Starting a hedge fund is an intensive task and there are many aspects of the business that a portfolio manager must consider. Expectations are higher than ever, and investors want to see that new hedge fund startups are taking the right precautions and steps to ensure that both the investment strategy and business operations are sound.
There are a wealth of considerations to review before starting a new hedge fund, and truth be told, most of these points are just as important to keep in mind if you are an established fund. Take a look and you’ll notice these best practices apply to more than just new launches.
To be successful, a hedge fund needs to raise assets. If you’re just starting out, outline your investment strategy for capital raising. You will need to continue to solidify and expand on your investment strategy as a firm. As your fund becomes more affluent, investors will continue to increase expectations. It is imperative to plan for this and envision where your fund will be five and ten years down the road. Along these lines, established firms should regularly evaluate their marketing and capital raising strategies to ensure they are up-to-date and remain effective.
Regulations are constantly changing, so it’s important to remain educated on the industry and what’s required of your firm. For example, hedge fund managers are often unsure about the process that SEC examiners follow when examining a firm. Some of the items you can likely expect to produce during a routine SEC examination include:
Organization chart showing ownership percentages and control persons
Names of firm’s officers and/or directors who resigned during the examination period
Names of employees who were disciplined or terminated during the examination period
Current standard client advisory contracts or agreements
Current fee structure
Names and locations of service providers, the services they perform and information about the due diligence process to select and monitor the providers
Institutional- Grade Technology
Naturally, we had to highlight this one. A robust technology infrastructure is the backbone of your hedge fund and will greatly affect your daily operations. Investors and regulators expect a high level of sophistication in terms of technology, and funds that don’t meet these expectations will struggle to keep up and make the same returns. Effective technology solutions will minimize infrastructure risk and increase operational efficiency.
As you probably know, the hedge fund industry is seeing a rapid rate of adoption for cloud computing services, a trend validated by our recent Cloud Usage Survey. The survey revealed that nearly nine out of 10 investment management firms are using cloud services to support their operations in some way. Other critical areas of focus remain security and disaster recovery.
Applications for Hedge Fund Operations
Now that firms are adapting to cloud computing technology, the next question is how to decide which essential applications should be moved to the cloud. Having your applications in a private cloud provides a strong network that can strengthen and streamline connectivity to trading counterparties. The environment is constantly changing, so it is essential to be aware of what functionality your hedge fund requires, as well as what your investors are expecting to see in terms of infrastructure and reporting.
Want to learn more?
To learn more about the intricacies of launching and operating a hedge fund, join us for a Breakfast Seminar on December 3rd in Boston. Co-hosted by KPMG, Eze Castle is excited to bring together industry specialists to discuss critical considerations for investment firms including many of the topics we mentioned above. We hope you can join us! Click here for more details and to register.
Or download our Launching a Hedge Fund Guidebook. It is 42-pages long and packed full of great information.