News wires around the world covered the story about RMF (a subsidiary of the Man Group) backing ex-Fortress manager, Stanley Ku. Interestingly enough, according to Hans Hurschler, head of Man Investments’ Hedge Fund Ventures, the hedge fund seeding business is now more like loaning money to a start-up than making a private equity-style investment. RMF will invest for only “a couple of years” – the official number is 3 years (source). That means within 3 years, Mr Stanley Ku will have to build his business, hire staff, invest profitably, and raise money (at least $50m). It’s a long shot, considering the markets, but thankfully for hedge fund managers, seed investors usually have a strong herd mentality.

Nobody (usually) wants to be the lead seed investor, but many will soon follow.  Herd mentality is strong amongst hedge fund seed investors. As with all larger seed investors, RMF Global Emerging Managers probably makes four or five seed investments each year. It would probably invest seed capital in the underlying hedge funds rather than the investment companies that manage them (usually in the form of a non-recourse working capital loan). Without a doubt, it will also agree to an arrangement sharing some of the underlying fund’s management and performance fees. I’m almost certain that other seed investors will be coming on to the bandwagon soon. Mr Hurschler however, is warning other seed investors not to take too much advantage of the current availability of hedge funds looking for seed funding.

Here’s my summary of what possibly attracted RMF to this deal:

1. Good pedigree - Stanley Ku used to work at Fortress and Goldman Sachs
2. Good reputation/branding - Stanley Ku is a “very well respected money manager in Asia”
3. Liquidity & Transparency - The fund invests in highly liquid assets (mainly G7 Government Bonds and related highly liquid products with fully transparent pricing), and the entire portfolio is designed to be liquidated in 48 hours
4. Strategy - Fixed-income arbitrage
5. Team - Experienced team, and history of working with each other (The 8 seasoned team members have 127 years of combined industry experience, 94 of which have been spent working together.) [p.s. I really don't understand the purpose of considering the number of years of "combined industry experience". What is the industry norm? If there were 2 managers with 30 years experience each, does it give 50% less brownie points than a team of 8 with a combined industry experience of 127 years, even though the smaller team's average industry experience is 100% more?]

About RMF Global Emerging Managers

• It’s a relatively new seeding fund, and its launch was covered in the media in November 2007 (Google search link)
• The fund targets entrepreneurial managers with substantial hedge fund management experience whose operations have good growth prospects and solid operational infrastructure. (source)
• The fund aims to deliver hedge fund returns enhanced by revenue-sharing schemes with the managers; in addition to delivering performance returns, the managers will share with investors a fixed proportion of their gross revenues for a defined period. (source)

(Some) Terms of the Deal (source)

• Certain beneficial rights not available to other investors (rights to further investments? redemption rights? etc.)
• Ability to run shadow risk management and fund administration systems
• Most Favoured Nation status
• Share of the performance allocations (on gross performance? probably…)
• Man will not be able to redeem its investment from 5:15’s fund until June 30, 2011
• …and more!

Keeping a look out for other seed investors now… something’s definitely brewing!