10/09/2013

Crowd-Funding Meets Hedge Fund Marketing

Inspired by the JOBS Act, a business that maintains a database of 70,000 wealthy individuals is taking a crowd-sourced approach to raising money for hedge funds.

InvestedIn Alpha, led by programmer Alon Goren and asset manager Frank Troise, is signing up new and emerging fund managers for a service that would widely broadcast their offerings to names in the database. The operation doesn’t purport to play an active marketing role, but rather functions as a kind of virtual capital-introduction service. As a result, managers will be charged a flat monthly fee of $1,000, instead of a “success fee” based on the amount of fresh capital they take in.

To launch the business, Goren and Troise formed a joint venture with CrowdFunder, a Venice, Calif., firm led by Chance Barnett that has used crowd-sourcing to raise more than $15 million for small companies. CrowdFunder, which will host the service on its website, has its own set of investors it can bring to the table.

Separately, Goren and Troise are using InvestedIn Alpha to cater to large, established fund operators looking to diversify their sources of capital. Those managers would carve out feeder funds specifically for clients they pick up via the service — and pay traditional marketing fees. Goren and Troise plan to launch that business in the first quarter of next year, initially with 4-6 offerings.

Through an affiliate, Goren has used crowd-funding to raise a total of $32 million for early-stage companies and charities. The JOBS Act, which took effect Sept. 23, lifted an 80-year-old ban on advertising by private funds. That cleared the way for Goren and Troise to target managers of hedge funds and private equity vehicles.

A key selling point is that all of the individuals in their database are accredited investors. While the JOBS Act permits managers to market to the general public, they’re still allowed to accept capital only from accredited investors — those with at least $1 million of net assets excluding their primary residences — and deeper-pocketed “qualified” investors.

The joint venture with CrowdFunder appears to be attracting widespread attention from newer and smaller fund operators. It already has 20 clients on board, including Norfolk Capital and Regenedyne, and expects to have 100 by yearend.

At the same time, InvestedIn Alpha aims to recruit 15 large management firms representing a range of strategies. Goren and Troise envision raising $50 million to $75 million for each firm. They’re taking a slower approach with larger managers, in part because their funds may not be subject to the JOBS Act. Funds that trade substantial amounts of futures, for example, would have to be registered with the CFTC. And under current rules, CFTC-registered vehicles are banned from advertising — regardless of the JOBS Act. In that case, a manager might have to carve out a strategy that avoids futures trading if it wants to raise money via InvestedIn Alpha.

While the service for large managers will charge typical hedge fund-marketing fees, there will be no cost for investors — unlike feeder funds available through bank platforms.

Goren previously worked as a programmer at MySpace and IMBD.com. Troise started an investment operation in 1996 called Soho Family Office, which ran money for multiple families. The firm had $3.2 billion of assets at its peak before winding down in 2011. Separately, Troise founded SoHo Asset Management, a once-$105 million fund shop he sold in 2011.

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