In This Issue:

• Insurance Companies Showing Interest in Private Equity Funds - Richard Rapacki
• Advantage Seeders - CT McLean
• Hedge Fund Recovery Nearly Complete - Ryan Rutherford
• Hot New Mandates

As the hedge fund industry shakeout has continued, unique opportunities for seed investors have been bountiful. Many investors agree that emerging funds typically outperform in their first three years. A recent conversation with the portfolio manager of a $1 billion Geneva-based fund of hedge funds shed light on the contrasting forces that have been at work in the industry regarding new ventures.

On one hand, given the economic environment, the barriers to launching new hedge funds have been exceedingly high. Attracting investors has obviously been one of the biggest challenges. In a recent interview with Pensions & Investments, the manager of a newly launched hedge fund stated, “It was very difficult to attract investors because absolutely no one could make a decision in the last quarter of 2008 through the first quarter this year.”1 Recently, however, the fund reported having received $200 million one public pension plan, and another $100 million from a separate pension. In addition to attracting investors, new funds also have faced the challenges of sourcing quality prime brokerage support, top-quality external administrators and auditors, as well as increased demand from investors for superior transparency, liquidity, and fee structures.

On the other hand, there has been an enormous amount of individual talent on the street. The collapse of Lehman Brothers, along with the difficulties of other major financial institutions, has led to an incredible number of unemployed veterans who are eager to get back in the game. As a result, there is no shortage of opportunities to invest in new funds. Alternative Investment news sources are routinely filled with fund launch announcements from ex-high ranking officers at various Wall Street firms. Many fund managers have been able to leverage their contacts and have had an easier time in raising assets from their former employer.

In conversations with numerous investors during the past few weeks, many seemed ready to take advantage of these opportunities. One New York-based fund of funds, for example, is presently focused on building out its emerging manager platform and targeting new fund managers with substantial pedigrees. It believes that the present environment has created excellent opportunities to access world-class talent, while also being able to negotiate favorable terms.

Although recent news has shown an uptick in hedge fund hiring, seed investors are poised to have a multitude of options since the financial markets have displaced a number of gifted investment professionals.

¹ Pensions & Investments, “Arrowhawk Capital’s first fund finally takes flight,” October 14, 2009.

Hedge Funds are on the brink of reaching their breakeven points, a feat that appeared to be quite a long shot in the depths of the recent financial crisis. As of October 26, 2009 the average fund needed to gain only 2 percent to get back to its value as of June 30, 2007, the height of the last market boom. On average, hedge funds have returned 18.3 percent this year. Hedge fund indexes are projecting that in late November the industry will return to its high of two years ago.¹

Since the beginning of the year, analysts at BHA have noticed an increase in the number of investors looking to allocate to hedge funds. From June through October, there were approximately 150 more investors allocating to hedge funds than there were during the first five months of the year. This increase is directly related to hedge funds’ improved performance.

Although hedge funds’ returns are on the rise, investors are still most interested in funds that provide liquidity. Among the investors BHA has profiled, the strategies that have generated the most interest are long/short equity, global macro, CTA/managed futures, credit, and distressed debt.

A European wealth advisory firm was wary about the market during the first half of the year and put its alternative investments on hold. However, now that the hedge fund market is improving, the firm wants to add a couple of CTA/managed futures managers before the end of the year.

BHA analysts will continue to track the correlation between hedge fund returns and the number of investors seeking opportunity in the hedge fund space.

¹ http://online.wsj.com/article/SB125651608549607185.html

© 2009 Brighton House Associates, LLC. 4 Mount Royal Ave., Suite 140, Marlboro, MA 01752

The Investor Monitor is a general circulation weekly. No statement in this issue is intended as a recommendation to buy or sell securities or to provide advice. Reproduction is prohibited without the permission of the publisher.