Yesterday the news broke that Lehman Brothers and Aladdin Capital, a credit fund, are each raising $3 billion for funds that will back small hedge-fund managers. Investment in hedge funds severely contracted in the first three months of this year, and so many hedge funds are feeling squeezed. Lehman and Aladdin hope to take advantage of the need for liquidity at smaller hedge funds by investing now while investment cash is otherwise tight, and they hope that investors in their new funds-of-hedge fund managers will share that ambition.
Felix Salmon doesn't think this makes sense. In part, it seems that Salmon doesn't grasp the idea that because it is rational to invest in a diversified portfolio of hedge funds, it is rational to invest in a a diversified portfolio hedge fund managers. In fact, one can be looked at as a hedge against the other. Hedge fund investors only participate in the upside but hedge fund managers typically get a take of the overall assets under management regardless of trading profits. Therefore, the Lehman and Aladdin funds should operate as a hedge against hedge fund investment losses.
But Felix also doesn't see why hedge fund managers should be interested in selling, which might indicate he doesn't understand just how tight money has become for smaller hedge funds.
Posted by guest , Jul 01, 2008 1:17PM
What about a fund of hedge fund of funds
-Department of Redundancy Department
Posted by guest , Jul 01, 2008 1:21PM
How many Genie wishes does this Alladin come with?
Posted by guest , Jul 01, 2008 1:22PM
Unlike Salmon, I get why it makes sense to invest in Hedge Fund managers. However, I also think it's a stupid idea given Lehman's financial situation.
How about they raise funds to invest in treasuries and stay out of the hedge fund game for a little while?
Posted by guest , Jul 01, 2008 1:26PM
looks like the only thing lehman is capable of managing is the amount of mayo on their sandwiches
Posted by guest , Jul 01, 2008 1:26PM
This is more VC than strict private equity. Imagine the return if such a fund were to invest in SAC or Citadel. Granted the type of fund manager willing to sell a stake may not be a top notch investor, and no one should exactly trust Lehman to invest their money, but still in theory I don't think its a terrible idea.
Posted by guest , Jul 01, 2008 1:27PM
This is more VC than strict private equity. Imagine the return if such a fund were to invest in SAC or Citadel when they were still moderately small. Granted the type of fund manager willing to sell a stake may not be a top notch investor, and no one should exactly trust Lehman to invest their money, but still in theory I don't think its a terrible idea.
Posted by guest , Jul 01, 2008 1:34PM
It would be very small at SAC because Stevie forced all of his original investors out of the fund, and likewise pretty small at Citadel because Ken Griffin would strangle you with a chicken wire
Posted by BlackSwan06 , Jul 01, 2008 1:40PM
@1:26/1:27 - concur. The idea in and of itself isn't stupid, how they execute... liquidity-strapped managers will do almost anything to avoid generating that liquidity via a fire-sale if they're really in trouble, which can create some very interesting opportunities... but I would agree with the sentiment of whether or not this is the right time for Lehman to be getting into this.
Posted by BlackSwan06 , Jul 01, 2008 1:45PM
above should read "but it's a matter of how they execute..."
Posted by guest , Jul 01, 2008 2:13PM
WTF?!?! Seriously, these mayo comments are getting really fucking old!
Posted by guest , Jul 01, 2008 2:20PM
Chances of finding the next Ken Griffin
in a pool of 5,000 or so emerging hedge mgr's seems remote.
Due dilligence is practically impossible. It takes ten years before you know if the manager is good or just lucky.
Posted by guest , Jul 01, 2008 2:24PM
there's something between horrid idea and finding the next Ken Griffin, and I think that is were this idea is. Lehman may not be the best to put into place, but the idea itself likely is not as laughable as it may seem
Posted by guest , Jul 01, 2008 2:24PM
Actually the Lehman part of the story was reported on June 18 by Private Equity Insider.
Posted by guest , Jul 01, 2008 3:25PM
nig
Posted by Suits , Jul 01, 2008 5:57PM
Something doesn't pass the sniff test. They want to raise $3B-$5B and invest in "up to 12" fund management co's, not the funds themselves (leave aside the fact that the majority of the proceeds would likely be reinvested in the funds).
$3B into 12 managers is $250M per manager. Assuming they buy 49% minority stakes, they need to find fund managers they can value at $500M or more. If we give them generous P/AUMs of 15%, they need to invest in managers which already have $3B under management. I suppose there are likely more of these firms than I realize, but the opportunity set seems rather small. More importantly, once a manager reaches that size, the opportunity for excess returns is much smaller.
Posted by guest , Jul 01, 2008 10:10PM
RE: Suits. That's not how the operation actually works. Having been part of one of these deals, you essentially give the hedge fund "seed capital" to manage ($250mm sounds right). The idea is that if the manager does a good job, he can increase aum much quicker because clients don't want to ticket much more than 10% of AUM. So instead of a 100mm fund which can only take 10mm, he can take 25mm tickets and can grow at a much more rapid pace. The opportunity set is actually quite large if you seed the right managers and there are guys with pretty significant track records running hedge funds (part of shops like Tudor or rv type products in the major asset managers, etc.) that might consider such a deal, especially when the big shops are pulling liquidity just like the small.