September 13, 2012 (PLANSPONSOR.com) – Institutional investors who think hedge funds will resume their growth trajectory and continue to play an important role in the investment landscape should consider a seeding vehicle to capitalize on hedge fund growth.
A white paper from Larch Lane Advisors contends a hedge fund seeding vehicle is particularly appealing to investors that desire greater return potential than a typical hedge fund portfolio; diversification of a large multi-manager portfolio; an ability to capitalize on any potential growth of the hedge fund industry, not just its return potential; and returns approaching those of private equity, with potentially better liquidity.
Hedge Fund Seeding
A seeding vehicle commits capital to individual hedge funds, typically for three to four years. As those commitment periods expire, money is typically returned to seed vehicle investors. Capital that remains invested may be eligible for periodic withdrawal from the seed fund or may be subject to the standard liquidity terms of the seeded hedge fund. Specific liquidity terms vary depending on the seeding vehicle’s structure.
Hedge fund seeding vehicles have characteristics of both hedge funds and private equity funds. This hybrid feature makes it more difficult to determine their proper role in an institutional portfolio. However, investors who are willing to consider an opportunistic strategy that does not fit neatly into a pre-defined investment silo may reap rewards. Larch Lane’s model found a seeding strategy exhibits a risk/return profile between traditional hedge fund and private equity strategies.
To benefit from a hedge fund seeding strategy, prospective investors should have a multi-year investment horizon and be willing to tolerate short-term volatility, said David Katz, president and chief operating officer of Larch Lane Advisors LLC.