Given today’s economic market –with continuous fluctuation and new regulations – many hedge funds are making the decision to move their offices or expand further internationally. European hedge funds are popping up at a steady pace, and the general expectation is that U.S.-based hedge funds will continue to open remote offices in Europe and Asia, maintaining strong footholds domestically and increasing operation and trading internationally.
Overseas expansion requires a number of strategic considerations. Today, let’s examine some key business and technology factors as well as prime broker considerations.
Let’s start out with some key first steps.
One of the most important steps a hedge fund must take in beginning the international expansion process is to understand the local government requirements for establishing a new business in the selected region. These local regulations will impact launch time and all additional aspects of business.
To better understand these regulations, there are several steps a fund should take. First, talk with industry peers to gain first-hand knowledge of their experiences. Once a fund manager (or other administrator assigned with the task) becomes comfortable with the available options, he or she should set up meetings with key vendors and partners.
Secondly, the manager should become acquainted with local market regulations. Rules and regulations for the necessary stock exchanges(s) should be read thoroughly. Thirdly, a manager should leverage a number of important relationships:
Legal: Many legal firms have international offices or at the very least they can refer you to an in-country law firm that can assist with the incorporation and employment visa process.
Banking/Accounting: Many of your existing firms may already have an international presence, and firms may be able to startup accounts from a domestic office.
Prime Brokerage: A firm’s prime broker can answer questions on custody, settlement and trade execution.
IT Provider: As far as technology requirements are concerned, a firm’s IT provider should be able to help the firm de fine its international needs and implement its systems globally with ease. They should be able to support U.S. and international offices seamlessly.
Real Estate: A firm’s real estate broker is a key partner is defining its international presence. These individuals understand the local environment, as well as what they can obtain for the firm in regards to services and pricing.
One of the first decisions a firm will need to make when setting up an international office is selecting a location. A number of factors should be taken into consideration, including the size of the space, location and ability to support the firm’s technology needs. A firm will want to consider locations that offer adequate power, cooling and redundancy to support the technology requirements, as adding the items can be very costly and time consuming.
As mentioned, infrastructure needs can play an important role when establishing a new office, particularly in international territory. A firm should be able to make a location work for its specific technical needs. Identifying a good architect, engineer and technology provider will ensure that a firm is able to adequately assess its individual infrastructure needs.
When choosing an office space, a firm must consider whether it will choose to host its technology infrastructure in-house or store at a local data center. Hosting equipment requires a tremendous amount of power, electrical support and dedicated cooling systems for hardware and backup power systems. In addition to many servers, an office location would need to have the necessary power to run all front end equipment for each user, such as monitors and PCs. More and more, firms are turning to colocation facilities to host their back-end server infrastructure. These colocation centers are built to house thousands of server cabinets with high levels of cooling and electrical power and substantial redundancies.
When a hedge fund is choosing its technology provider, it should ensure that they are situated and/or have engineers located within the area and are appropriately staffed to be able to handle multiple client incidents. A firm does not want to be an engineer’s third or fourth stop of the day. Additionally, remember that many applications can be run out of a domestic office in the U.S. so a firm must determine what has to be housed locally and what can be remote.
In a follow up article we discuss the Prime Broker perspective.
You can also download our full article on this topic, ‘Expanding Your Hedge Fund Internationally: Operations and Trading Considerations'.