Ivaldi Backs Two Asian Startup Hedge Funds Filling Funding Gap

Ivaldi Capital LLP, founded by three former Citigroup Inc. prime brokers, is backing two Asian hedge funds that will start trading in the first half of 2013, said Chief Executive Officer William Potts.

They include a team employing a market-neutral long-short equity strategy that trades with computer models and a stock fund that focuses on the region’s telecommunications industry, he said in an e-mail, declining to identify them. Ivaldi is waiting for the Monetary Authority of Singapore’s approval to start trading in the city-state, he added.

Small hedge funds have struggled to raise money and managers are under increasing pressure to meet investors’ short-term return expectations, said Potts. Investors willing to consider giving capital to new hedge funds whose managers had at least than three years’ track record at other hedge funds, and doing so without demanding fee discounts, dropped by 23 percentage points since 2010 to 38 percent this year, according to a Credit Suisse Group AG survey this month.

“It is proven early-stage or second-generation managers outperform over time,” said Potts. “With the lack of seed capital, closure of proprietary desks and, in Asia specifically, a seeming reduction of funds’ presence, we have an enormous opportunity.”

An estimated 263 Asian hedge funds opened in the two years to December, while there were 33 more liquidations, according to data from Singapore-based Eurekahedge Pte.

Smaller Suffer

London-based Ivaldi hires teams of so-called second-generation managers who used to work at other hedge funds to join its offices. Successful managers are allowed to raise capital directly from other investors after at least two years, with Ivaldi helping market their funds, Potts said.

The arrangement helps new managers focus on investment, rather than being distracted by marketing, trying to run a business or concentrating on monthly returns, he said.

The region’s hedge funds have suffered from investor flight to the biggest managers. Hedge funds overseeing at least $5 billion accounted for $43 billion of the $31 billion new capital added to the global industry in the first nine months last year as investors moved assets out of smaller funds, according to Chicago-based Hedge Fund Research Inc.

Asia Focus

Ivaldi currently runs money only for European state pension funds, Potts said, declining to identify the investors or give the amount they have committed. It plans to raise capital also from sovereign wealth funds, insurers, foundations and endowments, including those in Asia, he said.

Ivaldi has hired six equity fund teams in London. It opened a Singapore office in December and plans to have five Asia-focused hedge-fund teams eventually, Potts said. So far, all the managers it has hired trade stocks, and it plans to add managers that trade non-equity securities in London first later this year.

It aims to allocate 30 percent of the capital committed by investors seeking global diversification to Asian managers, Potts said. The percentage will be higher for those who want bigger holdings in the region, he added.

“Asia combines the most diverse and complex array of markets while being the youngest and least crowded in the evolution of alternatives,” Potts said.

Potts, a former London-based European head of prime finance sales at Citigroup, co-founded Ivaldi in 2009 with Todd Johnson and Nick Jarrett. Johnson was a European head of prime brokerage at the bank and Jarrett was Citigroup’s global head of prime finance technology. Prime brokerage provides services such as trade settlement, securities and cash lending to hedge funds.

The New York-based bank owns a minority, non-controlling stake in Ivaldi, Potts said, declining to specify the size of the holdings.

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