The Art of Seeding : RMF Hedge Fund Ventures

Depending on who you speak to in the hedge fund industry, seeding new managers is viewed very differently. Investors have a broad spectrum of views: some are converts, and actively invest considerable time and resources to find new investment talent, while others will require a fund to be up and running with a one to three year track record before they will consider it. But there is more to the seeding process than simply finding the manager, and being one of the investors who backs him from the start, providing so-called ‘seed capital’. A seasoned seeder of hedge funds will also be looking to profit from the success of the fund as a business, not simply earning a return from the assets managed by its principals. A typical seeding arrangement will involve a fund of funds seeking a share of the fees the manager earns as well as potentially taking an equity stake in the business. Capital invested by the seeding company is not considered to be working capital for the fund management company.

The following is on :
http://www.thehedgefundjournal.com/magazine/200811/profile/the-art-of-seeding-rmf-hedge-fund-ventures.php

Former Man executives launch platform for emerging hedge fund managers

A group of former Man Group executives has launched a new hedge fund platform, Revere Capital Advisors, which aims to allow emerging hedge fund managers to focus on their core investment activity at the critical early stage in their development.Revere will adopt a private equity type model, taking strategic equity stakes in partner managers and in return leading the sales, marketing and distribution of their funds. The firm also plans to offer corporate, administrative, compliance and IT services to help funds meet investors' increased demand for solid infrastructure and risk management capabilities.The firm has been founded by Daniel J. Barnett, the former chief financial officer of commodity trading firm E D and F Man and chief executive of Broadmark Asset Management, one of Revere's first two manager partners, as well as other former senior Man Group executives including chief executive and chairman Harvey McGrath, chairman Michael Stone and head of global sugar trading and operations John Kinder.

The article is on :
http://www.hedgeweek.com/articles/detail.jsp?content_id=270829

Hedge Fund Standards: Best Practice

“With influence comes responsibility”, said Paul Marshall, co-founder, Marshall Wace Asset Management, in an article published in The Hedge Fund Journal last year. Marshall and thirteen other well-established managers took this idea and ran with it. They set up the Hedge Fund Working Group (HFWG) under the Chairmanship of Sir Andrew Large. Their remit was to review standards within the hedge fund industry with the aim of creating a benchmark of best practice and of promoting self-regulation: hedge fund managers would be encouraged to ‘comply or explain’. Following a consultation process the HFWG published a report outlining 28 principles-based standards for best practice (‘the Standards’) and in February 2008 the Hedge Fund Standards Board (HFSB) was established as custodian of the Standards. The Standards cover five key areas: disclosure, valuation, risk management, fund governance and shareholder conduct. Now chaired by Antonio Borges, the HFSB is looking to encourage hedge funds to sign up to those Standards.

The article is on :
http://www.thehedgefundjournal.com/research/kpmg-best-practice-survey/index.php

Fund innovation : Emerging managers - healthy returns

Man Investments is a hedge fund group that prides itself on offering investors innovative approaches. Its new Man Vision fund aims to produce an annualised return of 12.5% with annualised volatility of 12.5% by investing in strategies such as Asia and emerging markets, commodities, environmental and energy markets, event-driven and healthcare.As an example of even more way-out strategies, Man Investments head of communications David Gleeson mentioned fine art, movies and freight derivatives as areas that hedge funds are moving into. He added that Man looks to back new managers early: “Hedge funds tend to produce their best returns in the early years and we are keen to get in early with the best and most promising managers.” To this end, it runs a programme called Global Emerging Managers, which will back managers with up to $50m in seed capital.Volatility is another investment opportunity and Crédit Agricole Asset Management co-head of volatility, arbitrage and convertible bonds, Gilbert Keskin, said it is an asset class and an area where skilled managers can produce alpha. “We have two ways to invest in volatility; a directional way or using a long-short approach,” Keskin comments.The directional approach aims to benefit from the tendency of volatility to revert to a mean, while the long-short approach aims to arbitrate volatility discrepancies between different indices or single stocks. In both cases derivatives are used to isolate the volatility element of an option representing an underlying asset.Keskin adds: “Volatility works very well in time of crisis and the alpha generation process is decorrelated from other processes – that is the main reason investors should consider it as an asset class now.”

The article is on :
http://www.funds-europe.com/June-2008/ALPHA-SOURCES-Healthy-Returns.html

Emerging Managers : Playing an important part in today’s troubled markets

It’s an interesting time in the seeding/emerging manager space as the current market environment is making it even more difficult for new funds to get off the ground. Investors are increasingly allocating to ‘safe’ investments, giving capital to larger, more established hedge funds. Yet, a large volume of independent research continues to indicate that early stage/smaller managers will outperform these large, more established funds. So why are investors apparently foregoing the most profitable years of a hedge fund’s life cycle? And where does that leave emerging managers? Whilst it is true that the attrition rate for hedge funds is highest in the first 3 years of their life, the majority of failures are proven to occur at the operational and not the performance level. The determining risk factor has proven to be not the amount of assets under management or performance track record of the fund, but the quality, independence and strength of the operational and control environment. But the days of ‘two-men-and-a-bloomberg’ are long gone. Indeed, recent research conducted by SEI on institutional hedge fund investors concluded that a hedge fund’s infrastructure is even more important that a hedge fund’s performance in the manager selection process1. The majority of emerging managers are adjusting to this demand by partnering with platforms, housing themselves in hedge fund ‘hotels’ or investing heavily in operations to meet the requirements of institutional investors. The perception that start-up hedge funds do not have the necessary infrastructural support to mitigate operational risk is no longer the right one. Having a robust operational infrastructure is now essential for a fund of any size to attract and retain investors. Looking for a safe haven Importantly, operational implosions are not only the preserve of small, early stage funds, as recent events have reminded us. Investing in a big name hedge fund is no longer a guarantee that your money is safe; being a big name or a smaller start-up is not in itself synonymous with success or failure.

By KAREN PAGE, VCM FUND MANAGEMENT LLP

The article is on :
http://www.thehedgefundjournal.com/magazine/200810/commentary/emerging-managers.php

Luxembourg a prime location for Investment Management

End 2007, Luxembourg boasted over EUR 2.1 trillion in net assets in over 10,500 Luxembourg domiciled funds (2,870 legal entities), easily placing Luxembourg as the second largest fund centre outside the United States.
Luxembourg’s position as a key domicile for internationally distributed funds began in 1988 when the UCITS Directive was implemented into local law. Since this date, Luxembourg has enjoyed significant and consistent growth in both assets and fund numbers with a notable surge since the turn of the century reflecting the increasing attractiveness of Luxembourg as a hub for global fund products in both mainstream and alternative asset classes. Historically, Luxembourg’s success has been fuelled by its ability to offer an attractive platform for firstly European and more recently globally distributed retail funds. In addition to the importance of the mainstream, Luxembourg is a major centre for each of the primary alternative asset classes. Its long-standing focus on Hedge funds and fund of Hedge funds products has enjoyed rapid growth in recent years as a result of regulatory and market developments and now comprises a market of over EUR 123 billion in net assets within 902 (sub) funds set up under Luxembourg law. Real Estate funds have been a particular success story with Luxembourg now recognised within this market segment as the leading domicile for structured real estate products targeting international investment and distribution. Private Equity funds are emerging as a 3rd significant alternative asset class with Luxembourg building on its dominance as a location for structuring transactions to become a leading centre for establishing the fund-level vehicles themselves.

The article on the PWC web site :
http://www.pwc.com/lu/eng/about/ind/im_profile/im_prime_location.html

Systematic Approach to Measuring Hedge Funds Implied Credit Risk

Flexibility is the key factor. Investors hire talented portfolio managers with the objective that they deploy their alpha skills. If a manager loses the capacity to adapt his portfolio to difficult markets, he can no longer exercise his skills. In other words, skill alone does not guarantee performance. Success also requires an appropriate balancesheet structure within which a manager can remain flexible and avoid the risk of becoming a toy in the hands of the market, his investors and his prime brokers. Every manager’s motto should be: “Play the game, never become the game”. The systematic approach to balance-sheet structure analysis that we have introduced in this article serves two purposes: first, it makes a contribution to closing the gap with regard to the management of extreme risks; and second, it allows those managing portfolios of hedge funds to assess the risk of a manager losing flexibility and being tossed about at the whim of the market.

By Dr. Nicholas Verwilghen, who is a partner and Head of Quantitative Research and Dr. Didier Michoud, who is Senior Quantitative Analyst of the EIM Group in Nyon :
http://www.eimgroup.com/jahia/webdav/site/eim/users/eimadmin/public/Systematic%20Approach%20to%20Measuring%20Hedge%20Funds%20Implied%20Credit%20Risk.pdf

Wealth boutiques seek to cash in on crisis : Independent managers set to prosper

As the financial crisis cuts a swathe through the ranks of large financial institutions, independent wealth management boutiques are sensing an opportunity. With big brands battered by scandal or investment losses, investors have questioned whether it is sensible to remain with familiar names that no longer possess the sheen of stability. Research by Prince & Associates in the US suggested 80% of wealthy investors would change their advisers as a result of the crisis. Smaller operations offering straightforward investment products with personal service and equitable fees should benefit.

The following on : http://www.wealth-bulletin.com/home/content/2452237475/

Funds of Hedge Funds

By Simeon Stoitzev, Harcourt Investment Consulting

It is not the knowing that is difficult, but the doing.- Chinese Proverb

Once in a while commentators turn on the funds of hedge funds industry by criticising performance and fees. And lately, the industry has also been competing with replication strategies offered by investment banks and market indices. Warren Buffet has bet US$1 million that the S&P 500 will outperform a given fund of funds over a decade. The winner will donate the stake to a charitable organisation. Buffet has attributed a 60% probability to his winning the bet. It is a wise but also a brave bet, given that the bet is placed in times of above average price/earnings ratios (even more so if adjusted for cyclicality of earnings). However, a decade is a fairly long time and a probability not too far from 50% is a reasonable bet.

The following is on : http://www.thehedgefundjournal.com/managerwrites/index.php?articleid=85331322

Hedge Fund Returns - a Challenge for Reporting

In contrast to mutual funds, hedge funds employ dynamic investment strategies and enjoy a high degree of freedom with regard to the instruments that they can hold in their portfolio. To that can be added the possibility of engaging in short selling of securities and using leverage. Consequently, alternative strategies are infinitely more complex than those of traditional funds.

The sophisticated investment strategies of hedge funds have considerable consequences for their return structure. In essence, hedge fund returns differ from those of mutual funds in three respects. First, hedge funds returns are – as opposed to mutual fund returns – not normally distributed. Second, they are non-linear with respect to the standard market factors, such as those of equity and bond markets. Finally, hedge funds often modify their investment style so that their exposure to risk factors is highly dynamic over time.

All these differences are very important when it comes to the detailed analysis of hedge fund returns, as required by adequate and comprehensive hedge fund reporting. Most important, many studies have highlighted the weaknesses of traditional mutual fund risk and performance indicators for evaluating hedge funds. Hence, it is essential for any good hedge fund reporting to employ performance and risk indicators that are appropriate and thus reliable.

The following is on : http://www.edhec-risk.com/edito/RISKArticleEdito.2008-09-03.2013

Luxembourg continues to dominate onshore hedge fund industry in Europe

With an eye on the competition, Luxembourg has enacted flexible and attractive legislation aimed at tempting more hedge funds to domicile in the tiny European state.

http://www.ey.com/Global/assets.nsf/Luxembourg_E/HedgeFundsReviewMFESept08/$file/Hedge%20Funds%20Review%20Sept%2008.pdf

Hedge fund reinvention is on the cards

From his office overlooking Geneva’s Jardin Anglais, Guy de Picciotto has a unique insight into the state of the hedge fund industry.

Earlier this year Union Bancaire Privée, the Swiss private bank of which he is chief executive, surpassed troubled compatriot UBS to become the largest allocator to the global hedge fund industry, according to a survey by InvestHedge, with $56.9bn (£32.2bn, €41.2bn) of assets under management. “In the first semester of this year there was still growth for hedge funds. Probably the next survey will be very different,” says Mr de Picciotto, the scion of UBP’s founder and chairman Edgar de Picciotto, hinting at waning desire among UBP’s own clients.

The younger Mr de Picciotto is a deep believer in the absolute return philosophy embedded at the heart of the hedge fund concept. Yet even he foresees a need for rapid re-invention across the $2,000bn industry, which is on course for its worst year on record. The typical fund has lost 9.6 per cent so far this year, according to the HFRX index of Chicago-based Hedge Fund Research, with the industry almost certain to underperform cash for the first calendar year since 2002.

“We have already changed 40 per cent of our list. In order to deliver performance you need another set of managers,” says Mr Picciotto, citing distressed assets, global macro and arbitrage as strategies that UBP believes can deliver in the next stage of the economic cycle.

The article is on FT.com :
http://www.ft.com/cms/s/0/fb4c7b9c-917a-11dd-b5cd-0000779fd18c.html?nclick_check=1

Prime brokers : BNP Paribas Securities Services

It has been obvious to hedge fund commentators for a long time now that the industry is changing. It is becoming more institutional, both in the way that hedge fund firms operate and in terms of the sources of the capital they manage. This is having a profound effect on day-to-day business practices and, in turn, is also changing the way hedge funds are serviced.

In the driving seat of this revolution are large, institutional investors, attracted to hedge funds by the prospect of absolute returns and a more active approach to money management. At the same time, they are not prepared to compromise on service standards, and expect fund managers, and their service providers, to deliver the same levels of service and accuracy that they would expect to receive from a large mutual fund structure. This is tough if you are relying on a small, boutique hedge fund administrator to deliver your NAVs. In recent years, we have been witness to a number of landmark deals that have seen major investment banks buying up many of the independent administrators that have been active in the hedge fund space in an effort to tap into the perceived growth in the asset class. The rationale has been to match the scale and infrastructural quality of a major international bank with the specialist knowledge and client base of a boutique administrator. There are, however, other approaches.

One such is represented by BNP Paribas, the major French bank which has been gradually building up its presence in the hedge fund world via a number of avenues, including its Securities Services arm. Other acquisitions for the bank in the alternative investments arena have included fund of hedge funds manager Fauchier Partners, and Bank of America’s prime broking operation. The bank is obviously coming into the hedge fund sector from a variety of different directions, and in all cases, employing its already extensive experience in operations, markets and instruments to give itself an edge.

As a group, BNP Paribas already enjoys considerable scale, with a presence in over 85 countries, 163,000 staff and the additional benefit of an AA+ credit rating. It is hard, in the current climate, to underestimate the value of being the highest rated securities services provider in the world. “We actually had an upgrade during the crisis,” says Maria Cantillon, Global Head of Business Development at BNP Paribas Securities Services (BPSS). “In the hedge fund world, where historically credit rating was not a top priority on a hedge fund manager’s radar, from an investment perspective they now need a credible minimum in their prospectus. Having an AA-rated bank, and a bank that can do prime broking, finance and leverage with that credit rating, brings additional gravitas.”

http://www.thehedgefundjournal.com/profiles/index.php?articleid=85375184

Emerging Managers : ELIZABETH FLISSER, CAPITAL Z ASSET MANAGEMENT

In the hedge fund industry, the so-called emerging manager is both the ‘holy grail’ and the ‘problem child’. Both anecdotally and in research conducted over the years, emerging managers have been shown to offer higher returns than more established funds. They are entrepreneurial and agile, often able to capitalise on market opportunities the bigger players cannot. Yet the risks of investing in early stage hedge funds, from size and liquidity to transparency and headline risk, have largely left institutional investors wondering how – or even if – it is possible to include emerging managers in a fund of funds portfolio. Although the challenges are many, there is no doubt a place for emerging managers in hedge fund of fund portfolios, especially in the current market environment.

What defines an emerging manager? A key consideration for investors is the very definition of an emerging manager. Many define emerging managers simply as having less than a two year track record. Yet the small group of highest profile hedge fund launches – those launching with $500 million or more – quickly attract institutional assets prior to their first anniversary and are hardly regarded as ‘emerging’ by the industry. It is perhaps more useful to consider the emerging manager as one who is both relatively new to the market but has yet to reach critical mass in terms of assets. The best of these managers are experienced portfolio managers, fiercely entrepreneurial and begin building a solid track record right out of the gate. These are the emerging managers that high net worth individuals, family offices and private companies have targeted for several years, while their institutional brethren have remained focused on the larger managers.

The article on : http://www.thehedgefundjournal.com/managerwrites/index.php?articleid=71065389

Caliburn Capital Partners : Thriving at the frontiers of investment

A scaleable research engine - In the start-up phase Caliburn Capital’s partners brought in two PhDs and an aeronautical engineer with a risk management background to build quantitative models. They wanted their quantitative tools to be high-end, and they are: "our quant capabilities are shared only by a couple of the largest funds of funds businesses," asserts Rowlands. They were using statistical tools that were more typical of the proprietary trading desk of an investment bank according to the Caliburn Capital CEO: "these tools were more sophisticated and more relevant to the assets to which we have exposure than others available and more widely used." Continues Rowlands, "the head of quant will tell you that he spends a lot of his time trying to move the quantitative agenda on – twelve months ago they thought they were market-leaders in their use of quantitative tools. We have certainly moved a long way from the souvenirs of the long only industry such as the Sharpe ratio and Sortino ratio. Now people are catching up and we have to continue to work to move the quantitative agenda on. We want to stay at the leading edge of quantitative practice."

The article on : http://www.caliburncapital.com/uploads/THFJCaliburnarticle.pdf

Total-return strategies weather the storm

Investment solutions containing the names “Total return” and “Absolute return” look to use innovative investment techniques to achieve an attractive return above the risk-free interest rate.With the markets in turmoil over the last few months, these techniques have been criticized for failing to deliver the promised returns. Unfortunately, the two strategies are continually being confused with one another, and all too often the impression is conveyed that a positive return will always be achieved. This expectation belongs in the realm of fairytales, making disappointment inevitable.

The article on the "Private" website :
www.private.ag/media/2008/041/de/027_Total_return_strategies.pdf

47 Degrees North New Generation Fund will offer investors access to emerging managers

A new hedge fund run by former RMF-Man Investment analysts is being set up and named after its Swiss latitude, 47 Degrees North Capital Management in Pfaeffikon, Switzerland.

47 Degrees North New Generation Fund will offer investors access to emerging managers with a track record of between a few months and two or three years. This fund will target returns of 12% with 5% to 7% volatility. The 47 Degrees N Seeding Fund will invest in start-up hedge funds, this fund aims for annual returns of 15% over a five-year cycle with volatility of 6% to 8%. The 47 Degrees N Commodity Fund will use the expertise of the team in selecting commodity managers and invest in hedge funds using both directional and non-directional strategies across commodity markets.

Claude F. Porret is the CEO of 47 Degrees North Capital Management. Before founding 47°N in 2006, Claude was the head of RMF Hedge Fund Ventures within RMF Investment Management. She was a member of the management committee and the investment strategy committee. Prior to joining RMF in 2001, Claude spent eight years with Hunter Douglas Management as a director, responsible for treasury management and supervision of the in-house hedge fund portfolio. Prior to this she worked for Salomon Brothers International from 1986, in New York, London, Tokyo and Zurich, initially as a Japanese equity salesperson and subsequently marketing OTC derivatives to institutional clients. Claude started her career in 1981 with Caterpillar Overseas in Geneva, working as a field engineer. Claude received her degree as a Mechanical Engineer from the Ecole d’Ingénieur du Canton de Neuchâtel, Switzerland, and her MBA from INSEAD, France. 47 Degrees North Capital Management is a premier alternative investment firm offering sophisticated institutional investors a unique line-up of specialized fund of hedge funds products. One of its flagship products, the 47 Degrees North New Generation Fund, offers investors access to a diversified portfolio of early stage hedge fund managers.

Newt event with Claude Porret as a speaker in Geneva on 11 - 13 November 2008 :

http://www.icbi-events.com/gaimfof/

Website : http://www.47n.com/

From Diversity to Diversification : The Evolution of the Term “Emerging Manager”

An article from Thurman V. White, Jr. who is President and Chief Executive Officer of Progress Investment Management Company, LLC, a pioneering specialist in developing emerging manager investment portfolios.This article explores current definitions of the term "emerging manager," with an explanation of why emerging managers are becoming more attractive to institutional investors. "Successful Emerging Manager Strategies for the 21st Century," a companion article to be released in the Fall of 2008 on ww.progressinvestment.com, looks at different ways to invest in emerging firms, with discussion of best practices in emerging manager investing.

http://progressinvestment.com/content/files/TheEvolutionoftheTermEmergingManager-Essay5.pdf

PerTrac Research Confirms That Emerging Hedge Fund Managers Outperform Older, Larger Funds

PerTrac Financial Solutions today announced the results of its updated Emerging Manager Study, originally released in March 2007, confirming again the widely held belief that emerging hedge funds perform better than older, larger funds. The company makes the popular PerTrac Analytical Platform, the world’s leading investment analysis and asset allocation software.“Our original study, released early last year, asserted that smaller, younger hedge funds outperform larger, older hedge funds, based on research spanning January 1996 to July 2006,” said Meredith Jones, managing director of PerTrac. “The new study, which includes data through December 2007, confirms the original results.” Data was compiled and analyzed using the PerTrac Analytical Platform software application.Two different analyses were completed: one based on fund asset size, and one based on fund age. In each analysis, funds were re-categorized each month from January 1996 through December 2007 into one of three size groups: up to $100 million; over $100 million and up to $500 million; and over $500 million. They were also categorized into one of three age groups: up to 2 years; 2 to 4 years; and over 4 years. The mean fund return was calculated for each group in each month, creating three size-based monthly indexes and three age-based monthly indexes. Various risk and return statistics were calculated on the returns of each index to evaluate historical performance while Monte Carlo simulations were run on each index to indicate probable ranges of future returns and drawdowns.

http://www.pertrac.com/per0020/web/me.get?web.websections.show&PER0020_1278

Risk Management : Nassim Taleb on "Bloomberg Markets"

"On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley's Manhattan offices on 47th Street and Broadway to address a group of the firm's risk managers. His message: Your models don't work.Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests--Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said......"

Link to the PDF file :
http://www.fooledbyrandomness.com/bloombergProfile.pdf

FUND MANAGEMENT: Incubators on look-out for start-up managers

FT REPORT - FUND MANAGEMENT: Incubators on look-out for start-up managers By Suchita Nayar Published: May 26, 2008 The upheaval in global capital markets is creating abundant new investment targets for hedge fund incubators. London's FRM, ADI Gestion of Paris and SkyBridge Capital in New York are among seeders that are seeking fresh capital to back start-up hedge fund managers around the globe. Toronto's Arrow Hedge Partners, along with partner Marret Asset Management, will soon begin deploying the $150m (£76m, €95m) it has raised for what is being billed as Canada's debut incubation fund. "We're seeing a lot more investment opportunities than we'd expected," says Patric de Gentile-Williams, chief operating officer of FRM Capital Advisors, the new incubation arm of the large fund of funds operator. "When we started out, we expected to maybe see 200 managers a year. We now expect to see between 500 and 1,000 this year. The opportunity is currently huge." A cross between venture capital that backs new businesses and a multi-manager hedge fund, FRM's new $1bn fund is one of a growing number of incubator funds cropping up. A mix of higher institutional due diligence requirements and a tougher fund-raising environment is making such funds an increasingly important source of seed capital for new managers. And the unwinding of global credit markets is only boosting their pickings in distressed and asset-based lending plays. "June 2007 to May 2008 has been a tumultuous period that's already cost the investment banks half a trillion dollars," say Anthony Scaramucci and Scott Prince, co-heads of SkyBridge Capital. The banks' angst has had a dramatic impact on hedge funds: it has drastically trimmed the leverage banks are willing to offer and is forcing them to separate out proprietary traders that previously ran such risky funds in-house. "The flow of potential managers is outstanding, given the current turmoil," the SkyBridge duo says. Having fully invested its maiden $330m fund in nine deals, SkyBridge is believed to be raising a $500m subsequent fund. As announced on May 15, SkyBridge inked a partnership with Australia's Challenger Financial to expand its geographic reach into the Asia-Pacific region to target both potential managers and institutional investors. Challenger, which is 25 per cent owned by Australian billionaire James Packer, is believed to be investing $100m in SkyBridge's fund and will also take a small stake in the company. It plans to open an outpost in London and will expand overall headcount to 30 from 18 this year. "Our vision has been to make SkyBridge a global seeding business," says Mr Scaramucci, who founded the business in mid-2005 and brought Mr Prince, an alumnus of Eton Park and Goldman Sachs, on board as a managing partner early last year. SkyBridge's global aspirations are the face of today's incubation business. Once, small players with $100m-$200m to deploy could thrive by doing deals of about $10m apiece. Not any more. The average ticket has risen to at least $25m, with some large funds chasing even larger investments for the sake of economies of scale. The due diligence it takes to select a manager makes the very small deals unprofitable. What is more, institutional investors require incubators to exhibit the ability to hunt down portfolio managers with substantive performance history and risk management skills in different corners of the world. As the contest for best-pedigreed managers and traders escalates, incubators are trying to set themselves apart from each other and prime brokerages, which also have the expertise to assist managers to set up funds and market them via their capital-introduction units. FRM, for example, provides guidance on best practice in areas such as operational infrastructure and risk management. Additionally, it encourages its managers to use the FRM moniker to give them credibility with institutions. The incubation unit is assembling its own research effort to vet investment targets and conduct ongoing operational risk analysis. SkyBridge, meanwhile, typically invests about $50m apiece. Once launched, it helps its targets to raise additional capital and encourages its limited partners to make direct investments into its portfolio funds. Its sales team gets referrals from existing investors and maintains what it calls "a MySpace of alternative cheque writers", referring to the popular online social networking site. While placing a premium on risk management, it stays away from providing general operational support. "We see a general flaw in the whole concept of risk management in the hedge fund space today," says Mr Prince, who leads the charge on risk management. "Most firms do the risk management internally and have no checks and balances." It pre-negotiates risk limits with its managers and wants full transparency. For instance, it would not work with managers that employ high leverage and monitors its funds closely to ensure that. Investors in seeding programmes make money via capital appreciation in underlying seed capital and revenue share for extended periods. This is how the mathematics works: the incubator charges about 100 basis points for key infrastructure and an additional 200-300 bps for $50m or more. All told, the price of capital has come down somewhat and incubators now generally charge 0.5 per cent of revenue for each $1m invested, says Mr de Gentile-Williams. The revenue share model will get tested in current turbulent times, says Antoine Rolland, who was installed as chief executive of ADI's NewAlpha incubation subsidiary in January 2008. NewAlpha is raising $250m for its third-generation incubation fund. Picking winners in this market will be the test for incubators, he says.