Hedge fund start-ups face tougher fundraising as industry giants dominate

Launching a hedge fund has become increasingly difficult as investors direct more capital towards established multi-strategy firms, leaving even experienced portfolio managers with prominent backers struggling to attract significant external assets, according to a report by Bloomberg.Sachin Gupta, 37, launched Covara Capital last year after the closure of the hedge fund where he had worked. With $250m in seed capital from Blackstone, the former portfolio manager might have expected to build a business capable of attracting billions of dollars from institutional investors. However, after a year of operations, Covara manages approximately $265m, only marginally above its initial backing.Gupta's experience reflects a broader shift in the hedge fund industry, where the growing scale of leading managers is making it harder for new firms to compete for institutional allocations. Adam Blitz, a veteran hedge fund investor whose Evanston Capital Management has allocated around $4bn to emerging managers, estimates that the number of new launches has fallen by roughly half over the past five years.The industry's largest firms have continued to attract substantial inflows, with the top 10 hedge fund managers each overseeing at least $75bn. Millennium Management, led by Izzy Englander, recently raised $22bn, taking it closer to the $100bn mark and reinforcing the appeal of established platforms with a record of delivering consistent returns.The concentration of capital and investment talent among a handful of large managers is also raising concerns about market stability. Many major hedge funds pursue similar strategies, potentially increasing the risk of correlated selling during periods of market stress and reducing diversity across the investment industry.Historical data illustrates the challenges facing new entrants. Bloomberg calculations show that 12 hedge funds launched with more than $1bn in 2005, whereas only one firm had achieved a comparable launch by the end of September this year. Research compiled by Goldman Sachs indicates that hedge funds starting with at least $1bn have an 84% probability of surviving for five years, compared with a survival rate below 50% for those beginning with $25m. Smaller firms are also more likely to close within approximately three years.The fundraising environment is influencing career decisions among senior investment professionals, including managers who might previously have been expected to establish their own businesses.Kelly Granat, a longtime Lone Pine Capital executive who became co-chief investment officer before founder Stephen Mandel stepped back, chose to join Boston-based Atreides Management rather than launch an independent firm. Granat, one of the most senior women in the hedge fund industry, had spent two decades at Lone Pine and was regarded by industry contacts as a potential candidate to raise substantial capital independently.Others have abandoned plans to launch their own businesses in favour of joining established platforms. Geoffrey Lauprete, formerly chief investment officer at quantitative investment manager WorldQuant, left in 2024 with plans to establish Libero Capital. Blackstone and Paloma Partners had been in discussions about potentially backing the venture, but Lauprete dropped the project late last year and joined Steve Cohen's Point72 Asset Management, where he now leads its quantitative business.For those who remain committed to building their own firms, the process can involve lengthy fundraising periods and relatively modest initial commitments. Connie Lee, who left Tiger Global Management in 2023 intending to establish her own investment business, launched Felis Advantage in March after approximately three years. The fund raised $150m, supported by a large endowment, according to a regulatory filing and a person familiar with the business.One alternative for managers seeking to build their investment operations without relying entirely on external fundraising is to operate within a larger hedge fund's platform. Millennium has increasingly provided capital to emerging and established managers, in some cases committing billions of dollars to external funds. Some of these businesses manage capital exclusively for Millennium, while others retain the ability to raise money from additional investors.The model allows Millennium to recruit experienced portfolio managers and expand its investment capabilities without requiring every team to build an independent institutional investor base.Bobby Jain's Jain Global provides a prominent example of this approach. Jain established the multi-strategy hedge fund after leaving Millennium in 2023, building a business with approximately $5bn in assets across seven investment divisions. Earlier this year, Jain returned capital to all external clients and shifted to managing money exclusively for Millennium.