The dog days of summer have hit us. It’s not even August and over 95 degrees in New York City and it doesn’t look like the heat spell is going to break anytime soon. It is hot.
The same cannot be said for the hedge fund industry results. As mid-year numbers come in, most funds are taking it on the chin. While the indexes are still crunching numbers, it seems like the fixed income guys are hurting while the long/short equity guys are at plus 80 to 100 basis points. I can just hear John Bogle in his TV close up saying: are these the results people need to pay 1 and 20 for – buy an index fund—and the tv producers are “chomping at the bit”.
I think these numbers mean nothing; the year is still young and there are good things and more important numbers yet to come. Sit tight hedge fund investors; we are in the fourth inning of a nine inning game!
That being said, the real financial news is the hullabaloo being made about the private equity shops going public. I for one am not buying into all of this. I think that there is a lot of hubris surrounding these deals and I have two words for you: “Buyer – Beware”! I believe that it was P.T. Barnum that said “there is a sucker born every minute and an ass for every seat?” Truer and more applicable words have not been spoken.
I’m scared that lots of investors will be hurt by buying the stocks of these companies; for the simple reason that if the “masters of the universe” are selling shouldn’t everyone else also be selling. I definitely do not want to be buying when these guys are selling and I don’t think you should either. However, this blog is not about investment advice, but rather market trends. It is because the IPO’s hint at market trends that I make these comments. Please, do not misconstrue these words; this is not investment advice; it is market commentary.
Okay. So the warning is over and it is now time to talk about business and reply to questions. Over the last few weeks, questions have been asked about seeders and emerging manager platforms / funds of funds. First the seeders. I ‘m not so sure that I see the value of pursuing the seeder platform. Everybody I talk with regarding seeders says the same thing; “we looked at 500 funds and chose one.” Sounds a lot like Gordon Gekko to me. This means very few deals are actually getting done. As a new fund manager, that this is a difficult route. However, if you do get a term sheet, you need do a lot of due diligence on your seeding partner. Make sure you fully understand the basic terms of the agreement, and then have documentation that is clear, concise and makes sense. Then be certain how things are going to be done and how money and ownership are allocated. Also, you need to evaluate the reality of the situation should it not turn out the way you want and understand every aspect of how you are going to break up.
As for the emerging manager platforms / funds of funds, these deals seem to make more sense. Basically, the funds will invest in your fund and you have more money to manage and additional investors. In some cases the funds ask for a haircut on fees or defined capacity – both of which do not seem to be egregious and make sense.
The real question you need to ask is how desperate you are for the money and what are you willing to give up. Everybody’s deal is going to be different; but you should insist on a formula that comfortable and will achieve the goals you need to be successful.
The bottom line in all these transactions is your gut reaction. If your gut tells you it’s a good trade then do it. If your gut tells you it’s a bad trade don’t do the trade. Fortunately or unfortunately I’ve gone by my gut for most of my life and it’s never steered me wrong. Stay cool and drink a lot of fluids.
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