Newly started hedge funds received $12.4 billion in deposits from 2009 through 2011

Newly started hedge funds received $12.4 billion in deposits from 2009 through 2011 from investors that believe many managers perform best during their early years, according to a Citigroup Inc. (C) report. Citigroup surveyed 90 global investors with $368 billion in assets, including funds of funds, family offices, private banks and endowments.

Investors allocated $5.6 billion to 352 start-up hedge funds in 2011 and have made $12.4 billion in day-one and early-stage investments since 2009, according to the report by Citi Prime Finance.

Researchers at Citi identified 78 investors globally that made 779 investments in hedge funds with a track record of less than one year since 2009. The average day-one or early-stage investment was $16 million, compared with $37.7 million for established managers.

Funds of hedge funds (FoHFs) accounted for around 70% of day-one and early-stage investors, followed by private banks and family offices. Institutional investors such as pension funds typically have minimum track record and ticket size constraints which preclude them from investing in start-ups.

US-based investors accounted for 63% of the universe of day-one and early-stage allocators and committed nearly three times more capital to start-up hedge funds than European groups.

Despite an up-tick in early-stage investments in 2011 compared with previous years, raising capital remains a huge challenge for start-ups. Hedge fund managers interviewed by Citi said they had to meet with as many as 100 potential investors to secure two to four allocations.

They were also pressured by investors to provide fee discounts and other concessions in exchange for capital. The average manager settles for a 1.5% management fee and a 15% performance in exchange for start-up capital.

Even then, early-stage investors tend to gravitate to funds that already have significant capital behind them, either in the form of a seed investor or personal investments from principals.

Globally, the average size of managers receiving day-one or early-stage allocations was $193 million. In the US hedge funds receiving early-stage investments tend to have more than $200 million, while in Europe and Asia the average falls to less than $100 million.