Starting a Hedge Fund: A Review of 2014 and Themes for 2015 and Beyond

April 09, 2015

This is a follow up to our recent publication on Starting a Hedge Fund in 2015 and provides an overview of our thoughts on the start-up market in 2014 and themes for 2015 and beyond.

In terms of numbers, 2014 appears to be a relatively poor year for new hedge fund manager start-ups. According to initial industry data, the number of start-ups in 2014 globally fell 40 per cent compared to 2013 and the industry saw the lowest number of new start-ups since 2003. There were only around 40 new hedge fund manager start-ups in Europe.

There were some new hedge fund manager start-ups of significant quality, many of which we at Dechert acted on. When it comes to managers with proven track records backed with significant seed capital the barriers to entry are rather smaller. It is the smaller and less well known managers who find it harder to launch.

We think that there are three key reasons for the 2014 slow down in start-ups. First, 2014 was a year of significant regulatory change both in the U.S. and Europe with the full or partial implementation of Dodd-Frank, FATCA, EMIR and, perhaps most significant, AIFMD. This led to increased uncertainty and higher costs. A manager who was happy to wait till the dust settled in 2015 would probably have been in a better position to launch. Second, the ease with which start-ups could raise critical assets has continued to be challenging (made worse by the fact that the amount of assets required for a viable launch has increased). Third, and more debatable, is that the regulatory change has acted as a further catalyst for what we shall call the ‘institutionalisation’ of hedge fund managers. In contrast, the 1990’s to the mid 2000’s can be seen as the era for start-ups. This labelling is not intended to undermine the importance of start-ups to the industry. Smaller and more entrepreneurial managers help encourage competition which can only be a good thing for investors. Further, there is a large pool of investors looking to seed start-ups so as to benefit from preferential fee rates and, often, to acquire equity and thus benefit from future growth. New start-ups will remain a significant feature of the industry albeit likely reduced in number.

Read "Starting a Hedge Fund: A Review of 2014 and Themes for 2015 and Beyond".