How to Build a Hedge Fund


I like this.


Launching a new hedge fund has always been difficult, and even more so since the financial crisis. More funds are closing down than starting up these days, and most of the failures are small operations with short histories, says Daniel Celeghin, a partner at Casey, Quirk and Associates, which advises asset managers. Because investors have become “more educated and more paranoid” since the 2008 crash, he notes, they gravitate toward “the perception of safety” in large hedge funds that boast long track records. Of the $15.3 billion that investors poured into hedge funds during the first three months of this year, firms that managed more than $5 billion soaked up $10.1 billion; firms managing less than $100 million got just $1.14 billion, according to analysts at Hedge Fund Research.

That’s what makes Mangrove Partners interesting. It was founded in April 2010 by Nathaniel August, a former Goldman Sachs private-equity analyst who’d worked previously at a start-up hedge fund, White Eagle Partners. August, 34, started with just $12 million that he, his partner, Jeffrey Kalicka, and a family office invested in an opportunistic long-short strategy that is thus far concentrated in equity. In its first three years, Mangrove delivered a sizzling annualized net return of 43.96% and accumulated $253.9 million in assets by March 31.

“We were the smallest of the small managers to launch,” recalls August. “But we had a clear idea of what the opportunity set was.”

AUGUST FOLLOWED SEVERAL logical steps to ensure that Mangrove — named after a tree that withstands severe storms — could cater to big investors. He started with the best-performing strategy in the wake of the global crisis — buying and shorting distressed equities. Stellar early results — a net gain of 73.31% in nine months — obviously helped, but he also lost no time transforming Mangrove into the kind of company that institutional investors expect — from the way he controlled inflows to the brand names of the service providers he hired.

After his first year in business, August limited deposits to $3 million a month to show investors that he had their best interest in mind, and he started turning away new investors in the third year. In 2012, he began building a team. To get a grip on the growing pile of assets, he hired two new investment analysts. To make sure the office was well run, he hired a trader, a controller, and a chief operating officer. This year, he moved from a cramped space to an impressive building on Madison Avenue in New York.

In recent months, August replaced all of his service providers with better known brands on Wall Street that, he believes, are equipped to comply with a tsunami of new financial regulations. He stresses that there weren’t problems with his previous providers. The fund’s accounting firm, Wolf & Co. of Boston, was replaced by Rothstein Kass of New York, which specializes in hedge-fund accounting. The fund administrator, Financial Solutions of Sagamore Beach, Mass., was replaced by SS&C Fund Services, the third-largest company of its kind. The fund’s prime broker, Jefferies, known for its strength in equities, was replaced by Morgan Stanley, which is better known for its reach across debt and other asset classes that August plans to invest in.

“These are important relationships,” says August. “Now we are better able to handle the growing complexity of what we are doing as we grow in size.”

The final touch was a Securities and Exchange Commission registration, which is not required but makes new investors more comfortable. August says he’ll reopen the fund after he builds new positions in fixed income. Investors are already knocking on his door.



Tags: , , , , , , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting