(Bloomberg) — Joshua Young started his hedge fund less than a year ago. Last month, he caught a break when a university endowment handed him $20 million,quintupling his assets under management.
How did an obscure Houstonfund called Bison Interests land such a big fish?
Young, all of 32, had set up a profile on SumZero, a website that started out as a repository for buy-side research andhas more recently morphed into a mashup of LinkedIn and Match.comwhere institutional investors can find up-and-coming fund managers and choose them basedon the quality of their analysis. Using SumZero, Young bypassed an old-boy network that prizesrelationships, credentials and word-of-mouth referrals. The company says it has helped generate hundredsof introductionsbetween the more than 12,000 fund managers with SumZero profiles and the 270 institutional investors now using the site, which include the familyoffices of several big tech executives.
“You can really get a sense of quality by looking at someones performance, looking at their research, looking at their profiles,” said Divya Narendra, SumZero’s co-founder and chief executive officer. “A lot of guys that are really smart dont have a brand, dont have a huge network and we can help them build that network out.”
SumZero is one of many”fintech” startups vowing to bring transparency to Wall Streetandis a long way from upendingthe existing order.But the New York-basedcompany is starting to win respect bysurfacing smallhedge funds with unique investment strategies.
Multiple studies haveshown that smaller funds tend to do better than larger ones, some of which have performed poorly during the recent market rout.But herd mentality and risk- avoidance prompts many institutional investors to steer their money to big, entrenched players. Firmswith more than $5 billion under management represent just 6 percent of all hedge funds but manage about 70 percent of the invested capital, according to Hedge Fund Research.
SumZero didn’t beginas a Wall Street matchmaker. Narendra, who previously worked atCredit Suisseand hedge fund Sowood Capital, founded SumZeroin 2012 as a place for buy-side analysts to share stock research. Analysts can only see others work if they post their own. Non-contributors pay anywhere from $10,000 to six figures a year for access to the research, depending on the size of their firm.
As the company signed up members, it began getting calls from institutional investors looking to use the site to scout promising fund managers. Narendra began seeing SumZero as a social network for the investment community. (He was no stranger to the genre. In 2002, Narendra started Facebook forerunner ConnectU with his Harvard University roommates Cameron and Tyler Winklevoss. Two years later they filed a lawsuit against Facebook alleging that Mark Zuckerberg had used their source code to build his own site. The case was settled in 2008.)
Institutional investors interest in SumZero prompted Narendra to launch a service that connects investors with fund managers-“capital introduction” in Streetese. He reasoned that the feature would prompt SumZero members to post their best ideas in an effort to get noticed byIvy-League endowments, family offices, pension funds, funds of funds and other institutional investors.
Based in the trendy WeWork office with various other startups in Manhattan’s SoHo neighborhood, SumZero is a lean operation with just 13 employees. The Winklevoss twins invested about $1 million in the company in 2012, and there have been no subsequent funding rounds. Narendra says the companyis cash- flow positive.
SumZero was a revelation for Boothbay Fund Management analyst Frederick Richardson, who says the traditional process of finding and evaluating hedge fund managers is time-consuming and archaic. Even after he finds a likely talent, it can take weeks of e-mailing and calls to get all of the funds documents and other materials. Then he may travel to meet the manager in person, only to find five minutes into the interview that the fund isnt a good fit.
Richardson recently discovered an obscure hedge fund on SumZero. When he proposed an investment, his boss was skeptical, asking him how he could trust a random fund based far from Wall Street in the U.S. Midwest. Richardson showed his boss all of the funds documents on the website, and eventually got approval to move ahead. After initially putting in $3.5 million, he has gradually increased his investment to $20 million.
“Its pretty amazing that before you even meet the manager, Ive already done all the background research,” Richardson said. “It makes my job a lot more efficient. It saves me a lot of time.”
Steve Keating, the director of investments for St. Johns University Endowment of$650 million, appreciates that the fund managers on SumZero cant cherry pick their best research to present to potential investors. Theres a historical record of the return on the funds investment ideas, and it cant be erased, no matter how poorly it performed. Keating occasionally logsonto keep tabs on young managers he thinks may eventually go big, but hes dubious that truly talented fund managers would use SumZero.
For most investors, SumZero is an additional tool, not a replacement. Richardson said he wont be using the banks any less, in part because they have a much larger network of fund managers. Katherine Boas, the executive vice president of Carl Marks & Co., a 90-year-old merchant bank that invests in emerging managers, has reached out to a few hedge funds on SumZero but hasn’t made any investments.
“I think there will always be an element to this world based on relationships that even the best online tools are never going to be able to replace,” shesaid. “But as a way to centralize information in a clear way, its a pretty good start.”
The siteseems tailor-made for hedgies just starting out-like Joshua Young of Bison Interests. It was his unique strategy that caught the university endowments eye, according to its managing director, who asked not to be identified to discuss private information. Most of the universitys investments in natural resources were of the same ilk, with overlapping positions inmid- to large-cap energy producers. Youngs hedge fund offered a different proposition-investing in smaller producers that are cheaper and betting that their value will rise once oil prices recover.
Still, persuading the endowment board and university to investwithan untested fund manager took some doing, the managing directorsaid. No one gets fired for investing in a known firm like Greenlight Capital, he said, no matter how badly it performs. But if an investment in a small manager goes south, he said, the person who made the decision gets the blame.
