It’s no question that the fundraising environment for hedge funds this year is tough. Investor demands are higher than ever, and even great performance may not be enough to secure commitments. Nevertheless, there are many funds coming to market with great ideas – the trick is convincing investors that your firm can make that idea work.
We recently attended Global Funds Media’s “Key Steps to Success” conference in New York, and learned that operations has become a key area of focus for funds looking to attract capital – particularly from institutional investors. Many of those firms are leaning on the expertise of outsourced legal, administrative and technology services to present their firms in the best light to investors.
Here are the top tips from the fundraising experts we’ve spoken to at the conference – and what we’ve learned in our many years of helping clients fill out due diligence questionnaires:
Operational due diligence is as important as investor due diligence.
The focus on operational due diligence has expanded tremendously in the last three years. Whereas previously investors were concerned about infrastructure, now they want to know everything from the structure of your organization, to people, systems, technology, compliance and how you handle third-party vendors. It’s therefore important to spend the time on preparing for your ODD reviews. Some tips:
- Create extensive documentation of everything critical to the function of your organization and provide it up-front.
- Ensure that you have a good narrative around how you run things and be able to explain it.
- Prepare for interviews, and answer questions investors should have asked. This will help build trust.
Create a culture of compliance.
Regulatory compliance and risk management are at the top of the list of investors’ concerns. We often hear the phrase “culture of compliance” in relation to registered advisers, but the truth is, even if you aren’t registered yet, you should follow the same practices as registered advisers to win over investors. That means:
- Hire the people you trust. Make that a priority.
- Create a strong compliance manual that reflects your core values, business structure, and objectives, and aligns to your strategy.
- Provide regular training on the compliance manual, as well as more regular check-ins when something changes.
- Update documentation regularly.
- Keep your finger on the pulse of upcoming regulations, and work with your people to understand how to build upcoming rules into existing processes.
- Hire external compliance experts if needed.
Make cybersecurity a priority.
Cybersecurity is now on every due diligence questionnaire we see. Institutional investors want to know everything about what’s happening with your client data, how you’re processing, where you’re storing it, and how you’re set up to avoid threats. To alleviate their concerns and yours, it helps to follow some best practices:
- Know what your risks are. Do a thorough evaluation of your setup to understand the risk profiles of your staff and systems.
- Ensure you have proper wrappers around your data. Follow best practices in setting up your cybersecurity protocols.
- Review and update your policies at least annually.
- Deal with any events immediately.
- If you’re using vendors, make sure they are ISO-certified.
- Hire experts to help you set up. This is not only encouraged, but expected by many institutional investors.
Don’t be afraid to outsource.
Fundraising experts and asset owners we’ve spoken to indicate outsourcing is no longer a big deal it once was. Many institutional investors are receptive to outsourcing in the front, middle-, and back-office across almost all positions. Here are some key areas where outsourcing can help you save money and improve your operational alpha:
- Middle and back-office outsourcing. It’s a no-brainer, as the industry has trended this way for the last few decades, and the trend is not going away.
- Compliance. Believe it or not, many institutional investors support using an outsourced compliance function. As long as you have an internal counterpart to manage the relationship, many investors actually welcome outsourcing compliance as an opportunity to gain outside expertise.
- Cybersecurity. This is a burgeoning area where expertise is scarce, so it’s important to do your due diligence and hire firms with expertise in your industry. When you do, treat your cyber vendors as employees, and ensure they have accountability.
- Front-office technology. We’ve written extensively about the benefits of choosing an outside provider vs building in-house, and we firmly believe outsourcing may be an economical choice for growing firms.
Selecting the right partners is key to success.
It’s no question that setting up operations correctly from the get-go can be difficult. That’s why you need expert partners to help get in optimal shape, whether that’s on fundraising, cybersecurity, compliance, or operations. Download our guide on how to select the right partners for success, and for a more comprehensive guide to starting a hedge fund, check out, How to Start a Hedge Fund: Setting Your Firm up for Long-Term Growth.