Launching a Hedge Fund in the EU: Key Technology Factors to Consider
This article first appeared in HFMWeek's Special Report: How to Start a Hedge Fund in the EU 2015.
HFMWeek catches up with Eze Castle Integration’s executive director, Dean Hill, to discuss the importance of selecting the right business service providers and the key technology factors new funds must consider when starting out in the EU.
HFMWeek (HFM): Are you seeing a healthy market for new hedge fund launches in the EU?
Dean Hill (DH): Yes. I think going into 2016 we will see an increase in terms of the amount of new hedge fund launches across the UK and European markets. Not only are these launches coming more frequently, but their size, structure and launch AuM is greater than anything we have seen in the last two-to-three years. It is certainly on the uptake.
HFM: What do you see as the greatest regulatory challenges facing new hedge funds in the EU?
DH: Overall compliance and regulatory stipulations driven down from the SEC and ultimately picked up by the FCA are driving significant changes in the way that new, and indeed existing, hedge funds operate. Accountability across business functions have put an end to the days of ‘box ticking’ in areas such as due diligence. I think the biggest challenge that COOs are now facing is that they are now much more accountable for areas of their business and operations where they may not have significant insight. Technology, especially the growing focus on cyber security, is one such area. As a result, choosing reputable and established outsource partners is key.
HFM: There are a number of factors that play an important role in the success of a hedge fund. From the prime broker to fund administrator, auditor, legal counsel, and technology provider, how important is it to work with the right key service providers?
DH: Selecting the right service providers is probably the most important decision a new or established hedge fund will make. Competition in the market is at its highest at all levels. Funds are trying to attract institutional investment from other regions, and investors are looking to work with individuals with a solid pedigree and companies that have a solid background in providing proven solutions. We see a lot of service provider companies coming into the market with little or no experience and no concept of what it takes to service a client in such a demanding and fast-paced environment. Eze Castle Integration has been building up its reputation for over 20 years now. We will continue to do so through our dedication of servicing to the alternative investment industry. What we are seeing across the market, in terms of hedge fund launches, is the selection of the right partners and providers across all aspects of the business is absolutely critical.
HFM: How much of a consideration should cybersecurity be for early-stage funds?
DH: Cybersecurity has been the industry buzzword for 2015. It will continue to be so right through 2016 and possibly beyond. The most common cybersecurity threats that we are seeing mainly consist of ‘spearphishing’ and other phishing attacks on companies and individuals within those companies. We have had clients that have been attacked, and we have seen it happen to other companies in the marketplace. Cyber security should be taken as a serious consideration for any firm that could be perceived as an easy target for fraudulent or malicious attack. Criminals are becoming more and more sophisticated in their approach to corporate fraud and extracting money from victims. Security in any firm should be one of, if not the highest, priority. It is important in order to protect business, reputation and members of staff. Again this comes back to selecting the right vendors to outsource services to. It will have a direct impact on security risks and averting these risks. At Eze Castle Integration, for example, we have built layers of security into our Eze Private Cloud solutions to help ensure user data is protected from the data centre to the desktop.
HFM: What role are investors playing in shaping technology decision-making?
DH: Investors are ultimately driving the initial success and setting the precedent with new launches and established firms. All too often we advise funds not to cut corners in their technology operations, as this has a direct impact on the long-term success and reputability of their business. Investors expect firms to maintain institutional grade IT environments regardless of their size. The proliferation of private cloud services has had a marked impact in levelling the playing field. But, we always caution clients that there are differences between cloud offerings so they must conduct due diligence on the service providers to ensure all resiliency, security and service level requirements are met or exceeded. Many funds fail because of issues like downtime on services or compliance issues. But the main reason we see funds fail is because of a lack of target investment to launch. This is often driven by choices of funds over selection of service providers.
HFM: What is the single most important technology decision a new start-up will make?
DH: Today, there are many variations of technology solutions in the market. COOs are often overwhelmed with differences between private, public or hybrid owned cloud solutions. Ultimately a fund is putting its trust in an outsourced provider to deliver a service that ensures the business is up and running at optimum performance levels for the longest time possible. You are looking for 100% uptime. The most effective way to achieve 100% uptime is to select a service provider that has as much ownership and control of the service that you are buying into as possible. Typically risk is added when a service provider relies on other third parties to provide some or all of their solutions, as they effectively become an intermediator. This creates a situation where they have little or no control over the service being provided.
That is not the way Eze Castle Integration works. We manage the Eze Private Cloud, for example, from end to end so we can give clients confidence that the solution will perform as promised. Since selecting a technology partner is one of the most important decisions a firm can make, we encourage clients to conduct thorough due diligence, which includes inquiring about what services are outsourced. Once launched, a start-up should also commit to conducting annual risk assessments of their technology partners.
HFM: How can emerging managers leverage technology as a competitive differentiator against larger, more-established firms?
DH: Technology is a great talking point at any level. Everybody uses technology on a daily basis. As such, everybody has some kind of understanding of it. Established firms tend to rest on their laurels. They think: ‘Well, it has worked for so many years, why would we change it?’ Or ‘Why would we adopt anything different?’ Newer technology has enabled firms to be more dynamic in their approach and new businesses to be more flexible in the way that they operate. If start-up firms can demonstrate the same or better results through technology, they have the ability to shock older, more established, institutional firms to take note of what they are doing. Ultimately, it all comes down to profitability across the business. Technology enables newer firms to achieve this.