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May 29, 2019  

Texas Emerging as Hedge Fund Hot Spot

Texas is attracting a disproportionate number of new managers.

In the past five years, the number of fund-management firms in the Lone Star State has jumped 27% to 136, according to Hedge Fund Alert’s Manager Database. During the same period, the total number of firms operating in the U.S. has increased 8% to 3,172. Meanwhile, manager rosters in the hedge fund bastions of New York, Connecticut and Illinois have shrunk. The Manager Database captures firms reporting to the SEC either as registered investment advisors or so-called exempt managers.

Based on its share of hedge fund businesses, Texas now ranks fifth, while Illinois slipped to sixth position with 116 firms, down from 121 five years ago. New York ranks first with 1,056 managers, a drop of 47 since 2014 but still almost a third of the nationwide total.

Houston has long been a magnet for energy-focused funds, but much of the recent launch activity has centered around Austin and Dallas, encompassing managers pursuing a range of investment strategies. The number of hedge fund firms in the Austin metro area has more than doubled since 2014 to 23, while the count in the Dallas metro area has increased to 73, from 63.

Several well-pedigreed managers are in the process of setting up shop in Dallas. They include Brad Stephens, who recently left a portfolio-manager post at Scopus Asset Management in New York to form Six Columns Capital. He aims to raise at least $100 million for a consumer-stock vehicle that could begin trading before yearend.

Other Dallas-area startups include Avidity Capital, a healthcare-focused shop led by former Highland Capital executive Michael Gregory and former Citadel portfolio manager David Witzke; BWCP, led by former Citadel portfolio manager Brandon Wier; and Sagefield Capital, led by former Citadel portfolio manager Mark Schlueter and former Highland executive Jonathan Lamensdorf.

A number of factors have contributed to the expansion of Texas’ hedge fund sector, including a lower cost of living compared to states on the East and West Coasts. And Texas is one of only a few states that don’t have an income tax. Both of those factors translate to lower startup costs for hedge fund managers, who can offer leaner pay packages than their peers in California and New York.

“With the continued downward pressure on fees, it makes a lot of sense, especially for certain strategies, to be able to launch in a more affordable area,” said the chief financial officer at a Texas fund shop. “Sure, there are disadvantages to not being in a major commercial hub like New York or Chicago or San Francisco. But there is still an abundance of wealth in the area.”

What’s more, ultra-wealthy individuals and families in Texas are more inclined than those in other states to hire local investment firms to run their money.

“People there prefer to give their money to local managers and keep it in their own economy, as opposed to some outsider showing up from New York,” a family office advisor said. “If you like living in Texas, even if you’re not from Texas, it’s a very welcoming place. If you move from somewhere else and embrace what Texas is all about, they’ll like you. And maybe they’ll give you money.”

Industry professionals also point to the state’s richly funded endowments and pensions — including Texas Teachers, University of Texas and Texas County & District Retirement — which have long been known for aggressively allocating to hedge funds. Last year, the $28 billion Texas Employees Retirement formed a joint venture with Pacific Alternative Asset Management to deploy $3 billion of seed capital to new and emerging hedge fund managers.

The state’s hedge fund field is led by HBK Capital, with gross assets of $29.7 billion; Maverick Capital ($13 billion), Carlson Capital ($12.9 billion) and Crestline Investors ($5.5 billion). Among the few notable liquidations in recent years was Lee Hobson’s Highside Capital, a once-$5 billion firm in Dallas that shut down in 2013.

But several Texas investors noted that the demise of Highside spawned at least a half-dozen launches in the Dallas area, including some that were seeded by Hobson. Among them: Andrew Sinwell’s N2 Capital, Joseph O’Brien’s AlphaMine Partners and Jonathan Gattman’s Cloverdale Capital.

More recently, the burst of startup activity has caught the attention of hedge fund service providers. Among them: prime brokers BTIG and Jefferies, each of which has added staff in Texas this year. BTIG installed Steve Stich in Dallas to oversee its prime-brokerage operations in the region. Stich, who has worked at Tarpon Capital and U.S. Trust, joins prime-brokerage salesman Joseph Vacca and about a dozen traders who are stationed in Texas.

Jefferies hired Alice Kennon from Bank of America to beef up its prime-brokerage sales efforts in Texas. Kennon, who divides her time between Texas and California, is working with Katie Dillard, who oversees capital-introduction functions in California and the Southwest.