04/15/2009

'Cap Intro' Is Back . . . And So Are Investors

Capital-introduction events, which virtually disappeared amid the market's meltdown late last year, are suddenly showing signs of life.

As the hedge fund industry reeled from steep losses and heavy redemptions during the fourth quarter of 2008, prime brokers quickly moved to scale back or scuttle cap-intro gatherings in New York, London and elsewhere. Investor appetite for alternative investments all but evaporated as many hedge fund managers were unable to meet redemption requests or make good on the promise of absolute returns.

Now, investors are beginning to show renewed interest in hedge funds, based on the attendance at several recent cap-intro events. At the beginning of April, for example, 120 investors attended a gathering in New York hosted by Credit Suisse. In late March, the bank hosted a similar event in London that drew 140 investors.

The turnout at both events was "more than we expected," said Robert Leonard, Credit Suisse's global chief operating officer for capital services. Attendance has jumped 40-50% compared with late 2008, he said, and is on par or slightly ahead of early 2008. In the coming months, Credit Suisse has additional cap-intro events scheduled for Boston, Geneva, Zurich, Paris, Sao Paolo, Rio de Janeiro and Hong Kong.

Merrill Lynch hosted a cap-intro gathering in New York last month that also drew a good crowd. "Some very senior people from big fund-management companies attended," said one market player who was at the event.

Morgan Stanley organized an event in New York last month that was described as "standing room only." It featured a host of marquee names, including Tudor Investment and Galleon Group.

"Investors are less interested in unknown, untested managers," said Sharon Solomon, who heads capital introductions at Royal Bank of Canada in New York. "They are generally not looking for quantity but quality, and are asking for longer performance records."

Just last week, RBC hosted a cap-intro event in New York showcasing natural-resources managers, most of whom are seasoned players. Later this month, the bank will organize a London event featuring a number of strategies it believes are suitable for the current market conditions.

Credit Suisse's Leonard expects established managers with long track records to benefit from investor anxiety. According to a market player, a Credit Suisse event in Zurich last month featured Arkos Capital, DragonBack Capital, GLG Partners, Marble Bar Asset Management and NewSmith Asset Management - all established firms.

But Sal Campo, a partner at Conifer Securities in New York who previously headed capital introduction for Citigroup, said prime brokers are playing up big-name fund managers at cap-intro events because those are the banks' most profitable clients. "It's less of a function of large managers looking for money - as they've always looked for new money - and more of brokers having to focus all their resources on their big clients who pay their bills," Campo said.

It's too early to say whether the flurry of cap-intro events will lead to a spike in allocations. It typically takes 3-6 months for prospective investors to conduct due diligence on a fund.

Credit Suisse was one of the few prime brokers that didn't cut back on cap-intro resources during the economic crisis. "It was a calculated bet we made at the end of 2008," Leonard said. At the request of investors, Credit Suisse has used recent cap-intro events to highlight liquid strategies, including global macro, commodity trading and actively traded long/short equities.

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