We’ve said it before, and we’ll say it again. Starting a hedge fund is a thoughtful and time-consuming process that requires skillful considerations and supportive collaborations to drive success. But with the changes that have swept through the industry of late, now seems like as good a time as any to launch a new fund.
We recently hosted a webinar with KPMG to examine the current hedge fund landscape for startups and determine whether 2013 is the right time to begin the launch process. Below is a short summary of the topics discussed. To watch the full event replay, click here.
Forming a Hedge Fund
There is a wealth to consider when launching your first (or second or third) hedge fund. From organizational and personnel matters to grappling with regulatory and compliance requirements and infrastructure needs, the list seems to never end. With the help of experienced prime brokers and service providers, however, managing these tasks has never been easier.
Some areas to consider:
Where will your fund be based? Are there tax implications based on which geography you select?
Will you be required to register on a state and/or federal level?
What type of governance model should you employ?
What are your investors’ expectations? (re: compliance, infrastructure, reporting, etc.)
The decision to outsource or take internal control over certain functions will also weigh heavily on your business. The functionality of a CCO or CFO is one that is often up for debate, and there are firms who will provide staff to fill these roles and assist with SEC and CFTC compliance requirements, registration forms and other needs. Be sure to consider what your investors’ perceptions of an outsourced CCO/CFO would be, though. Do they expect you to have someone on staff full-time? If the idea of outsourcing such an important role makes them uncomfortable, you may want to retain someone in-house.
For services and functions you do choose to outsource, it’s important to remember that managing those relationships is essential to success. The one function you cannot outsource is vendor relationship management, so taking the time to properly vet and communicate with your service providers will serve you well as you launch your business. Some vendors you will likely work with during the course of your launch include a fund administrator, attorney, audit or tax firm, prime broker and technology provider.
The Technology Shift
Fifteen years ago, hedge fund firms followed a “traditional” path, managing their IT in-house and making significant investments in technology infrastructure. They likely had Comm. Rooms directly in their office space and rarely relied on outsourced service providers. Fast forward to present day, and you’ll see that times have changed dramatically.
Disaster situations such as Hurricane Sandy and the global adoption of new technologies (read: cloud computing) have prompted hedge funds, particularly startups, to re-evaluate their technology strategies and leverage outsourcing.
On the cloud front, most firms seems to understand what it is and how it works. But the reality is that every cloud is not created equal, and all hedge funds should do their due diligence before settling on a cloud platform. Performing a SWOT analysis should give you a good indication of how cloud providers stack up against one another. One area to examine closely is cloud security. Again, not every cloud is secured in the same way or employs the same security measures. A reputable cloud vendor should provide you with clear documentation defining the technology infrastructure and security layers as well as the policies and procedures in place to manage the security of the cloud (and of your data). Security is one area where you don’t want to take shortcuts, so be thorough in your evaluation and selection process.
The technology infrastructure you choose (cloud computing vs. on-premise hardware) may very well be influenced by your real estate situation. Are you working from a home office? Sub-leasing a space in the city? Operating out of a hedge fund hotel? Your situation may affect if you have the ability to manage IT in-house or build out a Comm. Room, or perhaps it makes more sense to utilize the cloud. As you investigate real estate options, be sure to consider your location and accessibility to clients, any future expansion of your firm and, of course, economics.
A few other technology areas you’ll want to put some thought into:
Eze Castle Integration has helped over 2,000 hedge funds launch and is adept at working with firms throughout the entire launch process and beyond. If you’d like to speak with one of our experts to talk through your options, please contact us.