Hedge Fund Backer Makes High-Stakes Offer in Europe Drive

(Bloomberg) -- A U.S. investor who has backed hedge fund managers from John Paulson to Kyle Bass is pushing into Europe to offer managers an unusual choice: They can take a bigger share of profits with the catch that they risk losing all their money if the bets go awry.

New York-based Prelude Capital Management, which specializes in a niche offering called first-loss funds, has hired former Bank of America Corp. prime brokerage executive Adam Karp to lead its expansion within Europe, according to people with knowledge of the matter. First-loss funds typically offer hedge fund managers an opportunity to hold on to more than half their profits, in exchange for taking on the bulk of the risk.

Karp, who is Prelude’s first employee in London, will reach out to more managers looking to raise assets, the people said, declining to be identified as the matter is confidential. A spokesman for New York-based Prelude, which has allocated $4.8 billion to money managers including billionaire Paulson, declined to comment.

Prelude’s expansion in the European market comes as the $3 trillion-hedge fund industry faces one of its biggest challenges in years, with investors revolting against high fees and mediocre returns. The average size of startups has plummeted by more than 70 percent since 2000 to $28 million, according to Singapore-based data provider Eurekahedge, making first-loss funds a vital lifeline for managers, along with seed capital providers and anchor investors.

The first-loss funds provide as much as nine times the capital of a hedge fund, with their money being housed in a separately managed account. The arrangement, which provides a significant boost to assets under management, requires any losses to accrue to the hedge funds’ own invested capital until that pool of money is erased.

Prelude, which competes with firms such as Topwater Capital and Boothbay Fund Management, registered with the U.K. Companies House in February and already provides capital to some European managers, the people said.

Paulson and at least nine other hedge funds with assets of $100 million or more signed up in 2017 to run first-loss accounts on behalf of Prelude, according to regulatory filings in the U.S. Paulson and Bass’s Hayman Capital Management, as well as Chicago Equity Partners and Napier Park Global Capital continued to work with Prelude as of March, the filings show.

Karp previously worked at Credit Suisse Group AG in London and Hong Kong at its prime brokerage unit, which provides services such as lending money and settling trades for hedge funds.

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