By Svea Herbst-Bayliss

BOSTON (Reuters) - Wealthy investors are showing a healthy appetite these days for newly minted hedge fund managers, judging by the activity in one Blackstone Group <BX.N> managed portfolio.

In about four months, hundreds of individual investors sank some $355 million into a so-called hedge fund seeder set up by the New York-based investment firm, a recent regulatory filing shows.

While the bulk of money raised by Blackstone for its Strategic Alliance Fund II comes from pension funds, central banks and other institutional investors, fresh demand from the ultra-rich investors provides fresh evidence of how the $1.9 trillion hedge fund industry is roaring back to life after the financial crisis.

The red-hot interest in the Blackstone fund also shows how a firm best known for making private equity transactions is shaking up the hedge fund world.

Overall, Blackstone's Strategic Alliance fund has raised $2.4 billion, say people familiar with the fund. The new fund, which already has "seeded" two newcomers and is in advanced discussions to seed another two, is Blackstone's second foray into the hedge fund incubating business. An earlier seeder fund raised $1.1 billion and invested that money with eight young funds including Richard McGuire's Marcato Capital, Eric Bannasch's Cadian Capital Management, Nick Taylor's Senrigan Capital and Michael Hodge's Hilliard Street.

The two seeder funds plus some $36 billion that the firm has in its hedge funds business have turned Blackstone into one of the most prominent and powerful investors in the hedge fund industry. Some of the well-established portfolios that Blackstone's fund of funds group has long invested with include mega-stars like Steven Cohen's SAC Capital Advisors and William Ackman's Pershing Square Capital Management.

With its seeders, Blackstone is hoping to get in on the ground floor with promising new managers and profit down the road if these newcomers make it big. Blackstone's seeders take anywhere from a 15 percent to 25 percent cut of the business, people familiar with the terms said.

Competition for Blackstone's seed money is fierce.

For its first fund, Blackstone reviewed applications from about 250 prospective managers before picking just eight to write checks to. People familiar with Blackstone said new managers get initial commitments of between $100 million and $150 million. The underlying managers in that first fund now control about $6.5 billion in assets, showing that other investors were quick to follow with fresh funds on top of the $1.1 billion that Blackstone committed.

A Blackstone spokeswoman declined to comment.

The selection process has been similarly competitive for the second seeding fund. So far, only two people have been awarded money.

The two men seeded so far are former Kingdon Capital manager John Wu and former Credit Suisse commodities trader George Taylor. The firm is close to inking a deal with a new fund managed by Michael Pearl, an alumnus of Stanley Druckenmiller's Duquesne Capital, and Howard Shainker, who previously worked for Dan Loeb's Third Point Capital, people familiar with the selection process said.

Blackstone, of course, is not alone in the seeding business. Rivals like Skybridge Capital, Tiger Management, and Capital Z Asset Management and others also promise to find a new generation of talent, providing would-be investors with a wide selection of portfolios and newcomers to bet on.

But not all investors are wowed by the seeding business.

Critics note that seeder funds can have uneven records with some inevitable problems no matter how thorough the due diligence. Indeed Kishore Moorjani, one of the eight managers tapped in Blackstone's first seeder fund, has closed down and returned money to investors, people familiar with the matter said.

Alan Gold, a Chicago-area real estate financier and hedge fund investor, said he's a skeptic when it comes to seeders. He prefers to send money to managers with at least three to five years experience on their own.

"I am not a pioneer," said Gold. "Out of all the thousands of the funds out there, maybe there are less than 100 funds even worth looking at that may come close to meeting my criteria. Seed funds are only as good as the people picking the underlying funds."

But for upstart managers, getting a chance to partner with a firm like Blackstone can be just the shot in the arm they need to get their businesses up and running. The money is especially welcome now that fundraising has become tougher than ever with many pension funds and other institutions reluctant to write checks to people without track records. Blackstone can also help with tips on how to structure funds, finding real estate and even act as a sounding board on strategies, fund managers who have been in contact with the firm said.

(Additional reporting by Matthew Goldstein in New York, editing by Dave Zimmerman)