Where hedge fund traders go to escape: "I receive 30 calls from portfolio managers a week"
Benny Menashe is a man in demand. Around 30 times each week, his phone rings with a portfolio manager who wants to work for his fund. Menashe says this is three times the frequency of such calls a few years ago.
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Menashe runs Falcon Investment Management, a London investment management firm that operates "pods" in the style of multistrategy hedge funds, but with a few key differences. Firstly, it's tiny, as are its pods. Secondly, Falcon operates a "first loss" platform, in which traders/portfolio managers stump up their own money and lose it again if bets go wrong.
First loss platforms are nothing new, and Menashe is not alone in running one. Tim Pearey, the former co-chief executive of Odey Asset Management (who recently appeared in court saying that Crispin Odey was a "sex pest"), also briefly ran a first loss platform - AB Asset Management, which seemingly closed last year. Maybe he should have hung on a bit longer.
Traders on first loss platforms put in their own money, which is matched or exceeded by investors in the platform itself. When the traders on the platform make a profit, they keep a lot of it (Menashe is offering them 70-80%; Pearey was offering 50-60% of profits, payable on a monthly basis). But if they make a loss, it comes from the money they've put in.
"A trader who has $1m to invest and who wants to scale up can come to us and run a regulated hedge fund under the Financial Conduct Authority," says Menashe. "If he brings $1m of his own money, he can get 10x that from us." However, if that same trader loses $500k, Menashe and his colleagues at Falcon will start with some heavy risk management. If he or she loses $800k, he will be stopped out and left with only $200k of his own money.
For traders burned by big funds, the model might seem appealing. But it also comes with a cost. Falcon Investment Management charges an average fee of 8% per annum on the capital it provides to traders on its platform. "If you generate 6% returns a year, it's probably not for you," says Menashe. There can be flexibility: sometimes fees are lower in return for a lower share of profits.
This might be why comparatively few of the 30 portfolio managers each week who call Menashe appear to join the platform. Two or three years ago, he says the "multistrategy fund" run by Falcon on the basis above had five teams; now it has 20.
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