Falcon Investment Management, a London-based multi-manager seeder platform, hopes to turbo-charge emerging hedge fund talent with its novel first-loss Accelerator program as startups continue to grapple with increased launch costs and investor aversion.
Launched in May 2021, the firm’s Accelerator Capital program — one of only a few first loss hedge fund vehicles in the U.K. and Europe — now has some $150million in leveraged allocations across a number of portfolio management teams, the majority of which are running long/short equity strategies, as well as some fixed income and foreign exchange funds.
Josh Oliver, Falcon’s head of business development, said the first loss Accelerator program is a core part of the firm’s business, creating fund vehicles for emerging and established hedge fund managers in a Cayman-domiciled structure, and offering access to Falcon’s internal compliance, risk management and operations teams.
“The program stems from emerging managers who are looking to grow scale. We allocate one-for-one to whatever a manager is willing to bring in risk capital,” Oliver told Alternatives Watch, adding that Falcon’s approach differs from typical U.S. first-loss seeder models. “If a manager is trading with, for example, $1 million in their account, we can lever them up to ten times their capital. They take most of the performance, but they bear the risk.”
For increasing a manager’s assets, providing institutional-grade operational infrastructure, handling set-up and administration costs, offering favourable fee terms with prime brokers, as well as monthly payouts, Falcon charges a management/facilitation fee, and performance fee. In exchange, the fund manager is required to absorb first losses on the account.
Oliver explained: “Most fund managers — whether they were macro, long/short equity, whatever their trading strategy — saw a drop of around between 10-20% during COVID. We only approach managers that have incurred max drawdowns of between 3-5%; we look at how they performed during that period, and we want to see that they are all-weather, and that they withstood COVID.”
“They are more than happy to accept those terms, especially if they have a track record of two or three years, and have only incurred a maximum drawdown of 5%,” he added.
As many emerging hedge funds continue to struggle with increasing barriers to entry, underpinned by growing operational and regulatory headaches and ongoing allocator aversion, Oliver believes the program can help turbo-charge those small and mid-sized hedge funds confident in their ability to scale up to the next level.
“If you are an emerging manager with a strategy that is able to make money out of the market, and you want to capitalize on the opportunities there are, with institutions still waiting on the sidelines for things to stabilize and a majority of inflows going to $1 billion+ funds with track records of 10 years or more, then this is the solution to scale right now,” he added. “The first-loss vehicle with leveraged capital essentially gives you a larger AUM which puts you on the radar of these institutions come the time they are ready to start to deploying money to emerging managers. With the amount of capacity coming in, with the amount of managers we are looking to onboard, it’s an attractive prospect.”