Although industry assets are at record highs, the majority of asset flows have recently gone to managers with multi-billions in assets despite empirical evidence suggesting smaller, emerging managers perform better.
There are a several channels by which managers are able to raise assets necessary for progression, however there is one in particular which has been gaining the most traction with Falcon – the First Loss Program.
The First Loss Program, also referred to as seed capital or accelerator capital – is a means of obtaining trading capital outside of the typical investor channels. The provider (Falcon) and a portfolio manager (with their own funds/investor commitment) both contribute capital to a designated regulated fund under the Falcon Umbrella. The manager has trading discretion over the fund and bears, as the name implies, the first losses up to a maximum of 10%, with risk parameters set at 8.5% drawdown.
Managers accepted to Falcon’s First Loss Program are carefully selected through a qualitative and quantitative process which involves both analysis of their track record, and assessment of the investment strategy – once selected, managers go through Falcon’s full onboarding and due diligence procedure. Their service supports managers who trade liquid strategies, such as L/S equity, market neutral, arbitrage & CTAs – with average annual returns of 10-15%+ and very low drawdowns.
The program is designed to align interest between investors and managers, with managers receiving higher performance fees in exchange for accepting the risk of absorbing first losses. Furthermore, Falcon applies a high water mark, and so it’s important to understand that in months of losses there are no performance fees incurred by the manager.
Participating fund managers benefit in numerous ways:
1. High performance payout – Falcon pay a higher than industry normal performance payout
2. Increased AUM – Falcon can facilitate up to 10x (including additional AUM and leverage)
3. Monthly payouts – the manager receives their split on the P&L on a monthly basis above high water mark vs. having to wait till year end or post audit
4. Cost effective and turnkey – the cost to the manager is minimal as Falcon handle all the set up and administration related costs
5. Establish a track record – the track record is owned by the manager
6. Regulated structure & support – through institutional grade operational and risk management frameworks
There is a growing interest in first-loss programs for good reason. These structures allow for managers to grow their business, generate cash-flow, and receive higher than average performance fees, which are just a few of the reasons why managers choose Falcon’s First Loss Program.
