What is a Quant Investment "Seeding Platform"?

Broadly speaking, there are two types of quant hedge fund: the single strategy hedge fund, which uses just one type of strategy - i.e., equities, energy, macro - and the multi-strategy hedge fund, which uses a range of the aforementioned strategies to diversify their risk and profits.

Most hedge funds start out single strategy. Some of these will evolve and diversify over time to become multi-strategy; they might hire another trader or portfolio manager with a different strategy experience to open a new market, or else someone already in the firm may start to test out new types of trades.

However, over the course of the last ~ten years, there has been an exponential growing emergence and adoption of a variety of set ups known as "seeding platforms" - where allocators grow multi-strat set-ups from day 1.

So, what is a seeding platform?

At its heart, a seeding platform is a vehicle for an investor to allocate capital to individuals who seek to generate a return on that capital in exchange for a management fee. This is no new concept. However, the style of the set up and the 'added extras' is what is defining most of these seeding platforms nowadays.

In essence these set-ups offer experienced portfolio managers, who want to set up their own shop, capital, and other perks in exchange for equity and/or exclusivity. This model offers managers with a proven track record the opportunity to build their own business, often leveraging battle tested infrastructure, greatly reducing the personal risk.

For the most part, to be attributed the title of seeding platform, there is usually a baseline element of 'stuff' that should be provided - data, prime brokers, exchange connectivity, regulatory umbrella (or help with set up), office space, head count expense - the list goes on. The range of what is provisioned differs greatly, and in some cases the set up can look as familiar as working as an internal employee for a state-of-the-art hedge fund.

These platforms offer a partnership that will de-risk the transition from employment to entrepreneurship while giving managers the chance to create significantly more income from their work than they most likely would in a classic employment scenario.

There are several types of seeding platform offering a variety of interesting benefits for portfolio managers. Below summarises the three main types.

Institutional multi-strategy funds

There are a handful of very large (>$20bn) institutional multi-strategy platforms operating a seeding model. As part of the perks of signing, they offer managers state of the art infrastructure and considerable start-up capital. The shared resources available (data, exchange connection, prime broker relationships, regulation umbrella etc.) makes it very easy to get up to speed very quickly.

While these firms will seed portfolio managers to establish a new business, these often start as internal teams, meaning you will start your partnership as an employee, with a view to launching your own firm, sponsored by them, later down the line. The advantage here is that you do not need to deal with all the day to day business management in the infancy of your business, meaning you can focus on deploying your strategy and building your track record.

Team hires are commonplace here, with emphasis placed on analysts/researchers to help scale the business faster or diversify the book. Quant developers are often also hired into the team for tooling or backtesting. Platform and data engineers are usually provisions are part of shared resources should bespoke solutions to exchanges, brokers or data providers be required. Team expense is costed up in the initial terms sheet.

Depending on the firm, IP can either be co-owned or owned by the investor. This can be a potentially very import consideration for anyone looking to ensure they retain IP from the start.

While these firms onboard multiple new portfolio managers each year, there are typically very strict limits around drawdown and there is a very large investment in due diligence and risk when assessing the investee. The biggest considerations for any manager looking to engage with these firms nowadays is scale of live track record coupled with Sharpe - given the size of these institutions, individuals need to have a mid-high double digit PnL, with ability to scale without greatly increasing risk, to be an interesting proposition.

For those managers who do spin out to form their own business, there may be help with raising additional external capital. Not only can a network be leveraged but this will often come with the additional help from the marketing department.

These funds are perfect for portfolio managers who want the ability to build and scale a business quickly, with autonomy, entrepreneurship, and a better formula, but without all the overheads of running it on day one.

Fund of funds

There is a good number of mid-sized ($5-20bn av.) multi-strategy firms, the Fund of Funds, that are focused on forming perhaps more entrepreneurial partnerships from inception and often have a larger risk appetite than the above-mentioned institutional firms. The relationship is an investor/investee style one, where the investee will be offered support in the form of capital, coaching, access to technology (sometimes), help with regulators, introduction to prime brokers, back-office functions and often use of office space.

However, there is a big range in what kind of support you might expect as a portfolio manager in these types of funds. The relationship may range from a simple exchange of cash for equity and/or exclusivity and little else; others will offer a partial or full technology ecosystem to help you set up your strategy, or you may have to build the infrastructure yourself. This can be a big consideration, particularly for systematic strategies, where implementation without solid infra can take over 12 months.

Initial team hires are also commonplace here - with managers often hiring researchers or analysts from day one, but also very likely quant developers/data scientists and software engineers, perhaps under the title of CTO. As things scale, COOs are usually brought in. All these hires will be costed out over a timeline on an initial business plan.

IP is usually owned by the individual manager given they own the firm. This can be a big advantage for those looking for full IP retention.

Some of these institutions will help with capital raise processes for scaling strategies further after the initial lock-up period. This is not insignificant, given the network of other investors and a marketing team which can sometimes be provided.

Partnering with a fund of funds can be the best option for those who want to run their own business and put their name on the door from day one.

Family office

The third category of seeding platform clusters around managing the wealth of high-net-worth individuals in the form of family offices (<$5bn av.). Family offices will offer seed funding, and some might help with some back office, but they typically have less infrastructure than either of the above-mentioned platforms. Regulation will usually fall on the portfolio manager to obtain and there are possibly no relationships with exchanges, prime brokers of data vendors to be leveraged.

Since these are usually working with individuals or families, who may have preferences for particular types of investment strategies or areas of investment, it is usually important for the manager to align closely with their interests and personality. Making sure the family office truly understands your investment process and are on board to support for the long term is critically important. There will typically be strict criteria around what can be done with the money, which can prove limiting as things scale, especially if an additional external capital raise is sought - the family office may not want to partner with a particular investor. You are also at risk of the family office pulling capital due to personal reasons.

Team hires can be tricky in the first instance here if you are looking for them to be funded by the family office. Often the initial scale of the team will be smaller in the first instance until performance is demonstrated. Being able to be autonomous is important. Managers will need to be able to take care of the business.

IP is usually owned by the individual manager, but some family offices will want co-ownership or full retention.

Working with a family office can be a great partnership, however it can also come with far more risks outside of just the market, so finding and vetting the right one is highly important.

To Sum Up

For those with an entrepreneurial flare, who want to build their own business and who have a good risk tolerance, seeding platforms can be highly rewarding, both financially and from an ownership perspective. More allocators are launching new platforms year on year and there appears to be a paradigm shift happening, where allocation of capital via this less traditional medium is becoming more mainstream than it has been in previous generations. This is a good thing for those with the track record, qualifications, and aspirations to launch something more entrepreneurial - though for those without a clear, auditable track record attributed to themselves, securing a ticket with one of these platforms can remain a big challenge.

If you are interested to learn more about what it takes to join a seeding platform, get in touch at info@thurnpartners.com