Summary:
Nearly 150 hedge fund launches expected between 2024 and mid-2025.
New hedge funds rely on prime brokerage units for capital and operational support.
Avoid cutting costs on non-investment roles — hire strong leadership for success.
Maintain communication with allocators post-launch to secure liquidity.
Craft a compelling narrative that highlights your unique investment strategy.
The Surge of New Hedge Funds
It's shaping up to be a bustling period for new hedge funds, with nearly 150 launches expected from larger funds between 2024 and mid-2025. However, the fundraising environment is complex, as many new launches are seeded by existing multistrategy giants with excess capacity due to strong performance — 7.8% annually over the past five years. Meanwhile, institutional allocators are currently constrained by illiquid private investments, limiting their available liquidity.
The Role of Prime Brokerage
New hedge funds often rely on investment bank prime brokerage units, which serve as crucial partners in the early stages of a fund's life. Morgan Stanley, one of the top prime brokerages, emphasizes the importance of their role in helping hedge funds raise capital and finance operations. Their prime services team advises on 50 to 75 hedge fund launches globally each year, akin to a venture-capital model, working with upstarts to gain long-term trust.
Key Mistakes to Avoid
Morgan Stanley's Penny Novick and Kim Shaw shared insights on the common pitfalls emerging managers face:
1. Cutting Corners on Non-Investment Costs
Penny Novick: It's crucial for new fund managers to prioritize the non-investment side of the business. Hiring a strong COO, CFO, and operations team is essential for long-term success. The right systems and partners significantly impact a manager's ability to execute their strategy effectively.
2. Neglecting Communication with Allocators
Kim Shaw: New fund managers often stop communicating with allocators post-launch, especially if they experience early success in raising capital. It's vital to maintain these relationships, as allocators can become important thought partners and sources of liquidity.
3. Failing to Articulate Your Unique Story
Penny Novick: New founders need to present a compelling narrative about their investment strategy that differentiates them from similar offerings. Morgan Stanley's capital introduction team provides guidance on effective presentations and handling tough questions, which is especially crucial in a challenging fundraising environment.
Final Thoughts
Articulating your edge and demonstrating how your strategy is unique, backed by data, is critical for success in today's competitive hedge fund landscape.
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