Relentless Determination… Keys to starting and growing a successful hedge fund
Every year, thousands of new portfolio managers venture out on their own to hang a shingle and launch the next ThirdPoint or Tiger Global. These new “Dan Loebs” or “Chase Colemans” are incredibly smart and super ambitious. They have been at the top of their game in everything they have done: top university, top business school, investment banking, serving as an analyst to a successful portfolio manager, and even making their name running a book at a platform. They have grinded and excelled, they have perfected their research and stock picking skills, they have contributed to the success of their fund, and, in many cases, they have generated envious returns. Now, it’s their time, the moment they launch their business with ambitious goals and a relentless determination to build a successful hedge fund.
Gone are the days where a desktop computer and a Bloomberg terminal were sufficient to launching a hedge fund business. Of course, you can still do that, but only as long as you’re only investing personal capital and a few friends and family. But, the second you attempt to offer the fund to external investors, the highly coveted family offices, funds-of-funds, and pensions or endowments, you realize that a fancy pedigree and a stellar track record are not enough. Those, and your investment acumen, are only 10–20% of what drives the investors’ decisions. Whether or not you admit it, you are now running a business, and you now need to look like a professional organization with all the essential elements and functions of a business. And, this is not simply to satisfy investor expectations. You now have professional obligations and a variety of organizational risks that require to be managed. You can no longer do it on your own with a computer and a Bloomberg, you now need a team and resources.
Complicated and demanding business
The hedge fund business is complicated, far more complicated than many new managers realize when going off on their own. At their previous job, whether a hedge fund, a bank or a multi-manager platform, all these needs and resources were provided. All the managers had to do was pick stocks and make buy or sell decisions. Everything else happened magically. They became blissfully ignorant of all the complexities and moving pieces that enabled them to research and trade and make a name for themselves.
The hedge fund business has a set of core functions that a critical for the day to day operational needs, meet the business’s various obligations to its many stakeholders (investors, regulators, counterparties, employees, etc.), and mitigate a number of inherent risks (regulatory, operational, conflicts of interest, etc.) that could quickly put an end to one’s ambitions. Investors evaluating a fund for a potential investment, expect to see these functions and understand how the many risks are being mitigated. They expect to see an infrastructure, with essential technology and service provides, and an experienced team, whether in-house or outsourced, overseeing these core functions and supporting the investment process. The investors also want to know how they will interact with the fund and how they will monitor their investment, and how they can be assured what they will be seeing and hearing is accurate. Anyone who has gone through a due diligence process with an investor knows how extensive and exhaustive it can be, and how demanding investors’ expectations can be.
Core functions
Emerging funds, as well as established and growth stage funds, have a number of critical functions that are essential to facilitate the investment process and sustain growth. Every one of these entails any combination of selecting and engaging vendors or professional service firms, establishing policies and procedures, implementing vital technology, managing the process, and — especially — doing the actual work itself. Each function requires a specific level of expertise and perspective, and very specific experience in an emerging or growth stage fund with limited resources. These functions can be thought of as, but not limited to, those listed below:
1. Legal and Structuring (Chief Operating Officer)
2. Investment Operations (Chief Operating Officer)
3. Accounting, Audit and Tax (Chief Financial Officer)
4. Budgeting, Planning and Strategy
5. Regulatory and Compliance (Chief Compliance Officer)
6. Marketing Support and Investor Relations
7. Due Diligence
8. Human Resources, Information Technology and Other Miscellaneous
Starting a hedge fund is extremely complicating, and at times can be very daunting. But, it is not rocket science. It simply requires expertise, the right team and the right resources. It also requires capital. That is why you need the right partner. A partner who’s not only launched funds before, but has done it thoughtfully and intelligently. A partner who knows how to optimize limited capital and limited resources to build and deliver investors a high quality, institutional-grade product. Finally, it does not hurt to have a partner who has successfully launched and scaled investment organizations running billions of dollars, and who is known and well regarded by the investor community.
Prizm Advisory Partners
With almost three decades experience launching and running complex and compelling investment organizations in demanding and rapidly evolving markets, Prizm Advisory brings unparalleled experience and expertise to emerging and early stage asset management organizations: hedge funds, private equity funds and private credit funds. With talent that covers the many facets and competencies of the investment organization, Prizm Advisory possesses a unique blend of insights and proficiency in all aspects of investment management, including marketing and investor relations, operations, accounting and finance, legal and compliance, quantitative analytics, technology and infrastructure, operational due diligence and risk management. Prizm Advisory also advises established, fully-scaled investment organizations, allocators and family offices.
Prizm Advisory advises our partners in establishing their investment organizations, formulating business plans and executable strategies, determining the appropriate legal structures, selecting and negotiating service providers, implementing systems and controls, recruiting critical talent, handling legal and regulatory needs, and developing risk controls. Prizm Advisory provides outsourced oversight of the businesses, handling every functional need of the organization. Prizm Advisory will also structure the marketing framework and oversee Marketing and Investor Relations process.
The engagements vary on the specific situations and are catered to the unique needs of each client, ranging from a full suite “COO” service, to supporting various roles and functions a la carte within the organization, to spearheading certain projects and initiatives.
For those institutional clients, such as family offices and funds-of-funds, that have aspirations of offering their product to a broader base of clients, Prizm Advisory will provide support with capital raising and investor relations. From developing a compelling narrative and preparing marketing materials, to identifying and engaging with prospective investors, Prizm Advisory will help our partners grow their businesses and attain their organizational ambitions.
For additional information or to discuss how Prizm Advisory can help you, please contact Michael Lubman, michael@prizmalpha.com or +1 917.518.7745.
