Giving Hedge Fund Start-ups a Helping Hand
HFMWeek Catches Up with Eze Castle Integration’s Managing Director, Vinod Paul, To Discuss How Technology Can Help Tackle the Challenges Facing Hedge Fund Start-up Firms
HFMWeek (HFM): Are you seeing a healthy market for new hedge fund launches in the US?
Vinod Paul (VP): 2013 and 2014 were very strong years for start-ups in the US. Our US pipeline is also quite healthy for 2015 in terms of start-ups, which is a little different to Europe, where there aren’t as many launches. In terms of overall US business, 50% of the clients we brought on in 2014 were start-ups; this is up from 40% in 2013. There are several factors that have contributed to this, some that we cannot control, such as how the wider market performs. Institutional money coming back into the market is causing some of the start-up activity. Many of the start-ups we have been able to bring on were funded by larger institutions.
HFM: How are today’s start-up funds different than those from five years ago?
VP: The barriers to entry are harder now compared to three or five years ago due to regulatory and compliance requirements, as well as increased investor due diligence expectations. In the past, due diligence around technology consisted of merely check boxes, to see if a fund had disaster recovery and a compliance system in place. There is now a dramatic shift in the due diligence process, especially in the last year. Those conducting due diligence are much more educated on technology and the various solutions out there and are asking deeper questions. They are also more familiar with solutions like the private cloud and they want to understand all the facets of technology, such as, what’s being outsourced and to whom. Investors want to know that funds are following proper processes and procedures. The Securities and Exchange Commission in the US has taken a strong look at cyber security this past year. These forces have created the need for better due diligence questionnaire (DDQ) processes, as well as better education and awareness to potential investors regarding technology and security systems.
HFM: What are some key operational priorities for a firm starting out?
VP: We are seeing a real investment in the back and middle office processes. A few years ago, when a start-up was entering the market they often had one person responsible for several functions. Today, the chief operating officer (COO) might also be the chief compliance officer (CCO), but they are now utilizing all the tools that are out there to support their operations and workflows. Another operational priority is to have a processor round to conduct clear due diligence concerning the firm’s investment in compliance, disaster recover, written information security and managing all of their vendors and partners (including prime brokers, order management systems and client relation management tools). In addition, unlike years ago when people had servers in their office and disaster recovery in another location, when the location of data was easier to understand, with the advent of cloud technology, a top priority now is understanding where their data is and what is the most important data to them.
HFM: Overall, has launching a start-up become easier due to improved access to better technology or has regulatory developments made it more complex?
VP: There are two answers to that. As I mentioned previously, the barriers to entry are tougher. At the same time, there are now more technologies out there that make it easier for start-ups to manage a fund and the different operational needs required of the fund. Five years ago deploying an order management system was very costly and you could spend thousands of dollars in server software, while the deployment time was often several weeks. Now you can deploy the same system in a few days and readily obtain the processing power in the private cloud with the redundancies built in on day one, all at a much lower cost.
HFM: What role does technology play in powering hedge fund start-ups to compete with established investment firms?
VP: Simply, technology is critical to the successful operational management of any fund, start-up or established. Technology is exceptionally important for start-ups because it allows them to compete for institutional investments. In terms of cyber security there are many third-party firms out there that can help protect your fund as well as mobility tools. The world has changed quite a bit over the course of the last five years and access to information is now vital for funds that are trading and making decisions on the go. The mobility tools in the marketplace have only made it easier for funds to react quickly to these changing conditions. We were extremely involved in that process of launching each of the start-ups we brought on in 2014. This helps them make the right decision at those early critical points, like picking the right technology platform from the start. It’s vital not to take shortcuts from day one because it makes it harder to make the necessary process changes later on. The other advantage of the cloud is it allows firms to layer on tools as their assets grow.
HFM: Cyber security is only going to become more relevant in years to come. How are start-ups able to offer a competitive level of cyber protection to investors?
VP: The best way to protect yourself and your clients is by having layers of security; there isn’t one silver bullet that can cover you entirely when it comes to cyber risk. You must ensure you have the right technologies and deploy the right policies and procedures. We even take it a step further by partnering with eSentire, which specializes in cyber security. My advice to start-ups would be to make sure you pick the right provider – a reputable one – by doing the correct due diligence to ensure they are also using layers to manage security. In this way a start-up fund is able to protect their fund as much as is reasonably possible.
HFM: How do cost implications affect a start-up’s ability to gain a high level of protection?
VP: This is where the private cloud really excels. If a fund was to privately build what can be offered on the cloud it can cost up to $500,000 a year. By deploying storage area networks, bringing in high-end firewalls and hiring third party security systems, a firm can really succeed operationally. By using a private cloud provider, funds are able to offer scalability on a per user, per month basis. They could boast all the same features, redundancies and protections a an on-site infrastructure, but in a much more cost-effective manner.