Deep Dive into Hedge Funds (Capital Allocators, EP.34)

Seeding

Seeding methodologies in hedge funds involve strategic decisions that can significantly impact both the fund's and the investor's success. Patrick O’Shaughnessy highlights the importance of being a price maker rather than a price taker when investing early in hedge funds, as it allows for more favorable terms 1. He notes that while Yale was considered a seeder, it did not take economics, unlike Protege, which seeded about 40 hedge funds during his tenure 1. Ted Seides adds that the economics for seeders typically involve a revenue share of 15% to 25% of the top line, which serves as a discount on their capital 2.

   

Risk

Risk management in hedge funds is crucial, especially in fluctuating markets. Patrick O’Shaughnessy advises hedge fund managers to think like entrepreneurs, focusing on compounding their investments over time rather than chasing immediate growth 3. He compares the allure of hedge funds to growth stocks, suggesting that while they offer potential high returns, they also carry significant risks 3. Ted Seides argues that while hedge funds can manage risk effectively, the high fees often make them less attractive compared to simpler investment options like the S&P 500 4.

   

Innovation

Strategic innovation in hedge funds involves adapting to market changes with unique approaches. Patrick O’Shaughnessy discusses the importance of creating fair fee structures with managers, a practice that Yale successfully implemented early on 5. He emphasizes the need for flexibility in accessing capital, as rigid strategies may hinder new investment businesses 5. When evaluating potential seed investments, Ted Seides considers factors like pedigree, track record, and unique strategies, noting that the allocator's interest plays a crucial role in decision-making 6.