The competition for investors is intense among hedge funds, as we still seem to be in a situation where too many funds--especially smaller funds--are chasing a limited number of dollars.

We've noted that seeding firms are active these days, including Topwater Investment. This brings some interesting twists to the fund raising game. As noted by MarketWatch, Topwater Investment pays a performance fee that is more than double the standard 20 percent, provided the manager generates gains. There's a big twist of course. If the manager loses money, the fund is expected to swallow the entire loss, leaving Topwater's initial investment intact. The fund is ahead of the seed investor in the line to absorb any losses.

For some firms, this risky proposition is worthwhile because they do not have to give up an equity stake in the hedge fund, a condition that many young fund investors require. Others funds may be drawn by the outsized performance fees. All in all, you can see why it resonates with would-be fund managers, who invariable are convinced they've got nothing but upside. If they win, the upside gains are multiplied.

But that is also true on the downside. Basically, the risk-reward stakes are multiplied. But we're seeing more of this. In addition to Topwater, Prelude Capital is also said to be offering this kind of investment.

For more:
- here's the article

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