Goldman Sachs plans to challenge Blackstone on hedge fund start-ups

NEW YORK: Goldman Sachs Group is seeking money to bankroll fledgling hedge funds, its second attempt since 2008 to break into a business now dominated by Blackstone Group, according to three persons with knowledge of the plan.

The bank has spent the past year trying to attract clients for a seeding fund, which provides managers with startup investing capital in exchange for a cut of their fees, said the sources, who asked not to be identified because the effort is private. Blackstone recently raised $2.4 billion for its second seeding fund, the industry’s biggest.

Reservoir Capital Group, Larch Lane Advisors and PineBridge Investments are also marketing new funds, saying it is a good time to back startups because after the financial crisis investors are reluctant to trust even talented traders going out on their own. Goldman Sachs, based in New York, shut a fund in 2008, underscoring that betting on new managers can be tricky even for one of Wall Street’s savviest firms.

“Seeding isn’t an easy-money business,” Alexis Graham, co-founder of Acceleration Capital Group, a New York-based firm that works with seed investors, said in a telephone interview. “There are only a small percentage of people out there who can consistently outperform, build a business and scale assets.”

About half of the 100 or so firms that financed startups before 2008 have curtailed their investing or quit the industry, Graham said. Reasons for the shakeout include poor manager selection and hardto-navigate financial markets.

Seeders generally invest $100-150 million in a hedge fund, providing a pool of capital to help the manager begin trading. In return, the seeding fund gets 15-25% of the hedge fund’s fees. Hedge-fund managers typically charge clients 2% of assets and take 20% of investment gains.

The seed money is often locked up in the hedge fund for three years, and seeders return initial capital to their investors after about five years. Seeding funds retain their ownership stake until it’s bought out by the manager or a third party.

“If you have a 10-fund portfolio and three funds climb over $1 billion, then the economics work and you have a winner,” said Eric Weinstein, who runs the $4 billion fund-of-fund business at Neuberger Berman Group in New York. Seeders target annual returns of about 12-15% for their investors, he said.

Blackstone, the world’s largest private-equity firm, jumped into seeding in 2007 with a $1.1-billion fund that took stakes in eight managers. While one of the hedge funds failed in 2008, the New Yorkbased company’s portfolio has returned about 50% since inception, according to investors.

The remaining firms collectively manage $7 billion, and three have more than $1 billion, including Senrigan Capital Group, run by ex-Citadel LLC trader Nick Taylor in Hong Kong.