Interview with Ted Seides, Hidden Brook Investments

Ted is tTed Seideshe Managing Partner of Hidden Brook Investments, LLC, an advisory and private investment firm that helps asset managers and allocators with investment strategy and business execution. From 2002 to 2015, Ted was a founder of Protégé Partners LLC and served as President and Co-Chief Investment Officer. He began his career in 1992 under the tutelage of David Swensen at the Yale University Investments Office. Following business school, he spent two years investing directly at Stonebridge Partners and J.H. Whitney & Company. Ted holds a BA in economics and political science, Cum Laude, from Yale University and an MBA with honors from Harvard Business School. Mr. Seides, you recently published the book “So You Want to Start a Hedge Fund: Lessons for Managers and Allocators”. Tell us a bit about your personal experience that led to writing this book.
Ted Seides: Over the years, I met with hundreds, probably thousands, of start-up asset managers. From my first days in the business working for David Swensen at Yale through the last decade and a half at Protégé Partners, I spent nearly all of my professional career analyzing and investing in early stage managers.
Managers regularly came to me seeking advice when preparing to set out on their own. I tended to say the same thing over and over, yet it always was new information to the first-timer. I realized that I had acquired a body of knowledge from the many lessons I had learned that could be valuable to many.
I decided to write down some of the familiar lessons and share the knowledge as broadly as possible across the industry. My hope is that both allocators and managers can get a leg up on understanding the patterns of success that others have experienced before them. What are the key lessons you talk about in the book?
Seides: 1) Play to win
If you’re going to take the leap to start a fund, you can’t expect to succeed with “a guy, a Bloomberg and a dog.” That may have worked ten or twenty years ago, but it won’t work today. Competition with the big boys is fierce, regulation is more onerous, and allocators are more sophisticated than ever. Those taking the leap need to be prepared to invest real money, time, sweat and tears in the business for a number of years to have a fighting chance to win.

2) Be as thoughtful about the business as you are about managing money
Managers tend to be well schooled in investment analysis and portfolio strategy, but often are naïve about the time and effort required to build a business. Allocators often don’t appreciate all of the challenges a start-up manager will face either. Creating a clear business plan that lays out the path to success forces managers to consider crucial growth plans and helps allocators calibrate expectations should the manager encounter bumps along the way.

3) Clearly define roles in the organization
One of my favorite mistakes is the creation of “the two-headed portfolio manager monster.” New funds where the partners choose to share portfolio management equally have rarely survived the test of time. Managers should avoid the nearly extinct monster, and allocators ought to take a pause when they see one in the birthing process.

4) Be ready to sleep in the bed you make
Catering an investment strategy towards the perceived demand in the market can veer a manager from his real expertise. When seeking the advice of others in the pre-launch stages, managers should remember that the process is like preparing for a wedding; the many givers of advice intend to help, but they only get in the way of a blissful experience. For allocators, the art lies in divining if a manager’s heart is in the product he is presenting.

5) Play for the long-term
In all aspects of a start-up, it’s easy to be focused on short-term outcomes. Yet investing is a hard game to win in the long-term, and even harder if you get caught up in short-term results. Whether considering capital raising, strategy or performance, managers should do their best to keep their eye on the long-term prize. Why do startup funds make the same mistakes over and over again, especially considering that hedge fund managers – at least the legend has it – are the smartest guys out there?
Seides: The hedge fund industry does not have an ecosystem for entrepreneurship in the same way that the venture capital industry does, for example. Very few serial entrepreneurs exist and not many investors in early stage funds have been at it for long and have an incentive to share their knowledge broadly. As a result, new managers have nowhere to turn to learn the patterns of past successes and failures. They may talk to a number of friends and build a mosaic for the dos and don’ts, but they rarely can acquire a full suite of experiences. Without the benefit of experience, even the smartest guys can be babes in the woods. What tips do you have for allocators interested to seed a hedge fund? Are there any red flags that people do not think of?
Seides: The more time I spent as an allocator, the more I discovered similarities in my role to that of hedge fund managers. As a result, each of the lessons that apply to managers can have a shared benefit from allocators better seeking to understand the particular challenges facing start-up funds. There’s an entire chapter in the book dedicated to a few nuggets of wisdom for allocators – how to influence results positively, what terms to consider, how to be a favored partner in capacity constrained situations, and how to make sound investment decisions. How has the hedge fund startup scene changed over the last years and where do you see the hedge fund industry heading in general?
Seides: The industry is at a significant crossroads. It is maturing, competition is increasing, and succession issues will impact about two-thirds of all funds over $1 billion in AUM in the next 5-10 years. The confluence of these trends leaves an interesting opportunity for a generation of smaller funds to take their businesses to the next level. Startups are a real challenge entering a mature industry, but that’s nothing new. Those managers who take all the right steps stand a much better chance of achieving critical mass than those who don’t. One false step is enough for allocators to move on to the next prospective manager.
Despite the scrutiny in the media about recent performance, withdrawals from hedge funds have been miniscule relative to the size of the industry. With stock and bond prices near historical highs, hedge funds will have a significant place in well diversified portfolios for many years to come. Thank you for the interview.