How to Launch a Hedge Fund: Cap Intro, Legal & Tech Tips

Successfully launching a hedge fund is a complex endeavor. Not only must emerging managers evaluate traditional deployment strategies, but consider current factors influencing the financial landscape.

Last week, Eze Castle Integration presented a webinar, “How to Launch a Hedge Fund,” featuring an expert panel that addressed some critical areas for consideration, notably capital introduction, legal and technology. There was quite a bit of content discussed during the 1-hour event, so we’ve pulled out some key takeaways.

Click here or scroll down to watch the webcast in its entirety.

Capital Raising (Paul Schultz, Director of Capital Introduction, Wells Fargo Prime Services)

• Examine both content and context, i.e. cash inflows and outflows as well as the “big picture” that accounts for volatility

• Be aware of the kinds of investors coming into the hedge fund space. Large and institutional pension plans are currently the largest investor base.

• Be prepared when speaking to investors. Target those who have a history of being receptive to founder share class and who may offer lower management and performance fees.

• Show investors that you have a 3+ year budget for working capital without any performance fees.

• Have a well thought-out blueprint. Clarity and intention make all the difference.

Legal Considerations (Michael Mavrides, Partner, Proskauer Rose LLP)

• Structure your hedge fund as two companies: one as the management company (LP) and the other as the fund GP

• If you are a corporation, consider setting up an entity in a jurisdiction outside of the US to avoid a corporate tax rate

• Compare both the benefits and disadvantages of a “master fund” versus a “side-by-side” structure (e.g. the master fund allows for one set of books and trades, while the side-by-side structure allows for more tax flexibility)

• Keep things simple. Don’t have four or five classes out of the gate. A founder’s class and a general class is standard.

• Have clear conversations with investors about liquidity strategy, side pockets, etc. Use robust, upfront language. Prepare an institutional set of documents up front if you are looking to attract institutional money versus high net money.

• Be mindful of both the manager and investor perspective when it comes to the MFN clause.

• Make sure to properly allocate expense and investment opportunities if you decide to launch a single investor fund or separately managed accounts.

• When it comes to seed arrangements, pick the right partner and put parameters around potential issues that could arise. For example: negotiations regarding how long money has to stay in the fund, negotiations around the seeder’s ability to participate in sales, and the buyout right.

Hedge Fund Technology Tips (Bob Guilbert, Managing Director, Eze Castle Integration)

• Understand that investors will expect enterprise-grade technology built in from Day 1.

• Consider a variety of factors before choosing an outsourced service provider: the company’s financials and background, the service team and organizational structure, the breadth of services offered, the information security practices and policies in place, and the company’s disaster recovery and business continuity plans.

• Remember the advantages of the cloud: a predictable cost, flexibility and scalability (“tech on demand”), enterprise security, and professional management and monitoring.

• Compare the benefits of a public versus a private cloud; there’s a time and a place for each. Recognize where the private cloud has an edge: high-touch, industry-specific service and support, scalability and application integration, and security and compliance.

• Understand that “you get what you pay for” in terms of value. Value is derived from knowledge of the application, knowledge of business, and having a dedicated support team.

• Become familiar with the changing expectations on the cybersecurity front, from both investors and regulators. Review the six areas identified by the SEC in September 2015 as the top security concerns. They include risk assessment, governance, training, access control, vendor management, and information sharing.

• Don’t forget to factor in networking, voice, and applications as part of your IT budget/plan.

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