Aurora Investment Management, a $9 billion alternative
investment manager, has entered the early-stage capital space
offering strategic investments to Adi Capital Management and
Brenham Capital Management, in a move that could see the
Chicago-based firm offer two or three of these 'accelerator
capital’ deals per year. Aurora is not the only
name in the FoHF community that is taking advantage of the dual
needs of hedge funds for increased levels of starter capital
and investors’ need for enhanced returns.
Nearly 79% of the InvestHedge Billion Dollar Club, which
replied to the question of emerging manager investments, has
some form of focus towards the smaller or newer end of the
Only 10 groups said they did not touch this end of the
spectrum, while 43% had 20% or more in smaller managers, 27%
had 40% or more and nearly 19% had 50% or more – these
include Protégé Partners, Kairos Partners, ABS
Investment Management, Fundana, Prisma Capital Partners,
Pacific Alternative Asset Management Company and Alternative
Protégé Partners, which recently seeded
Michael Alsalem’s launch of Ledbury Capital,
continues to be a player focusing on this space, while many
FoHFs, such as Sail Advisors have a large portion of their
assets with smaller managers. More than 25% of
Sail’s managers are firms with less than $500
million, while 56% of their managers run less than $1
For PAAMCO, the bias towards the smaller manager is
significant with 84% of PAAMCO’s assets in smaller
and emerging managers defined as those with $500 million or
less, or which were two years or younger at the time of
PAAMCO’s hire. Some firms like LCF Investments and
Corbin Capital Partners have created dedicated funds to do what
Aurora is doing as a firm.
"We find ourselves at a wonderful intersection of investment
opportunity and structural inefficiency that creates a win-win
dynamic for both Aurora’s investors and our
underlying hedge fund managers engaged in these transactions,"
said Scott Schweighauser, Aurora’s president and
portfolio manager. "It used to be that the critical mass for
launching a hedge fund (depending on strategy) was in the
neighbourhood of $50 million – that was enough to
"turn on the lights" and get going, establish a track record,
and then be in a position to attract institutional capital to
reach a meaningful asset base in a relatively short amount of
time," he noted.
"However, given the substantially greater burdens related to
regulatory and infrastructure needs that have arisen in the
last several years, the figure needed to reach escape velocity
now exceeds $100 million, and that creates a more challenging
"chicken and egg" dilemma for many of these talented
investors," explained Schweighauser.
"Our underwriting standards have not changed at all.
We’re still subjecting these managers to the same
comprehensive and thorough due diligence process that every
other manager goes through to make it into our portfolios,"
said Schweighauser, adding: "The economic benefits of providing
this early-stage investment capital accrue to the benefit of
our clients’ portfolios in the form of an enhanced
return on our investment in their funds.
"During our 26 years of allocating capital to hedge funds,
there has always been a steady flow of investing talent
embarking on creating new funds, and Aurora has excelled in the
early identification of these skilled individuals," he said.
"We’ve been early stage investors with scores of
successful hedge fund managers – in fact, we were day
one capital for over one-quarter of our current roster of
managers, many of whom have been in our portfolios for years
and years and are now considered to be premier names in the
industry," he added.
Adi, a New York-based global long/short equity manager with
a value and event bias, was founded by Paritosh Gupta, formerly
of Brahman Capital, while Brenham Capital Management, a
Dallas-based energy-focused long/short equity fund that employs
an opportunistic, fundamental approach to the publicly-traded
energy sector, was founded by John Labanowski, who has worked
in the energy sector at Walker Smith Capital, Goldman Sachs and