May 21, 2010 / 7:59 AM / 10 years ago

Investcorp eyes overlooked hedge funds

LONDON (Reuters) - Medium-sized hedge funds are slipping under the radars of nervous investors but can offer great investment opportunities, says Investcorp, which is considering offering capital to these portfolios.

Deepak Gurnani, the Bahraini investment firm’s head of hedge funds, said many funds running $400-$500 million (277-347 million pounds) are looking for a large-scale investor who can boost their assets and give succour to other institutional investors.

Deals would effectively act as a form of secondary seeding, lifting a fund past a difficult moment in its growth. Seeding is normally conducted near the start of a hedge fund’s life.

In return Investcorp INVB.BH, which currently seeds much smaller managers, would take a share of the fund’s revenues.

“We’re getting approached by funds running $400-$500 million, saying ‘we need to go to the next level and we need a partner like Investcorp, we want to get institutional money’,” Gurnani said in an interview late on Wednesday.

Investors have been looking to bigger and bigger hedge funds for some time in the belief their large infrastructure gives greater protection against fraud, while they may also have more clout with prime brokers than small funds.

While $50 million or $100 million was previously seen as the minimum size that many investors would look at, Gurnani said even funds at around half a billion dollars in assets are now struggling for institutional cash.

These are either funds that have grown in size but more recently stagnated as assets have proved hard to come by during the crisis, or funds that have shrunk in size as investors have left.

According to figures from research firm Celent, just 5 percent of hedge funds ran more than $500 million last year, compared with 18 percent in 2008, illustrating the contraction in the industry during the credit crisis.

“It’s something that we’re seriously looking at, we’d love to work with these funds, we may put (money) in,” said Gurnani, who helped set up the fund of hedge funds unit in the mid-1990s.

“There are lots of funds with a good track record languishing with $400-$500 million. Institutions don’t have the time or resources to look at them.”

Meanwhile, many banks have scaled back their hedge fund seeding businesses since the credit crisis, providing less competition for those picking which fund they want to back.

Investcorp already provides seed capital for funds set up by managers leaving other hedge funds, although Gurnani said the firm had so far not committed money to medium-sized funds.

Gurnani also said he likes strategies such as credit, distressed debt, convertible arbitrage and long-short equity funds with low exposure to overall market movements.

He also favours global macro funds — which bet on moves in currencies, bonds, commodities and equities — because he believes the very wide spread of opinion about how financial markets will fare offers great opportunities to skilful managers.

Bahrain- and London-listed Investcorp, which once floated luxury goods brands icons Gucci and Tiffany, runs around $4.5 billion in assets in its fund of funds unit.

(To read the Reuters Funds Blog click on blogs.reuters.com/fundshub; for the Global Investing Blog click here)

Editing by Jon Loades-Carter

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