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Hedge Fund Startup Tips from 9 Emerging Manager Experts

By Mary Beth Hamilton | Thursday, September 18th, 2014

We’ve tapped the expertise of nine experts in the hedge fund startup space to share their thoughts on a range of topics specific to emerging hedge fund managers. Below are some highlights, and you can read the entire Emerging Managers Insight Series eBook here.

Hedge Fund Startup Tips#1: The Prime Broker Perspective (Glen Dailey, Jefferies & Company)

  • Set a realistic schedule to launch and don’t rush to get the hedge fund up and running too quickly. Take the time to partner with the right service providers that will support your business from the start and as you grow.

  • Budget for a marketer in your first two years of operation. If you look at the largest funds in the industry, they all have substantial investor relations teams that keep current investors informed while prospecting for future investors.

  • Capital introduction is a much sought after service from prime brokers which can be very helpful in providing a new hedge fund exposure to potential investors. Take advantage of introductions and begin to build relationships with potential investors.

#2: Flowing Into Liquid Alts (Frank Attalla and Marc J. Wolf, Rothstein Kass)

  • Managers have to make smart, informed decisions about whether a registered product is right for them, and how they can best implement the strategy if they decide to make the move.

  • Questions to consider include: Will a registered product cannibalize my existing private fund business? Will my strategy fit inside a mutual fund? Do I understand the distribution landscape? Is a registered fund too expensive? Do I understand the track record implications?

  • The liquid alternative space has grown at a breakneck pace in recent years, and there doesn’t seem to be any slowdown in sight. Before making any move, managers need to take a hard look in the mirror and consider all the business implications — and consult with their service providers — before getting caught up in all the liquid alts excitement.

#3: Assessing Never-Examined SEC-Registered Investment Advisers (Shelley Rosensweig and Beth Smigel, Tannenbaum Helpern Syracuse & Hirschtritt)

  • Published in the SEC’s National Exam Program priorities is the NEP’s initiative to conduct focused, risk-based examinations of investment advisers who have been registered with the SEC for at least three (3) years (including non-U.S. advisers) but have not yet been examined by the NEP and are not subject to the “Presence Exam” initiative discussed herein (“Covered Advisers”).

  • Examinations conducted by the NEP in accordance with the Initiative focus on two approaches. The first approach consists of risk-assessment reviews which allow the NEP to obtain a better understanding of each Covered Adviser and include a high-level review of the Covered Adviser’s overall business activities, with a particular focus on the compliance program and other essential documents needed to assess the representations made on the Covered Adviser’s disclosure documents.

  • The second approach utilizes focused reviews which emphasize certain high risk areas of the Covered Adviser’s business and operations, including the following: Compliance Program, Filings/Disclosure, Marketing, Portfolio Management and Safety of Client Assets.

#4: Guiding Technology Decisions: From Cloud to DR (Mary Beth Hamilton, Eze Castle Integration)

  • 9 out of 10 hedge fund startups are selecting a cloud-based solution versus a traditional on-premise solution for reasons including simplicity, cost containment, improved flexibility and simplified IT management.

  • Regardless of whether a hedge fund selects on-premise IT or cloud, security is fundamental as all investment firms are at risk. A multi-layer security approach is essential to protecting the critical information that passes through the organization’s system every day.

  • Disaster recovery and business continuity plans are crucial for sustaining operations during outages or disasters. A disaster recovery plan addresses how the business will resume normal operations in the event of a catastrophe. A business continuity plan is somewhat broader in nature and deals with sustaining normal business operations during periods of disruption.

#5: Alternative Strategy Investor and Valuation Risk (Daniel Johnson of Wells Fargo Global Fund Services and Eric Lazear of FQS Capital Partners)

  • Operational risk can take many forms, but valuation is a good place for investors’ initial focus: are the holdings of the fund accurately valued, and is there a process in place to ensure that they are accurately valued at each dealing period?

  • Unlike reviews of performance, it is essential that any review of valuation risk include all parties involved in valuing the assets of the fund. This will often include speaking to the administrator about their role in the process and what the involvement of the investment manager has in determining the final prices.

  • There are also some common questions that should be asked of all funds and questions for fund administrators covering key areas (read the full list HERE).

#6: Hedge Fund Trading Desks, Furniture Matters (Jeff Brechman, CFS Group)

  • For someone starting a fund, and relying on your own capital, creating an office space within a budget is essential. Also important is identifying what technology a hedge fund will use to ensure that the furniture selected supports the end users appropriately.

  • Hedge funds should look for a furniture partner that has the ability to identify each client’s specific needs and provide them with the right product for their furniture application.

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