Hedge fund duo wants traders to risk their own money

investmentnews.com:

When hedge fund traders make money, they get a share of the kill. When they lose, it’s all pushed to the clients. 

Two former top executives at Steven Cohen and Crispin Odey’s investment firms are trying to turn this traditional model on its head.   

Andrew Lubin, previously chief executive officer of the London unit of SAC Capital Advisors, and Tim Pearey, former CEO of Odey Asset Management, said they have started a hedge fund that provides capital to traders if they put in their own cash and agree to lose their money first when bets fail.  

Such arrangements, known as first-loss funds, are a niche part of the $4 trillion hedge fund industry and offer traders an opportunity to hold on to more of their profits in exchange for taking on the bulk of the risk. Traders signing up for Lubin and Pearey’s London-based AB Asset Scale could keep as much as 60% of the profits they generate, higher than traditional industry payouts of 20% at major multi-strategy hedge funds.

Lubin and Pearey are trying to build the business in Europe, along the lines of peers such as Prelude Capital Management, Boothbay Fund Management and Topwater Capital in the US. Some of the industry’s veteran traders from John Paulson to Kyle Bass have previously used first-loss funds to execute their bets.    

AB Asset has signed up its first money manager, Marco Serra who specializes in currency derivatives trading, and is in talks with about a dozen others to join the platform, the pair said in an interview.  

“We view this as a mentoring, seeding platform for future hedge fund managers or standalone portfolio managers,” Lubin said. “This is a very impressive candidate pool because you have to have an extraordinary high conviction in your own capabilities