Throughout my 22 years at SS&C Eze, I’ve seen my share of shifts in the market. Here is one worth noting: a report by Hedge Fund Research reports that more than 600 new funds were launched in 2021 - the highest number in four years. Others are noticing, too. The Alternative Investment Management Association and Eze partner Cowen provide a detailed analysis of this trend in their “Emerging Stronger: The Next Generation Manager Survey.”
Their research found declining costs to be a significant factor driving the increase in the number of hedge funds starting up. In fact, the breakeven point for hedge funds has dropped 25 percent, partly due to reduced headcount and reductions in travel and office expenses brought on by the pandemic.
Additionally, allocators are now more willing to consider managers with less than $100 million in assets under management or those with a track record of fewer than three years, breaking down another barrier to entry.
But this openness does not mean allocators are willing to invest in just any new fund. In the report, over 80 percent cite concerns over operational due diligence, poor administration standards, and lack of transparency as barriers to investment.
If you are considering taking advantage of these trends and starting a hedge fund, you must first prepare to address these potential concerns. Here, I share insights gleaned from more than two decades of experience in financial technology on how the right partners can help you address these concerns and set you up for success.
1. Set Your Course – Start with a Detailed Plan
Begin by making a business plan that outlines your investment strategy and the costs involved in running an efficient and institutionally sound operation.
At this point, you’ll also want to think about how you’ll market your fund. You’ll need to develop a compelling name that attracts investors and create a pitch book highlighting your investment objectives, strategies, and who is running the show. The pitch book is an investor’s first look into how you run your fund, so you want to get it right.
Getting up and running will likely take longer than you think. On average, hiring the right personnel and setting up all the partnerships you’ll need, including legal entities, auditors, and prime brokers, can take six to nine months. Having a plan and your end vision in mind will help ensure things stay on track.
2. Meet Investor Operational Demands with Help from the Experts
As I mentioned, allocators' most significant barriers to hedge fund investments are now due diligence, poor administration standards, and lack of transparency. Navigating evolving regulatory requirements and settlement changes while managing your firm's operations becomes increasingly complicated. Luckily, help from the right experts can make managing your fund operations successful regardless of complexity.
When choosing these experts, research and hire the best service providers you can find. Look for vendors and professionals with long track records of success in the industry who can work with you beyond launch as a long-term partner.
Once in place, put this team of experts to work. Before you enter due diligence, most investors will expect to see:
- Legal and tax infrastructure completed for jurisdictions in which you will operate.
- Connections to prime brokers who can provide capital introductions essential to fundraising.
- A technology operations system handling trading, accounting, reconciliations, etc.
- Proper certification for all vendors, demonstrating that they uphold rigorous, globally recognized standards.
To learn more about the partners you will need to set up and run your operation, download this eBook on the topic: Starting A Hedge Fund: How To Choose Your Vendors.
Addressing Security Concerns with Global Security Certifications
Investors want to know their money is safe and your operations are seamless and designed to mitigate risk. As such, security should be a primary consideration when establishing these third-party provider relationships. When choosing solutions, systems, partners, and vendors, ensuring they meet the highest global standards for security is essential.
ISO certification is the best way to ensure vendors employ strong security practices. For example, at SS&C Eze, our frameworks uphold ISO certification 27001, the gold standard for keeping client data safe and confidential, and ISO 27018 and 27017, signifying that our cloud services uphold the most rigorous privacy standards.
This important topic is addressed further in a whitepaper prepared by cybersecurity experts at SS&C Eze. Download your copy to learn how to ensure your vendors uphold global-standard compliance and have received the third-party validation necessary to mitigate risks for your hedge fund.
3. Beyond Due Diligence: Choose Partners for Long-Term Growth
Your goal in starting a hedge fund is to achieve long-term growth. Doing so requires working with trusted partners who will continue to support you on your path long after launch.
So how do you know if a provider is a partner for growth? This type of provider will have specific distinct characteristics.
Service is the most important characteristic to look for in a vendor. From onboarding and implementation to day-to-day support for your front- to back-office, you need to know your vendor can provide fast and personalized service from day one. Also, be sure your service partnership can expand to accommodate your needs as your business grows.
For a more in-depth look at evaluating technology vendor service, check out this blog.
In addition to scalable support, your provider should offer flexible and configurable solutions that will not only meet your current needs but expand and grow as your needs evolve.
At a minimum, your solution should be built using an elastic infrastructure and employ APIs that empower you to extend the value of your investment through integrations with current and future platforms.
To scale even more seamlessly, choose a vendor with an app store or marketplace of plug-and-play applications. This type of solution lets you expand your investment ecosystem quickly when the time is right, without the cost and hassle of vetting and onboarding additional vendors.
“Start-up funds tend to run lean, so it is very important to find partners that you trust and that will give you the attention you need.”
- JOSEPH WEISS, CO-FOUNDER & SENIOR ANALYST AT NATARE CAPITAL MANAGEMENT
4. When Selecting a Hedge Fund Technology Partner, Ask these Critical Questions
Often, hedge fund founders don't make necessary considerations or factor in growth when choosing a technology operations system provider. Instead, these firms simply settle for the vendor with the lowest proposal price or that meets only their day one requirements.
To avoid buyer's remorse, compare the goals of your fund with the technology the provider is offering.
Start by looking at your business plan and answering the following:
- What's my ultimate size goal? What technology will I need to accommodate a hedge fund of this size?
- How big do I envision my firm getting? How much mobility should my technology system have across offices and jurisdictions?
- Do I want to go after larger investors, and will I adjust my fee structure to accommodate them?
- What strategies do I want to run, and how much flexibility do I need to be able to introduce new asset classes?
Next, evaluate whether your technology partner can help you achieve your goals. Asking these questions can help you make your assessment:
- Are you a partner I can trust? What is your track record in the industry, and how do I know you take technological and operational risk seriously?
- What is the size of your service and support organization? Do they have expertise in specific areas of my business? Can I always get someone on the phone if I have an issue? What is your experience helping firms like mine grow?
- Are you capable of supporting the asset classes, jurisdictions, and strategies I have defined for my fund today, and any ideas I have for the future?
If the vendor can't answer these questions satisfactorily and grow with you to accommodate your desired path, the TCO is far greater than the low up-front cost.
Additionally, inquire about your vendor's system delivery options. A cloud-hosted system with a scalable, elastic infrastructure is best. Flexible, modern cloud technology allows you to access your systems and deliver returns, regardless of location or market volatility. Cloud-hosted systems also provide critical connections in today's hybrid work environment.
Choosing a technology provider that offers the scalability and adaptability to handle your workflows of today – and the future – sets you up for operational success and saves you the cost and hassle of switching providers down the line.
5. Don’t Wait – Get Ahead of the Competition
Hedge fund managers shouldn’t wait until after launching their funds to implement critical investment operations.
Making a plan, finding the right partners, and adopting scalable, reliable, and secure technology creates an institutionalized infrastructure that sets your hedge fund up for success. In doing so, you are better prepared to address any potential investor concerns, and having the right technology from the start sets you ahead of your competitors.
To learn more about starting a successful hedge fund, download our eBook: