2011 is off to a tremendous start in terms of hedge fund launches, so we feel it is important that we highlight some key steps firms can take to ensure their launch is successful. Earlier this week, we heard from some prominent experts on the topic in our webinar, Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011.
Speaking of our experts, let’s take a brief moment to introduce them.
- Our first speaker was Sam Stock, Executive Director of Goldman Sachs’ Prime Brokerage in London. Sam joined the Prime Brokerage division back in 2000 and set up their Property and Technology arm of Consulting Services in the U.K. Prior to that, Sam held various roles in Goldman’s Equities Division.
- Our second speaker for the event was Gus Black, Partner at Dechert LLC in London. Gus’s practice focuses on investment funds, asset management, corporate and commercial transactions in the financial services sector, and general U.K. financial services regulation.
- Our final speaker was Serge Bukhar, Executive Director of International Operations for Eze Castle Integration. Serge is responsible for overseeing Eze Castle’s three international offices in London, Singapore and Geneva and managing a talented team of customer service and engineering professionals.
In Part 1 of our event recap, let’s look at some insights from Sam Stock of Goldman Sachs on the hedge fund start-up process and the prime broker relationship.
- Regulatory Environment—Since the Lehman Brothers collapse and the general financial crisis in 2008, there have been numerous pieces of new legislation coming out that are important to be aware of. These changes are still ongoing.
- Redemption Pressures—Investors are recycling money, moving it from one place to another, as opposed to investing new money.
- Closures—We have not seen many closures in London. In fact, of Goldman’s top 100 clients, 75-80% are at their high water mark, and the rest are within 10% of that.
- Fiscal Pressures—After the bank levee, and with 50% tax pressures, this has become a fairly significant pressure. The reiteration code was much talked about last year, but has not had the impact on hedge funds that was first expected.
- Funding Markets—Financing and leverage in traditional hedge fund markets is as good as it has been for some time.
- Start-up Markets—These are off to a very positive start to 2011.
- Performance—After an average 2010, January remained flat with a slight uptick. The general feeling is positive for 2011, but the industry needs to see a more consistent performance for Q1 and Q2.
- Capital Raising—This process has changed significantly over the past five years. It has become much more difficult to raise, say, $1 million, and people are increasingly looking to seed investors as an alternative to raising their own capital. There are certainly people willing to invest to the right managers with a proven track record and a good history of returns.
Some Key Questions to Consider When a Starting a Hedge Fund
There are a number of questions that repeatedly come up when working with hedge funds who are in the process of launching a hedge fund. To help organize your thoughts, following are some important questions to ask as you navigate this process:
- Do I need to be regulated?
- What are the tax considerations for the fund and my staff?
- How do I pick which country is best to launch in?
- What are the other themes for new funds at present (e.g. managed account/UCITS)?
- What sort of budget do I need to get started?
- What are my responsibilities on the compliance front?
- What can I outsource, what has to be done in-house?
- How do I monitor rule changes?
- Who should be the CEO/CIO/PM/Head of Trading/COO/CFO?
- What sort of compensation will the individuals on my team expect?
- Which investor should I speak to and when?
- What should be my terms, fees, gates, and notice periods?
- How do I differentiate myself from the competition?
- How do I generate momentum in my asset raising?
- What kind of questions should I expect from investors?
Prime Brokerage and Clearing Relationship
- Do I need a prime broker? How many?
- How does financing/pricing work?
- What in-house requirements do I have?
- What does stock loan/locate/borrow actually mean in practice?
Since dealing with all of these considerations can sometimes seem overwhelming, Sam offers the following Pre-Launch Timeline to help you think through the order of necessary events leading up to the launch of your fund.
Next week, we will look into launching a hedge fund from the legal perspective, as provided by Gus Black of Dechert. Be sure to check back for some great insights from his presentation.
In the meantime, download our new webinar, Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011, or visit our Hedge Fund Launch Kit for more information.
*The above information was originally presented by Sam Stock of Goldman Sachs London during the "Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011" webinar on February 8, 2011.
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