The demise of Scudder Weisel Capital, the alternative-investment joint venture started just three months ago by Thomas Weisel Partners and Zurich Scudder Investments, offers lessons for other hedge fund sellers and advisers to the high-net-worth crowd.
One lesson: Even with the backing of a sound business model, certain investment products are meant for certain tiers of investors, and a bear market is the wrong place to test something innovative.
When Scudder Weisel Capital was launched in January, hopes were high. Zurich Scudder, a New York unit of Switzerland's Zurich Financial Services Group, provided much of the capital in return for access to Thomas Weisel Partners' research and its institutional contacts among San Francisco-area technology ventures.
Both partners saw large profit potential in selling hedge funds, venture capital funds, and initial public offerings to wealthy individuals who fell beneath the traditional threshold - $5 million of investable assets - used for such investing.
Scudder Weisel planned to reach these less wealthy people through their financial advisers, and sell $25,000 units in its funds to customers with investable assets of $1 million and up. Ordinarily, units of these funds cost at least $100,000. The venture also planned to offer investment advice online.
Scudder Weisel hoped to raise $500 million for its first private equity fund. But several problems emerged very quickly. As the tech market cooled, money came into the fund much more slowly than anticipated. When the firm announced on March 29 that it was dissolving, it had only raised $30 million, which it was returning to investors. It usually takes two to three months for these partnerships to fill, analysts say.
The $25,000 entrance cost also may have kept some investors out - a Weisel spokeswoman said more people might have come in had that cost been lower and the market better.
Distribution and poor targeting were only part of the problem, said David Ross Palmer, a high-net-worth analyst with Lobue & Associates, Northbrook, Ill. Scudder Weisel was also done in by a volatile stock market and other forms of bad timing, he said.
Alternative investment products are supposed to be popular in a bear market because they diversify risk, but this market is in a "freeze," and affluent individuals are much more discriminating about who handles their money, Mr. Palmer said.
Meredith Jones, vice president and director of research at Van Hedge Fund Advisors International Inc., said inflows for hedge funds were solid through February - they were rising an average of 50 basis points a month for domestic products and 90 points for global ones.
But Ms. Jones added that hedge fund returns posted a 2.5% loss in February after gaining 3.1% a month. And March inflow increases will be in the single-digit range in basis points, she said.
Zurich Scudder saw - and still sees - demand for these products among the mass affluent. But ultimately, it and Thomas Weisel Partners both saw that they didn't really need each other in order to create and sell hedge funds.
A press release from Zurich Scudder said both companies will be putting together alternative investment products and selling them independently. Thomas Weisel Partners has not announced plans to stay in the business.