How to Start a Hedge Fund in 2021: Your Technology Provider & Long-Term Success
At SS&C Eze, we saw many of our hedge fund clients have excellent investment returns throughout 2020. As word got out about the value demonstrated by these firms throughout market volatility, we saw an increase in start-up hedge fund activity as new industry players sought to take advantage of potential market volatility to jump in and start a new firm.
If you’re considering launching a fund of your own in 2021, you likely have questions: When should I start? How do I start? How do I select partners who will be there to support me? And, most importantly: How do I ensure long-term growth? Here are some tips to ensure you’re setting yourself up for success from day one.
Get Ahead of the Competition – Start Today
Getting up and running will likely take longer than you think, on average, 6-9 months to set up legal entities, auditors and prime brokers, and hire the right personnel. So, to get ahead of the competition, it’s best to start as soon as possible.
Preparing for Due Diligence – Meeting Investor Expectations
Regulations, like MiFID II and GDPR, have led to heightened investor scrutiny, making due diligence a more critical part of the capital-raising process than ever before. The additional challenge of conducting this process virtually only complicates matters and makes it even more important that you enter the process prepared.
During this stage, investors expect you to be retaining service providers who do their jobs well and have long track records in the industry. Before you enter due diligence, most investors will expect to see:
- Legal and tax infrastructure completed for jurisdictions you’ll operate in.
- Connections to prime brokers, which can serve as sources of capital introductions essential to fundraising.
- A technology operations system to take care of trading, accounting, reconciliations, etc.
- Proper certification for all vendors, demonstrating that they uphold rigorous, globally recognized standards.
Addressing Security Concerns with Global Security Certifications
In a recent report, WatersTechnology determined that the buy-side considers security concerns the primary challenge associated with third-party provider relationships.
When choosing solutions, systems, partners, and vendors, it’s important they meet the highest global standards for security. Yet without in-depth expertise, it’s hard to know where to start.
ISO certification is the best way to ensure vendors employ strong security practices. At SS&C Eze, our frameworks uphold the highest international standards. ISO certification 27001 is the gold standard for keeping client data safe and confidential, and ISO 27018 and 27017 ensure that vendors offering cloud services uphold the most rigorous privacy standards. You can learn more about global-standard compliance and ISO certification in our whitepaper on the subject.
Beyond Due Diligence: Choosing Partners for Long-Term Growth
Over time, the right providers only become more important. Your goal in starting a hedge fund is to achieve long-term growth. So, it is essential that you have selected trusted partners that will support you on that path.
So how do you know if a provider is a partner for growth? This type of provider will have certain distinct characteristics:
- Partnership Approach to Service - They are willing to work together to navigate and resolve any challenge or growing pain that you may face.
- Flexible, Adaptable Solution - Providers should be flexible about integrating with third-party systems and can come up with solutions that incorporate the providers you use.
- Designed for Growth - Most importantly, partners should be capable of growing with your hedge fund. They will help you scale because they are equipped to meet your current needs and can expand and grow with you in the future.
Questions to Ask When Selecting A Technology Partner for Growth
Over the long run, the right technology partners can greatly enhance operational efficiencies and improve your bottom line. Unfortunately, all too often, we see hedge fund founders not give the necessary consideration or factor growth into the equation when choosing a technology operations system provider. Rather than selecting a partner for growth from the outset, they settled for one that merely met their needs on day one.
One of the first things you should consider when determining whether a technology provider is a partner for growth is how their solution is delivered. Look for a cloud-hosted solution with scalable and elastic infrastructure that will auto-scale to accommodate growth. Additionally, in today's remote and at times uncertain work environment, flexible, modern cloud technology allows you to access your systems and deliver returns, regardless of your location or market volatility.
When you introduce a technology provider that offers the scalability and adaptability to handle your workflows of the future, you set yourself up for operational success and save yourself the cost and hassle of switching providers down the line.
To further interrogate whether a provider is a partner for growth, try asking these questions:
- What’s my ultimate size goal? Can this provider accommodate a hedge fund of this size?
- How big do I envision my firm getting? How much mobility should my system have across offices and jurisdictions?
- Do I want to be going after larger investors, and will I be adjusting my fee structure to be able to accommodate them?
- Is this a partner I can trust? What is their track record in the industry, and do they take technological and operational risk seriously?
- If I have any issues, who can I call? How quickly will my service provider address those issues?
- If I have new ideas, is my service provider open to helping me expand my technology to accommodate them?
- What strategies do I want to run, and how much flexibility do I want to be able to introduce new asset classes, geographies, or styles? Is this provider capable of assisting me with this?
Your investment technology provider is just one of the considerations you must make when starting a hedge fund. For a more comprehensive guide to starting a hedge fund, check out our guide:
James leads institutional sales efforts at SS&C Eze. He joined Eze in 2013, working from Dallas to grow market share and pipeline across the Midwest and then expanding his territory to the East coast. He transitioned to New York in 2015, and now covers the New York, Connecticut and Massachusetts sales efforts. Prior to joining Eze in 2013, he led sales efforts in the Alternative Investments group at Morgan Stanley Wealth Management and Gain Capital.