risk factors the fund manager has considered, etc. Two things really matter for them: the thinking process behind the numbers and how the investment strategy fits in PAAMCO existing portfolio.

However, I would also like to add that this doesn’t mean operational efficiency is not important to investors. Institutional investors, in particular, want to make sure if the fund is losing money, it’s due to investment decisions, not because of internal control deficiency, for example, some trading errors by brokers that should have been caught by the managers.

(Continue to Part II)