The Prime Brokerage Perspective for Emerging Hedge Fund Managers
The following article is part of our Emerging Managers Insight Article Series and was contributed by Glen Dailey, Managing Director, Jefferies & Company, Inc. Read more articles from the Series HERE.
Starting a hedge fund is easier than ever with many vendors offering turnkey services to get a fund up and running quickly. The challenge is starting a successful hedge fund that will grow and become a viable organization. With over 8,000 hedge funds operating around the world, the competition to attract hedge fund investors is greater than ever. For someone starting a fund, you have to rely on your own capital and that of your friends and family to get the fund off the ground. From there, the key to success is outstanding performance.
Someone starting a fund should set a realistic schedule to launch and not rush to get the 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 be there as you grow. Have a plan going into your new venture, which should include lining up friends and family as day one investors as well as reaching out to other investors to start a pipeline before you actually launch the fund. Once you are under way, you will end up getting tied to your screens, focused on performing, and time for marketing becomes scarce.
I would also recommend for a new fund to budget for a marketer in their first two years of operation. You can contract with a third-party marketer or hire an in-house person. 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. The largest funds did not get to where they are by waiting for someone to knock on their door looking for a good hedge fund. They built their funds by actively seeking new investors and building a brand that becomes known in the market place.
With so many competitors in every strategy, you have to be proactive in your approach to make sure that when an allocator is looking for a particular strategy, you have already laid the ground work by having a pre-existing relationship, which makes it easier for an investor to perform due diligence and ultimately make the investment.
Prime brokers offer services such as portfolio and risk reporting which makes your initial technology investment fairly minimal. There are other outsourcing services for technology, compliance, trading and accounting that are very economical and provide an institutional infrastructure. Capital introduction is a much sought after service from prime brokers which could be very helpful in providing a new fund exposure to potential investors. Capital introduction is exactly what a prime broker provides.
A fund has to take advantage of introductions and begin to build relationships and add to their list of investors and potential investors. All professional hedge fund investors want to know about new funds and funds that are performing well. They may not be willing to have meetings up front, but they all want to be on your mailing list and follow your fund’s performance and growth through your monthly letter.
Starting a fund is about starting and managing a business. Most new managers come with great investment capabilities and little business operating experience. The services of your prime broker and other service providers can make the transition a whole lot easier. Many prime brokers offer consulting services to help guide you through the maze of real estate, technology, benefits and staffing. These services can be a great value, and their experience can help you avoid costly mistakes that may distract you from your real mission, which is to make money for your investors.
The hedge fund industry has grown and become more institutionalized over the past 25 years. The industry is expected to continue to grow for years to come as absolute returns become the only alternative in a volatile market for corporate and state pension funds that are underfunded with huge obligations to meet in the years ahead. There will always be room in the market for talented individuals, and the most successful will be the ones that start with a solid foundation.
About the Author
Glen Dailey is the Managing Director and Head of Prime Brokerage at Jefferies & Company. He previously founded Banc of America Prime Brokerage in 1995 and was most recently their Chief Operating Officer. Prior to Banc of America Securities LLC, Glen was a Managing Director and Head of Prime Brokerage for twelve years at Furman Selz LLC.