2016 UPDATE: Eze Castle Integration has released its a new whitepaper, 10 Keys to Successfully Launching a Hedge Fund in 2016. Download it for new perspectives and guidance.
Last week, we hosted a breakfast seminar in New York City for emerging hedge fund managers and new hedge fund start-ups. Our goal was to provide attendees with actionable takeaways they can use as they launch their hedge funds.
Our expert panel provided great insight into the hedge fund industry and the key considerations for new managers who are launching hedge funds. Panelists included Tim Kennedy, Senior Vice President at Eze Castle Integration, Ron Geffner, Partner at Sadis & Goldberg, Robert Becker, Head of Capital Introduction at Jefferies & Co., and Bryan Borgia, Managing Partner at Topwater Investment Management.
Below is a summary of the key topics discussed at our “Launching a Hedge Fund” event:
One of the first steps you need to take after you decide to launch a hedge fund is determining how your fund will be structured. Will your fund be domestic? Off-shore? What will your primary strategy be? Are there tax implications based on your strategy or location? Are there regulation requirements? Flush out these considerations with a legal expert to help you get on the right track.
The Dodd-Frank Act is having a significant effect on many start-up hedge funds this year. The registration process for funds has clearly changed, and firms are now required to be much more descriptive of their processes and strategies. If not, they open themselves up for regulatory and criminal consequences. Interestingly, many funds that are not legally mandated to register with the SEC in the U.S. are choosing to do so because they believe it will be viewed positively by investors. Take this into consideration as you get off the ground.
As new hedge funds enter the launch process, one of the most critical areas of importance is obviously raising capital. Therefore, a hedge fund’s marketing practices are essential to its success in the long run. Raising capital should be a non-stop process, and hedge fund managers need to put time and energy into crafting comprehensive marketing programs.
Firms should start by creating a 24-month marketing plan, during which they identify their key processes and marketing pitches, contact early stage investors, and invest in a customer relationship management (CRM) system to track investor communications.
When investors are determining which funds to allocate capital to, they are looking for firms who are clear and concise in their marketing messages, and ultimately, those are they feel have the potential to succeed. For an advantage, prepare a Due Diligence Questionnaire (DDQ) before an investor meeting; this shows that you’ve done your homework and are willing to be transparent.
Investors also want to see that you are working with best-in-class service providers; this says a lot about the value you place on your firm. Lean on your service providers to assist you in the initial stages of your development. By choosing vendors whose strengths offset your weaknesses, you demonstrate that you understand the importance of a well-rounded structure.
Ultimately, when it comes to marketing your firm, you want to leave a good (and lasting) impression. Be clear and concise about your strategy. Explain how your firm is different from your competition. And explain your risk management and corporate governance procedures to keep investors comfortable and assure them you are taking all precautions to protect their investments.
Technology Infrastructure & Software
From a technology perspective, one of the first steps new fund managers should take is creating an IT budget. Be sure to craft a technology budget for 2-3 years, ideally, and ensure it coincides with your growth plan. Take into consideration your expected employee counts, office locations, investment strategies & trading practices, all of which will affect the types of technology you will require.
On the hardware side, hedge fund startups no longer need to invest in expensive hardware or build out in-house Communications Room (unless they want to!). With cloud computing services, many firms are choosing to host their infrastructure in the Cloud, allowing them additional flexibility and significant cost-savings. With software, conduct research on the types of applications your firm will need. Examples of systems you may need include: order management system, CRM, portfolio management system, accounting platform, risk management tools, compliance tools, etc.
Here are some final thoughts from our event speakers:
Remember that first impressions are everything.
Take the time to build a real business. Focus on more than just investments. Don’t forget about operations, technology, legal, etc.
Surround yourself with service providers who with grow with your firm.
Be transparent with investors. If you try to hold anything back, it will always come around to hurt you.
Interested in learning more? Take a look at our video on the 10 Keys to Hedge Fund Launch Success.
If you would like to speak with an Eze Castle Integration representative about your fund’s technology needs during the launch process and beyond, please contact us.
Photo Credit: Wikipedia