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Recently, I saw on Bloomberg that Eisler Capital is locking up client capital for a longer period of time.
I can’t say I’m surprised. That statement is nothing to do with Eisler Capital – it’s because I’m increasingly seeing hedge funds putting more time and effort into courting medium to longer term capital.
That’s exactly what the seeding market in the space provides, of course. But most hedge fund firms that work with a seeder only have one of them – after all, you likely don’t want to be surrendering a percentage of your GP to multiple firms. This isn’t venture capital, where founder/firm owners end up getting diluted way below 50%.
And while most seeders work with their managers to raise capital, a lot of that capital still has a monthly notice period (after the initial lock up). So, the constant looking-over-the-shoulder environment that the hedge fund manager has to work in remains.
That’s where working with a platform provider can help. Most hedge fund managers outsource their middle and back office because of cost reasons. That benefit remains – the cost of having even a handful of internal middle- and back-office professionals can end up being a substantial six figure sum, so outsourcing saves hundreds of thousands of dollars.
But there is a capital raising benefit, too. Investors in funds that sit on a platform benefit from the platform carrying some level of liability risk. That means that firms like ours have to make sure that the fund manager is not doing anything outside the lines. That is a capital raising benefit to the manager.
The second is that the manager is no longer a start-up manging eight figures. They’re part of a bigger group, but with all of the ownership and control that they would have if they were on their own.
The third is that there is an established process in terms of key person risk. Yes, the manager likely has insurance here. But in the case of a platform provider, in the event of something extraordinary happening, the platform can maintain the fund whilst either a) a replacement manager can be found, or b) wind down the fund in an orderly manner.
Hedge funds face a challenging outlook for 2024, as the higher interest rate environment means that they have to deliver higher returns to maintain the risk premium they charge over the risk free rate. The nature of open-ended funds means that hedge funds tend to be near the top of the list for redemptions in times like these, as locked-up capital in closed-ended funds can’t be redeemed as easily. Indeed, Nasdaq eVestment says that investors continued to pull money from the space in September this year.
The need for hedge funds to secure more medium- to long-term capital hasn’t been this obvious for quite some time. One of the ways to do that is to lock up client capital for longer. Another way to do it is to impose redemption restrictions over time.
But these restrictions tend to be used by very large, more established managers – because they can. The smaller, or younger – or both – manager will have a harder time imposing these restrictions. So they need to provide another reason as to why clients should commit in the medium to longer term. Having the support infrastructure of a platform provider is one of those reasons.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
Fundviews Capital is a full-service end-to-end Fund Management Platform. Our platform provides a complete end-to-end solution for asset managers or wealth managers to structure, launch, operate and grow their professional investment funds. You can launch a fund in a matter of weeks, not months, and with minimal capital outlay – not only reducing the risk of launching a fund but also maximizing your chance of success. Once launched, you will find that a dedicated team of professionals is just a phone call or email away at all times, handling all aspects of the back and middle office for your fund.