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How to Start a Hedge Fund In 2020: Your Technology Provider & Long-Term Success

James Baxter

 

In researching how to start a hedge fund, it can sometimes feel like you end up with more questions than answers. 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. 

Get Started 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, it’s best to start as soon as possible. 

Trusted Partners & Due Diligence 

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. 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. 

What Certifications Should My Vendors Have? 

It’s important to choose solutions, systems, partners, and vendors that meet the highest global standards for security. Yet without in-depth expertise, it’s hard to know where to start. 

Asking your vendors if they are ISO certified is the best way to ensure 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. 

Learn more about global-standard compliance and ISO certification in our whitepaper

Beyond Due Diligence: 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.  

One way we see new hedge fund founders go wrong in this area is with their technology operations system provider. All too often, hedge fund founders to do not give the necessary consideration when selecting this provider, and rather than selecting a partner for growth, they settle for one that merely meets their immediate needs.  

When you introduce a technology provider that will 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. Before settling for the cheapest solution out there, consider whether your choice offers these must-haves. 

How to Choose Your Partners for Growth 

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 - 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. 

How Do You Ensure That Your Technology Partner Is a Partner for Growth?  

So how do you ensure that a potential provider will fit your future needs? Ask 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? 

  • 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 choosing your vendors, check out our guide: Starting a Hedge Fund: How to Choose Your Vendors.