Launching a Hedge Fund There are a host of decisions hedge fund managers need to make during the launch process: – Legal/Regulatory – Marketing/Capital-Raising – Technology Lack of transparency no longer acceptable – Competition for investments is high Operational excellence is becoming top factor in allocation decisions
#1 Do your legal homework. As a first step, you’ll need to hash out some legal considerations: – Determine your structure and investment strategy. – Determine what assets under management you will be launching with. This number may affect your strategy/structure. • Are you seeking acceleration or seed capital? – Are there regulatory requirements based on your location/structure/AUM? – Are there tax implications related to your fund launch?
# 2 Create a 24-month marketing plan. Months 1-6: – Ask yourself important questions (Who am I? What is my edge?) . – Determine your process for marketing. – Create your marketing pitch (Write it down and learn it!). – Invest in a CRM system so you can keep track of investor communication. Months 6-12: – Contact early stage investors. Your success (or lack thereof) will help you determine if you need to tweak your marketing pitch.
# 2 Create a 24-month marketing plan. Months 12-24: – Implement a comprehensive marketing campaign.* *This is where having a CRM in place will be beneficial. If you’ve been able to track your previous contact with investors, it will help you better tailor your messaging.
# 3 Surround yourself with service providerswhose strengths will offset your weaknesses.Every successful hedge fund needs smart partners ontheir side. – Using best-in-class vendors and service providers says a lot to investors about the value you place on your firm.Select vendors and service providers you can growwith. If you outgrow your vendor, it can be a significant operational disruption to transition to a new one.From a technology perspective, investors want to seethat you’ve made an investment in systems andprocesses that support your business & tradingoperations.
#4 Develop an IT budget for your first 2-3 years. Establish a budget for both your infrastructure/hardware and software requirements. You will need to know: – How many offices will you launch with? How many users? – Where are your offices located? – What are your trading practices? – What kinds of systems do you need for daily operations? (Order Management System, Portfolio Accounting, Risk Management, CRM/IRM, etc.)
#4 Develop an IT budget for your first 2-3 years. Ensure your technology budget coincides with your growth plan. Do you expect to grow quickly? Open new offices? Expand internationally? You will need to account for these changes.
#5 Learn about Dodd-Frank and how it affectsyour firm. Hedge fund registration isn’t just checking a box anymore. Represent your firm accurately and be descriptive of your operations, otherwise you open your firm up to serious regulatory and criminal prosecution. Some managers, even if not legally mandated, are choosing to register their funds because they think it will be viewed positively by investors. Make sure you understand the technology implications of Dodd-Frank. Your firm will need system safeguards (data protection & disaster recovery) and email archiving in place.
#6 There are three steps to leaving a goodimpression. Use them. Explain your strategy clearly and concisely. Explain how your firm is different. – Is it your process? Your business? Structure? – Once you figure it out, use it to your advantage. Explain your risk management and corporate governance procedures. Ultimately, remember that your first impression is your best impression. If you blow it on the first opportunity, you may not get another one.
#7 Remember that when it comes totechnology, you have options. Years ago, hedge funds had to invest in a lot of hardware; some even had to build out expensive Comm. Rooms. Nowadays, firms have options when it comes to their technology infrastructure. – With cloud computing (infrastructure-as-a-service), firms can save on upfront capital expenditures by hosting their infrastructure in the Cloud. Cloud services offer more flexibility than traditional infrastructure models and can create significant cost-savings for firms of all sizes.
#8 Take the time to build a real business. Firms often place too much emphasis on managing portfolios and not enough on managing the business as a whole. Examine your firm from inside out. Invest in all aspects of your business (investment, legal, operations, technology, etc.) to create a firm that investors will want to allocate to.
#9 Transparency is of critical importance. Since the 2008 economic collapse and scandals caused by the likes of Madoff, transparency has become a key requirement for investors. Fund managers are taking this to heart and making efforts to comply with increasing investor requirements. Document everything. Invest in risk management tools that will give comfort to your investors.
#10 Remember that raising capital is a non-stop process. Marketing your hedge fund cannot just be a step in your launch process. It must be a step in your business process. Competition for investors is at an all-time high. Figure out what sets you apart. If you don’t learn how to differentiate yourself, you will get lost in the crowd. Put time into the small things that will set you apart. Write a thank-you note. It’s the small gestures (and common sense!) that often puts firms ahead.
Contributors The material put forth in this presentation is attributed to:
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