Close Close

Portfolio > Asset Managers

MD Sass Plans Fund Incubator

Your article was successfully shared with the contacts you provided.

NEW YORK (–M.D. Sass Investors Services Inc., a firm that manages a variety of strategies in hedge fund, private equity and traditional formats, is looking for alternative investment managers to seed with its own partners’ and clients’ capital.

The group will identify strategies that have an edge and then find managers who can execute those strategies, said Managing Director Jonathan Hochberg, explaining that demand for non-traditional managers is strong; especially as some pension funds are preparing to make large allocations.

“We seek people with experience and credibility to manage money,” Mr. Hochberg said, speaking at a symposium in New York organized by Strategic Research Institute. “In the next six months, we will raise capital to incubate managers and bring them into our organization.”

Investors want low correlation to traditional markets, he observed. “It is hard for institutions to find managers and to do due diligence on them.”

Moreover, many hedge funds with strong track records, such as those run by Viking, New York, and Citadel, Chicago, are closed to new investors. M.D. Sass is not alone in responding to this situation by seeding managers–others, from Blackstone Group, New York, to Moore Capital Management, New York, have gone this route.

But M.D. Sass has the advantage of long-time experience in starting and bringing up investment companies and an already developed incubator business model. In many of the past ventures, it withdrew its capital and reinvested in other managers after the portfolio companies matured and their value increased.

Encouraging Focus

The firm will start up or purchase small money management businesses in traditional and alternative strategies, including hedge funds. It will provide these with facilities and technology infrastructure and perhaps marketing and risk management services.

It also plans to take care of client relations, legal and regulatory issues, and initially accounting and financial reporting. This will allow managers to focus on doing what they do best and accelerate their growth, Mr. Hochberg said.

Managers will have to sign employment and non-solicitation agreements that will prevent them from taking clients and assets with them if they leave. Being acquired by the larger organization has a downside for them in diminished control and ownership. “But the advantages far surpass that,” Mr. Hochberg said.

He sees opportunity in smaller managers and talent coming out of proprietary trading desks and bank layoffs. New funds often need help in reaching critical scale and many institutions prefer to invest in funds that already have at least US$100 million in assets.

In preparation, M.D. Sass has reviewed 2,130 hedge funds in a database and identified 129 managers with less than US$25 million in assets and performance in the top quartile of their categories. These span eight strategies: long/short equity, fixed income, global macro, risk arbitrage, market neutral, statistical arbitrage, convertibles and distressed securities.

The program, which will rely on a private equity vehicle, needs to incubate two to three funds a year to get adequate diversification. Successful managers are expected to create self-sufficient infrastructure and a stand-alone team as their assets grow. M.D. Sass will monitor the portfolios for style drift and can close a fund down if it violates its mandate or fails.

Perhaps best known for distressed securities funds, the firm also runs a multi-strategy fund of funds, fixed-income and hedged equity portfolios, and municipal tax lien investments. The municipal arbitrage strategy has been very successful and is drawing a lot of demand now, according to Mr. Hochberg.

Cash management and real estate are also part of the business. Martin Sass and Hugh Lamle lead the firm, which was founded in 1972. They and Steve Shenfeld will share responsibility for the new incubator operation.

[email protected]