Hedge Fund Clients Race to Open Their Wallets for Star Managers

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Some of the hedge fund world’s biggest names are seeking fresh cash, and investors have been quick to respond.

Managers including Ken Griffin and Seth Klarman have wanted to raise money to seize on opportunities in the coronavirus pandemic — and clients once forced to the sidelines are ready to open their wallets. More than half of investors in a Morgan Stanley survey said they plan to boost hedge fund allocations.

They’ll have to act fast as managers are turning on a dime. In just one mid-March weekend, as credit markets froze, Griffin’s Citadel raised $2 billion for a new relative value fixed-income fund — but his firm swiftly returned the money after the Federal Reserve moved to stabilize markets, a person with knowledge of the matter said.

At Philippe Laffont’s Coatue Management, it only took about five days to amass roughly $1 billion for its new long-only fund, a person said. That was more than double the firm’s $400 million target. Meanwhile, Klarman’sBaupost Group reopened to new capital for the first time since 2011, seeking to raise as much as $1 billion from existing investors, Bloomberg hasreported.

Representatives for the firms declined to comment.

Driving investor interest is the industry’s solid performance. After years in which hedge funds underperformed — leaving some clients to question the steep fees they’re charged — managers lost almost 10% in the first quarter, though some suffered bigger declines. By contrast, the S&P 500 Index plunged 20% in the market rout. That decline has many managers now keen to capitalize on recent price dislocations.

The industry is seeking to expand after some managers saw their assets under management shrink over the last several years. Their future success depends on how well they have managed the market chaos so far.

Plenty of investors have been pitched new opportunities, mostly in the form of fund re-openings, draw down vehicles and co-investments, according to initial findings in aMorgan Stanley survey conducted at the end of March.

The entreaties appear to be working. About 45% of pensions, fund of funds and endowments, among others, that were pitched such offerings have acted on them, the Morgan Stanley data show.

Where will the money go? Credit funds, hard hit by the economic crisis, are expected to see the biggest increase in allocations, followed by equity long-short and event-driven pools, according to the bank’s findings. Quantitative and risk premia strategies are expected to see the biggest decreases.

Among the bank’s other findings:

  • The majority of those surveyed anticipate a U-shaped recovery, while 22% see an even deeper bear market.
  • More than half of those surveyed plan to make changes to their allocations. They’re most likely to boost allocations to long-only managers focused on equity and credit, followed by hedge funds, while trimming cash, private credit and venture capital holdings.
  • About half of the investors have unfunded commitments, mostly around 5% to 10%. Endowments and foundations have the most significant unfunded commitments.
  • About 46% of investors took “recent preventative/remedial action, mainly through increased cash and market hedges.”

Morgan Stanley’s capital introduction group surveyed 211 investors overseeing about $850 billion in assets.

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