07/29/2009

New Firm Targets Stakes in Side Pockets

Two fund managers have teamed up to buy stakes in hedge fund "side pockets" from impatient investors willing to sell their shares at steep discounts.

Andrew Lawrence and Jonathan Lewis, who formed Rosebrook Partners in New York, are targeting hedge fund shares tied to illiquid assets or long-term investments that could take years to unwind. They are looking to pick up shares on the cheap from investors unable or unwilling to wait for the side-pocketed assets to be liquidated.

Rosebrook has raised between $150 million and $200 million so far, managing the money in separate accounts for institutional investors that include an investment manager, a life insurer and an endowment. The firm aims to raise another $200 million for a private equity fund that would follow the same strategy.

Before launching Rosebrook, Lawrence worked at San Francisco-based Pantera Capital, where he was co-manager of the $800 million PCM Global Macro Fund. He left Pantera in March. He previously was chief executive of Longitude, a New York derivatives business that he sold in 2005. He also founded Rubicon Capital, a global-macro hedge fund operator in New York.

Lewis most recently was managing partner of New York-based Folio Holdings, an opportunistic fund that invests in multiple asset classes. He earlier founded Metropolis Capital, a $40 million venture-capital firm in New York.

At Rosebrook, the partners' initial goal was to raise $200 million for a private equity fund before the July-August European vacation season, when investors typically are unavailable. When their fund-raising efforts lagged, they switched to a managed-account platform. They now hope to have an initial close for a private equity fund in October, though they could end up sticking with separate accounts.

In buying discounted hedge fund shares, Rosebrook is targeting investors who want to redeem either because they need the cash or they have grown impatient with a manager's "style drift." Some managers have angered investors by walling off large chunks of their portfolios in side pockets or other special-purpose vehicles that operate more like private equity than hedge funds. Rosebrook is picking up hedge fund shares at discounts ranging from 25 cents to 75 cents on the dollar.

Lawrence and Lewis, themselves hedge fund investors, came up with the idea for Rosebrook late last year, when they discovered they had no options for selling their own side-pocketed investments.

Rosebrook won't invest in just any side pockets. It is specifically targeting those with underlying investments that will take 3-5 years to sell. That's why the planned fund would be structured as a private equity vehicle, with a six-year lockup, a 1.5% management fee and an unspecified performance fee.

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