So you want to get into HFT?

Hedge fund start ups are not dead. They just went through a rough spell that spared few in the financial world. Still, you've got to acknowledge that starting up a hedge takes a lot more than Dad's money and a computer in a studio apartment somewhere. There was a always a lot of myth involved when it came to hedge fund start-ups, akin to the "ran it out of our garage" myth in Silicon Valley. Gosh, was every business plan drawn up on a napkin at an eatery? 

But we are seeing some innovation when it comes hedge fund incubating and seeding, especially in the area of high frequency trading. And despite the controversy, HFT remains an area of heightened activity. Aite notes that a lot of traders, some of whom were let go in the crunch, sought to establish their own high frequency trading firms. The going will be tough and not all will survive, but the movement is throwing a spotlight on a group of high frequency trading incubators. The rise of solutions for entry into this field will likely be a big trend in 2010, Aite predicts. 

Near the fore of the movement is Trading Cross Connects, based in Jersey City. Trading Cross Connects, which styles itself a hedge fund incubator, has already ramped up one fund, based in London, that is run by former high frequency proprietary traders at a big European bank. Trading Cross Connects provides the technology infrastructure, while a partner firm provides capital and prime broker introductions. That pretty much covers the main bases. We've noted that Trading Cross Connects aims to incubate up to five more funds in 2010. Other companies are also eyeing this arena, most notably Thesys Technologies. We may very well see more turn-key solutions arise. 

At the same time, hedge fund seeding seems to be on the rise--again. It dried up during the financial crisis, but we've seen more activity in Asia to be sure. Penjing Asset Management, for example, made headlines for linking up with Asia Alternative Asset Partners to raise fresh investment capital to seed start-up hedge funds across Asia. Seeding platforms such as New Alpha continue to see strong activity from would-be managers. 

While it's premature to say start-ups are back, there are reasons to think we'll see more in 2010. - Jim