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December 07, 2016  

Hot Startup Collides With Realities of Market

Genesis Capital is looking for a lifeline — the latest example of a promising startup stumbling on weak performance and sagging demand for hedge funds.

The Stamford, Conn., firm, led by former Millennium Management portfolio manager Robert DeFranco, launched in early 2015 with about $12 million of seed capital from Harvest Funds Management. After gaining about 8% last year, the equity manager attracted another $50 million from a single investor in the first half of 2016.

But Genesis was built in the image of Millennium and other big multi-strategy shops, deploying capital among multiple portfolio teams that enjoy wide latitude in analyzing and managing investments. It’s an expensive business model as hedge fund operations go — with a break-even point, in Genesis’ case, of about $200 million of assets.

The firm remains far off that mark. In October, the investor that committed $50 million abruptly withdrew, citing concerns about holding too concentrated a stake in the fund. Meanwhile, Genesis has attracted little, if any, fresh capital amid a year-to-date loss of about 10%.

Bottom line: The firm has a little more than a year before Harvest Funds Management can yank its seed investment. At that point, unless it attracts large sums of new money, Genesis will have run out of operating capital.

Now, DeFranco and his partners are in talks with Harvest about the future of the business. Among the options are closing down the firm while selling its intellectual property to another asset manager; moving the investment team to an established investment operation; or continuing on in some other form.

“We never worked so hard for so long for so little,” DeFranco said, reflecting the challenges facing fund startups these days. “Trying to launch your own fund is just a monumental task and may not be the best choice now. There are other people who are accumulating tremendous assets right now, where it might be much easer to go to work for a place that has billions of dollars under management already. I don’t know that startup hedge funds make a lot of sense.”

Added DeFranco: “Whether or not we are closing or restructuring, I am not quite sure as of this moment.”

Genesis was part of a bumper crop of multi-strategy fund launches that included Blackstone’s Senfina Advisors unit, Sol Kumin’s Folger Hill Asset Management, and Deimos Asset Management, which launched with backing from Ares Management and Ontario Teachers. All of those operations have struggled to make money, with Deimos throwing in the towel in September.

Senfina, which posted strong returns early on, was down a whopping 24% year-to-date at the end of November. And Folger Hill’s assets have dropped from more than $1 billion to about $750 million as of August amid a performance slump that includes a 3% decline last year and a year-to-date loss of 14%. Even the $34 billion Millennium, which boasts an annualized return of about 14% over a quarter-century, is up only 2.4% this year.

Before launching Genesis, DeFranco was a managing director at Millennium, where he co-managed one of the firm’s most successful equity strategies, along with 16 portfolio managers.

His partners at Genesis are industrial-stock portfolio manager Anthony Lorenzo, who previously worked at Royal Bank of Canada; chief operating officer Peter Schaffer, formerly of Zebra Capital; and former Jana Partners marketing director Michelle Russell Johnson.