Growing numbers of investment firms are quietly financing promising hedge-fund managers, much as venture capitalists underwrite risky start-ups in the hope that some will strike it rich. Hedge-fundexecutives estimate that at least 30 providers of seed capital have emerged in the past three years. They include major Wall Street investment banks such as J.P. Morgan Chase and boutique firmsdedicated to financing young talent, such as BRI Partners of Chicago and FrontPoint Partners of Greenwich, Connecticut.

You’re seeing a great deal of interest in seeding as a means of accessing smaller, undiscovered managers, said Sharissa Jones, a partner at Capital Z Investment Partners, a hedge-fund and private- equity seeding company based in New York. Capital Z, backed by Zurich Financial Services Group of Switzerland, has invested about $800 million since 1998 in at least eight hedge funds, several run by individuals who had never run hedge funds before. Hedge funds are lightly regulated private investment vehicles intended for wealthy individuals and institutions. But as a result of the poor performance of the stock market, the funds have gained wide interest among less affluent investors. The funds generally provide little information about their operations, and the Securities and Exchange Commission last week warned investors to be wary of fraudulent offerings. Some of the hedge funds receiving seed money will provide investors with more information than the typical hedge fund. In return for financing, some new funds are being required to reveal to their backers exactly how they invest their capital. Such information is usually closely guarded by hedge-fund managers, who try to produce gains regardless of market conditions. And because hedge funds often use shorting strategies, which involve borrowing shares for future sale and can result in unlimited losses, an investment in the funds can involve considerable risk. The funds are generally open only to investors with a high net worth, often a minimum of $1.5 million, and many funds require a minimum investment of $250,000 The SEC has begun to investigate possible abuses in marketing hedge funds to people who are unaware of their potential risks, and it is considering tightening its regulations. Many newly seeded funds are required to meet performance benchmarks. If they fall short, investors can withdraw their funds, sometimes with substantial loss of capital. Some of the firms providing capital to new hedge funds offer a variety of services to help put the new ventures on their feet.

We make fairly sizable investments, in the tens of millions, but we also provide them with help and support and advice lawyers, accountants, prime brokers, hiring, you name it, said Jeffrey Izenman, a managing member of BRI Partners.