As the US economy begins to pick up pace, the number of hedge fund launches has also begun to rise. But although many of the challenges faced by managers are still very much the same – including capital raising and establishing a robust business strategy – firms will be entering a different playing field from years past.
The whole industry has had to re-evaluate and adapt to greater regulatory and compliance burdens, as well as increasing investor demands. What this means for emerging hedge fund managers is that a comprehensive and concrete pre-launch analysis must be in place to reduce the risk of early issues.
This does not mean that the homework is different this semester. Attracting investor capital is as difficult as ever and perhaps even more challenging is accommodating demands for transparency and reduced fees from institutional investors, as institutional capital continues rising in the alternatives space.
As this HFMWeek report discusses, considering the strategies, structures and partnerships available to emerging hedge fund managers prior to launch is crucial. And as preserving capital remains as important as ever, so too is choosing the right service providers and understanding the distinction between essential and complementary solutions.
For example, a start-up’s valuable capital can end up being consumed by the creation of an in-house technology system, which can take time to implement and even result in changes to service providers if they struggle to stay current with the changing regulatory environment. Finding a skilled technology provider that is able to grow with the business can make all the difference.
Looking forward, managers will need to focus their business strategies, considering infrastructure, operations, marketing and legal demands for their hedge funds’ performance in the context of greater investor and regulatory scrutiny. Read on for a comprehensive review of the US start-up space.
Increased competition, more demanding regulatory requirements, and establishing cost-effective structures with limited capital are all factors that should be taken into account by emerging hedge fund managers before launch. And as funds are tightening their belts in the current environment, knowing the distinction between an essential service and one that provides an added bonus, could make all the difference between a business strategy that succeeds or fails. HFMWeek sits down with Bart McDonough, founder of Agio Technology to find out what solutions should be considered essential for start-up managers.
HFMWeek (HFM): What technology considerations should be top of the agenda for managers when starting a hedge fund in the US?
Bart McDonough (BM): Starting a hedge fund is surprisingly similar to launching any new business. You want to preserve capital, move quickly, and invest in technology that will enhance your current operations to help you grow your business. Therefore, you need to begin with a list of essential technology services. This is when it’s important to separate the ‘must haves’ from the ‘nice to haves’. Far too often we see managers starting new funds with a ‘must have’ list that reflects the technology infrastructure of a 10-year-old, multi-billion assets under management fund. Yes, having all those ‘nice to haves’ would be wonderful, but what is it you really need?
Once you have your ‘must have’ list of technology solutions, you are now faced with the age-old ‘build/buy/ rent’ conundrum. Again, it is important to remember that building the robust in-house technology found in more established funds could very well consume 100% or more of your start-up’s annual fees – certainly not a plan anyone would recommend.
Finally, will the decisions about your technology solutions and infrastructure allow you to grow your fund over time? In a word: are they scalable? If your stripped down solution saves you money, but cannot grow as you grow, then you are left with the enormous expense and disruption involved in changing providers. Now is the time to understand if your solution is scalable.
HFM: What specific technology services would you say are crucial for start-up hedge funds to have in place?
BM: Hedge funds are not all the same, but every start-up fund should have the same basic essentials – hosted email, email security, web defense, file sharing and collaboration, compliance archiving, and backup and disaster recovery for all of the previously mentioned services. At Agio, we offer all of these essentials within SkySuite, an integrated package of enterprise-class services.
As great as SkySuite is, however, two of the most critical technologies for start-up funds are really e-mail and telephone services. Providing 24/7 access to skilled technicians who understand technology – and specifically hedge fund technology – is critical for any emerging fund. Few, if any, start-ups are staffed with in-house engineers, and when problems occur, knowing experienced help is a phone call or email away helps you sleep easier at night.
HFM: Establishing a business structure in a cost-effective manner can be a huge challenge for start-up hedge funds. How can firms establish an economical IT solution without compromising on quality?
BM: Do not build what you can buy, buy what you can rent, or rent what you can borrow – sound advice for technology at any start-up hedge fund. Building or buying an IT infrastructure has three main problems: it spends your valuable capital, it takes too long, and requires expertise not central to your firm’s mission. Renting the skilled IT professionals – employees and contractors – to run it can be even more problematic.
Partnering with a provider who has the infrastructure, people and hedge fund technology experience is cost-effective and can have you up and running in less than 10% of the time it would take with any other solution.
HFM: How has cloud computing changed the way businesses operate, and what are the advantages of using this solution?
BM: While the cloud may not have changed everything, it certainly has changed a great deal – most notably allowing emerging hedge fund managers to work from almost anywhere. In many applications the cloud has also significantly reduced costs, especially as it relates to the ‘pay as you consume’ models that provide greater flexibility. Overall, the cloud is a win from an economic standpoint.
On the other hand, it has led to some significant data security and privacy issues. While the Amazon outages have received most of the press coverage lately, almost all public and private cloud providers have to cope with these issues. Today, Agio’s position on the cloud is almost always a hybrid solution, which we’ve seen work best for most funds in varying situations.
HFM: In what ways is operational transparency important, and how can it make a difference in terms of predicting service costs and planning for business growth?
BM: Operational transparency certainly allows for predicting service costs that help with long-term planning, but it is also critical to ensure the health and reliability of client systems. With our unique Enterprise Service Platform (ESP), Agio clients see exactly what we see in real-time. Our ESP Dashboard provides them with access to what Agio engineers are monitoring and working on at any given moment, in their environment. Of equal importance as we mentioned before, is scalability. Agio’s technology environment can scale up as quickly and seamlessly as the client, without any interruption or need to change providers.
Servicing many of the largest and most operationally complex hedge funds, Agio has the people, processes, and tools to scale regardless of size or complexity.
HFM: How can data management solutions help new hedge fund managers satisfy the mounting transparency requests from regulators and investors?
BM: The one thing certain about the regulatory environment is that it is changing every day. Hedge fund managers must carefully select providers who are staying current with all compliance protocols, and who have the system Flexibility to adjust as new compliance is mandated.
Investors share compliance concerns as well, and have begun to look for funds with effective control procedures and carefully structured back-up and disaster recovery plans. Fund managers should carefully review their providers’ documentation in these areas, and many now look for independent verification. For this reason, Agio recently became the First hedge fund-focused IT service provider to successfully complete the SOC 1 Type 2 SSAE 16 examination for our internal control procedures and compliance.