12/19/2012

Quant Traders Getting Crack at Seed Capital

A new seeding vehicle run by quantitative manager Horton Point Capital would invest an average of $10 million apiece in up to 20 systematic-trading shops.

The New York firm wants to raise $50 million to $100 million of equity for its Soundview Emerging Managers Fund. In an unusual twist for a seeding operation, Horton Point would boost the fund’s capacity by borrowing $1 for every $1 of equity. It already has identified four “day-one” managers to back: a currency trader, a U.S. equity manager and two commodity-trading advisors. The plan is to begin investing early next year, taking a cut of the managers’ revenues in exchange for seed capital and operational support.

The fund would be unusually liquid as far as seed vehicles go. Backers would recoup their initial investments within three years — compared to five years or more for many seeding businesses. The fund would maintain its positions in the underlying managers for at least five years, at which point they would have the option of buying out Horton Point. Meanwhile, investors in the Soundview fund would be permitted to redeem at any point if the net asset value falls below 90% of the initial valuation.

Another unusual feature: Horton Point doesn’t charge a management fee. It will keep 20% of investors’ profits, but only after returning their initial investments.

The fund aims to deliver annual returns in the mid-20% range, reflecting both investment gains on the seed capital as well as revenue sharing with the underlying managers. The four day-one managers have been generating average annual returns of 8-16%. The fund will target managers who trade a range of assets using trend-following or mean-reversion analysis, among other strategies.

Horton Point was founded in 2006 by Dimitri Sogoloff, who previously co-founded Alexandra Investment. That firm peaked at more than $2 billion but shut down following the financial crisis.

Horton Point currently manages a little less than $100 million, using programmatic-trading techniques similar to those of the managers it wants to seed. The firm’s management team includes Alex Kaganovich, who once oversaw risk management for proprietary fixed-income trading at Lehman Brothers, and Marc Weiden, who previously held operations roles with Merrill Lynch’s hedge fund group and Soros Fund Management.

Like other hedge fund seeders, Horton Point is looking to capitalize on the difficult fund-raising climate facing even the most talented managers. It is scouting former bank proprietary traders and hedge fund portfolio managers who want to launch their own vehicles — particularly those who invest in highly liquid securities via strategies that are uncorrelated to mainstream markets. Candidates for seed investments will have the potential to develop viable businesses within three years.

Limited partners in the Soundview fund will have an opportunity to invest directly in underlying managers under the same terms as the commingled vehicle.

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