Hedge fund seeders benefit from financing draught
January 20, 2010
"My advice is always that if you haven’t got the stomach and cash to fund yourself for three years of unpaid toil then don’t start a hedge fund."
An interview with Paul Smith, CEO of Triple A
Asia Alternative Asset Partners, known less formally
as Triple A, was set up in January 2007 to provide seed capital
and asset-raising assistance to Asia-related hedge fund
The firm's early backers included Iveagh-the private wealth
office for the Guinness family-and CLSA Asia-Pacific Markets
Group. The two investors withdrew their capital during the
financial downturn, causing Triple A to put its seeding
activities on hold about a year ago. Since then, the firm has
found other partners and now has access to over $100 million in
seed capital. Triple A is seeking to raise another $100 million
In the past few weeks, Triple A has entered into a joint
venture with fellow seeder Penjing Asset Management, and the
latter's $30 million seeding fund has been rebranded the
Penjing Triple A Partners Emerging Managers Fund. Triple A has
also combined with Hatfield Advisors-now Triple A Partners
Australia-to expand its distribution network.
Paul Smith co-founded Triple A with Hans Tiedemann. He has an
extensive background in the hedge fund industry, having been
global head of alternatives fund administration at HSBC
(formerly Bank of Bermuda) from 1996-2004. He was previously
managing director of fund of funds firm Ermitage International
for 11 years.
"We will seed managers based anywhere in the world, but
primarily look for an Asian focus," says Smith. "The number of
funds we add will depend upon the assets that we raise, but we
feel we would like to have a stable of around 20-25 managers."
There are eight seeded funds in the stable at present.
How has the seeding landscape changed in the past few
Paul Smith: It's always very difficult to establish the number
of seeders out there in an exact way as so many seeders are "ad
hoc"-family offices and institutions who will occasionally look
at a deal. Current theory states that well over half of the
available seed capital in 2007 has left the market over the
last two years. This feels about right given how very tough it
has become for startup managers to attract capital. Further,
many of the remaining seed capital providers are looking more
towards "accelerator capital" deals (providing additional
funding to already up-and running businesses), rather than to
startups, as business risk in the underlying seeded manager is
less in this type of trade.
So, has the financial crisis been a good or bad thing
for a hedge fund seeding firm?
P.S.: It's been excellent. Shortage of capital drives up the
price of that capital. In addition, its lack of availability
means that for those of us left in the business there is
reduced competition for the best deals. Thus, the adverse
selection bias that is inherent within the seeding business
(the best deals don't need seed capital) is much, much less
How much do you invest in each fund, and do you take an
equity stake in the management firm?
P.S.: We invest up to $25 million and do not take an equity
stake as a rule.
What are the main criteria you look for when deciding
whether to allocate to a manager?
P.S.: First, second and third: the strength of the investment
proposition and the investment team. We base all decisions on
whether or not we like the investment thesis. We put that first
and our seed economics and other business concerns last.
So do you identify a strategy type for inclusion in
your platform, and then look for a suitable manager? Or do you
seek out talent, regardless of the strategy they're
P.S.: A bit of both. The nature of our industry is that it is
reactionary and can be difficult to build a well-diversified
portfolio. In times of intense competition this is more of a
problem. So right now we do have the luxury of planning the
portfolio with much more confidence. Our drive is to have a
very well-diversified mix of managers by strategy and by
geography within Asia.
Which strategies do you expect to do well this
P.S.: Multistrategy, market-neutral arbitrage funds. I think
equity markets will be quite choppy as some of the liquidity
that drove returns in 2009 leaks away. Therefore, I feel that
multistrats that invest in a non-directional fashion across the
capital structure will do well. I would also want them to have
the ability to trade volatility. I suspect volatility will pick
up as the year unwinds.
Are there any strategy types that you are purposely
P.S.: Our style is to invest in the liquid end of the hedge
fund universe. This has always been the case and remains
Do you prefer to invest in established managers or
newly-founded startups? Are there pros and cons to
P.S.: This is a big topic. We look at both and have done both
types of deals. We have also funded new products from
established managers. Operational risk is a lot less with
established managers and their brand also has a value which
helps the capital-raising process. Against that, you have all
the problems of working with a business that has an existing
set of business issues. A startup relationship is much easier
as you have a clean slate to work on.
How long do you typically spend negotiating with a
manager before signing contracts?
P.S.: Start to finish, it can be three months at best, six
months at worse.
How many managers do you meet with for every one you
seed? And roughly what proportion of 'serious' discussions fall
apart before a deal is reached?
P.S.: Very few, if any, discussions fall apart once heads of
terms are agreed. This is quite rare, especially in today's
market. Around 20 to 30 deals would be reviewed to find one
that is worth pursuing, as an average.
The industry has changed and most launches are smaller
now than three years ago. What constitutes a substantial
launch, and how much capital does a manager need to get off the
P.S.: A substantial launch would be anything that gets up to
around $50 million. A manager needs only $100,000 to get off
the ground. That's not the question. The real question is: How
long can the manager last out sub-scale-say $100 million-before
their patience and working capital run out? Each manager has a
different pain threshold in this regard. My advice is always
that if you haven't got the stomach and cash to fund yourself
for three years of unpaid toil then don't start a hedge fund.
Following the crisis, that is now probably four years. I would
estimate that 70% of the people in hedge funds at any one point
in time would be paid a lot more at an asset management company
than at a hedge fund. Most are not great businesses. The public
only hears about the 1% of people who hit the ball out of the
park. Underneath this stratum is a bunch of people struggling
Interview conducted by Robert Murray.