"Increasing asset flows into hedge funds and growing institutional interest are putting pressure on industry participants to continue to deliver on the true promise of this asset class," states the investment consulting group Hawthorn, a unit of PNC Financial Services Group.
The Konig brothers hope to build their hedge fund business by helping institutional investors expand and improve their hedge fund operations, and by teaming up with hedge fund seed capital providers to invest in the creation of funds run by managers provided by GPG. So far, the company has agreements with four financial institutions, including the global banking group ABN AMRO, to groom hedge fund managers, Mr. Konig says.
GPG has not debuted or hired any hedge fund managers yet but expects to do so soon.
The company is evaluating three traders as potential overseers. "Some of them look good and have sound strategies. One has had very good months but some bad months," Mr. Konig says. It can take several months to a few years to produce a hedge fund manager, he adds. GPG is recruiting more candidates.
Developing hedge fund managers is a low-overhead proposition for GPG. The company doesn't pay the traders, who use GPG's electronic trading system at a cost of up to 1.25 cents per order. "It's a win-win situation. We get access to traders that trade frequently and generate revenue. And they can get capital they wouldn't ordinarily have," Mr. Konig explains.
GPG targets independent traders with their own portfolios largely because it's less expensive and time-consuming than recruiting traders and money managers who work for financial institutions. Also, the industry will need entrepreneurial traders to help fill the need for managers.
Companies like GPG can develop hedge fund traders with pretty much a free hand because the industry lacks consistent standards for grooming managers, analysts say. However, GPG evaluates potential managers according to its own criteria for measuring financial returns and investment strategies, Mr. Konig says.
"We have many indicators that show whether a person is successful or not. A trader must sustain an amount of money over a specific period of time and grow it," he says.
If anyone can judge trading talent, Mr. Konig emphasizes, it's him and his brothers. Before launching GPG, Mr. Konig was managing director of an investment firm in Caracas and president of a U.S. company that provides currency exchange risk management services. Salomon Konig previously traded securities for investment companies and advised several hedge funds. Harry Konig traded currencies, commodities, and precious metals for several companies.
The Konig brothers are working to create hedge fund managers amid growing controversy about the industry's practices. The Securities and Exchange Commission began investigating hedge funds early last year after the number of fraud cases increased to 12 in 2002 from two in 1999.
In a recent high-profile case, the SEC alleged that South Florida–based Lancer Management Group defrauded investors with false performance and net asset figures. A Florida judge froze the assets of the company, which once claimed to have $1 billion under management.
One problem is that there are few barriers to starting and operating hedge funds. Registration with the SEC is not required, and the funds are not subject to many of the federal and state laws that require other investments to disclose information.
Hedge fund managers are notoriously secretive about their strategies. Returns have dropped recently, and many institutional investors that lost millions have directed their anger at managers who refuse to explain how it happened. The SEC also has expressed concerns about the trend to sell hedge funds to small investors and is considering proposing new rules and laws to regulate the industry.
But that shouldn't hurt the business of firms like GPG, Mr. Konig says. Hedge funds will inevitably grow, become a more common investment, and require more managers created by firms like GPG, he says.
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