Holtzbrinck investment fund eyes small web plays

Thu Jan 13, 2011 6:40am EST
* Holtzbrinck launches 177 mln euro investment fund
* Fund will provide capital to internet start-ups
* U.S. venture capital firm HarbourVest is partner
FRANKFURT, Jan 13 (Reuters) - While small Internet start-up
companies have little chance of gaining investment in an age of
global players, one investment fund aims to give them a boost.

Holtzbrinck has closed its fourth fund -- and first in
partnership with fellow venture capital firm HarbourVest -- at
177 million euros ($231 million). It will provide capital to
companies in its portfolio and to other media companies.

Martin Weber is a partner of Holtzbrinck Ventures
Investment, the venture capital arm of the Georg von Holtzbrinck
Publishing Group, which has been investing in small Internet
start-ups based in German-speaking Europe since 1998.
"We invest in small Internet start-ups, mostly consumer sites,
because it is financially attractive to do so, but also
because it is fun," he told Reuters on Wednesday.

"These are young, creative companies and it's fun to be a
part of their innovations and create growth."
He said the Internet was the most capital-efficient medium
because it was possible to set up companies with little capital.
The venture capital firm's 80 investments since 1998 include
some of the most successful German internet companies, such as
social networking website and Facebook peer StudiVZ, and fashion
retail site Brands4Friends, which was sold to eBay (EBAY.O) for
150 million euros in December.

Other main holdings include web advertising firm Groupon,
which offers leisure deals and merged with Citydeal in May 2010.
"We decided to invest in Citydeal because we thought the
concept would go down well in other countries," Weber said.
Holtzbrinck also provides capital to dating sites such as
Germany's eDarling, which it chose for its "innovative approach"
to online match-making.

Asked about the success of dating sites in its portfolio,
Weber said: "We need to think in terms of the overall portfolio.
Revenue that high-performing companies bring in must suffice to
cover losses made by other companies in our portfolio."
Asked why Holtzbrinck had entered a fund partnership with
HarbourVest, Weber said: "We wanted to create a wider basis,
which is why we got a partner involved.
Source: Reuters.Com

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Hedge Fund Investment Structure

Today the term hedge fund is a generic label for all of the diverse strategies used by hedge fund managers. The term itself is said to have been coined to describe what Alfred Winslow Jones did in 1949 when he combined a leveraged long stock position with  a portfolio of short stocks in an investment fund with an incentive fee structure. Since then, the scope of the term hedge fund has expanded beyond this specific strategy (a leveraged long portfolio “hedged” by short stock sales) to describe funds engaging in a range of investment strategies.

The commonality of these funds is their commingled investment structure, typically a limited partnership or offshore corporation. Like the term mutual fund, which describes only the investment structure and does not indicate whether the fund invests in stocks or bonds or in the United States or abroad, the term hedge fund does not tell an investor anything about the underlying investment activities. Thus, a hedge fund acts as a vehicle within which one or more of the investment strategies.

It should be noted that hedge funds differ from traditional mutual funds in the range of allowable investment approaches, the goals of the strategies they use, their typically private nature (they do not have to be registered with a regulatory agency such as the Securities and Exchange Commission), methodology of manager compensation (management fee plus an incentive or performance fee), breadth of financial instruments traded, and range of investment techniques employed.

This distinction, however, is becoming blurred as mutual fund regulatory changes and investor demand have allowed certain hedge fund strategies to operate under the mutual fund structure. Since the term hedge fund describes an investment structure and has been applied to a range of strategies, in order to understand
particular hedge funds it is necessary to separate the structure of the investment (its legal form and method of operations) from its investment strategy (how it invests capital in the financial markets to achieve its goals).

The investment structure is the legal entity that allows investment assets to be pooled and permits the hedge fund manager to invest them. The investment approach the manager takes is known as the hedge fund strategy or alternative investment strategy. The structure establishes such things as how manager compensation is determined; how many investors he or she can accept; the type of Fund of Funds in the Hedge Fund Industry investor allowed to invest in the hedge fund; and what the investors’ rights are related to profits, taxes, and reports. The elements that make up the strategy include how the manager will invest, the markets and instruments that will be used, and the opportunity and return source that will be targeted.

Legal Structure
Hedge funds and funds of funds have very similar investment structures.These come in a variety of legal forms depending on where they are located and the type of investor the fund organizer wishes to attract. To avoid entity-level tax, in the United States they are usually formed as limited partnerships, or in some cases, limited liability companies or trusts.

[..........]

Number of Investor and Minimum Investment Size
Hedge funds and funds of funds are usually private investment vehicles. In the United States this means that under one of the available exemptions the securities that hedge funds offer to investors (the limited partnership or limited liability company interests) need not be registered with the Securities and Exchange Commission (SEC) to be offered to the public. The exemptions specify certain requirements in order to avoid registration. These generally deal with the type of investor allowed to invest in the fund, the number of investors that
can invest (the previously mentioned “slots”), and how the investors can be solicited. Most U.S. state securities laws (blue sky laws) also contain exemptions from registration for limited or private offerings.

[..........]

Reporting and Disclosure
Hedge funds and funds of funds have historically calculated and reported performance on a monthly or quarterly basis. The level of fund of funds reporting is dependent on the information provided by the underlying hedge funds. In response to increased investor demand, some funds now report weekly, and even daily, estimates, but the industry as a whole normally provides monthly performance results. Furthermore, there is no standard reporting format. Some hedge funds provide faxes of percentage profit or loss. Others send detailed statements to each investor with a letter describing the fund’s investment activities and results.

[..........]

Liquidity
In a hedge fund context, liquidity refers to the timing and notice period required for investors to redeem their investment and have their money returned from the fund. For example, quarterly liquidity means that an investor can take money out of the funds at the end of each calendar quarter, while monthly liquidity means that an investor can get out at the end of each month. One mistake that many investors make is not factoring in the “notice period” they are required to give before they can redeem their investments. Some hedge funds cannot generate cash for investor redemptions on short notice and require notice periods that range from 30 to 90 days.

[..........]

Lockup
A lockup period is the length of time that investors must remain invested before their investment can be redeemed or becomes subject to the standard liquidity provision. The lockup period for hedge funds ranges from a few months to one or more years, but usually the lockup in U.S. funds is one year. It works like this: If the liquidity is quarterly and the lockup is one year, then an investor who invests on January 1 cannot redeem until December 31 of the same year. Once a year has passed, liquidity becomes quarterly, so the next date when a redemption would be allowed is March 31 of the following year.

The liquidity of underlying hedge funds will influence, if not determine, the liquidity provisions of a fund of funds. In order to meet its own redemptions, a fund of funds must redeem from the underlying funds in which it has invested in order to have cash available unless it arranges for borrowing to meet redemption demands.

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Hedge Fund Investment Options

A fund of funds (FOF) is a fund whose investment strategy is to allocate capital to two or more hedge funds. Investors purchase an interest in a fund of funds, and their assets are commingled with those of other investors. This pool of money is invested with a number of hedge funds.

It is estimated that there are more than nine hundred funds of funds in operation today, and there are many more being developed. As a group, they represent more than one-third of assets invested in hedge funds.

For most investors, the fund of funds provide an efficient and fund of funds (FOF) is a fund whose investment strategy is to allocate capital to two or more hedge funds. Investors purchase an interest in a fund of funds, and their assets are commingled with those of other investors. This pool of money is invested with a number of hedge funds.

It is estimated that there are more than nine hundred funds of funds in operation today, and there are many more being developed. As a group, they represent more than one-third of assets invested in hedge funds.

For most investors, the fund of funds provide an efficient and when combined with a portfolio of traditional assets. However, the decision to make an investment in hedge funds is only the first step in a multitiered process. Investors must then determine the most appropriate vehicle for accessing hedge fund strategies. This second point presents a hedge fund investor with a number of potential difficulties: with which strategies and which managers should they invest, how much capital should be dedicated, how is the structural risk associated with hedge fund investments controlled, and how will the investments be monitored?

A number of investment options are available. The four principle options are:
(1) investing directly in a single hedge fund,
(2) building a customized portfolio that combines a number of hedge funds,
(3) investing through an index fund, and
(4) investing in a fund of funds.

Direct Investment
One approach is for investors to make direct investments into hedge funds they select. Investment minimums for hedge funds, that is, the minimum amount required to invest with a manager, typically range from half a million to several million dollars. Investing directly, therefore, requires significant assets if an investor wants
good diversification by manager and strategy. Investing in one or a handful of managers increases the burden of manager selection and increases the risk of substandard performance results because of the concentration of investment.

Customized Portofolio
A second method of direct investment is to create a customized portfolio of hedge funds managed specifically to meet the needs of the investor. The portfolio follows a fund of funds investment strategy, but does not accept outside capital; it is managed internally, either by the investor or in conjunction with an outside investment adviser or consultant. This approach requires the same investment expertise as managing a fund of funds. Because of the cost of hiring experienced investment professionals, plus the expense of legal, accounting, and administration, this is a solution best suited for a large-scale investor who has the resources and commitment to maintain the ongoing analyses and due diligence necessary to prudently manage a fund of funds.

Index Fund
A third way to invest in hedge funds is to access the hedge fund industry or specific strategy returns by investing through an investable hedge fund index. Investing in an index is more cost effective than other approaches and is available to both individual and institutional investors. The goal of the index is to deliver the market return of the hedge fund industry or that of one of its underlying strategies. Unlike a fund of funds, such an index is not actively managed but follows an allocation methodology designed to mimic the collective exposures of the greater hedge fund industry.

Fund of Funds Investment
The fourth approach is to invest in an existing fund of funds. Funds of funds can provide an efficient solution to the challenge of investing in hedge funds. Indeed, they have become the most common means of access for investors who are looking for diversified exposure to hedge funds, but who do not have the resources
to research, monitor, and manage multiple hedge funds. For many investors desiring access to hedge fund returns, investing in a fund of funds is an obvious choice. It should come as no surprise, then, that the absolute number and total assets flowing into fund of funds vehicles have contributed greatly to the rapid growth of the hedge fund industry.

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