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2. investing
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HFMWEEK
S P E C I A L
R E P O R T
HOW TO START A HEDGE
FUND IN THE EU 2013
REGULATION
Navigating growing legislative concerns with emerging managers
CAPITAL
How difficulties raising day-one investment are driving innovation
TECHNOLOGY
The increasing importance of IT set-ups during the launch process
FEATURING Apex Fund Services // Bloomberg // GVTH Advocates //
HedgeStart // Linear Investments // One Ten Associates // Options IT
// Parex PR
001_HFMHow2EU_Cover.indd 3
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Untitled-2 1
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I
t’s fair to say that start-up funds are facing some of
their most challenging times yet. With the hedge
fund industry having undergone a raft of changes
over the past few years – including increasingly
demanding investors and regulatory burdens – hedge
fund managers have had a lot to get accustomed to.
Attracting early-stage capital in today’s environment
seems to be one of the biggest hurdles of all.
Hedge fund austerity measures are crucial
to reassuring investors about a fund’s survival, and this often means
consolidating operational structures in order to have cost-effective
operations. Setting up the required infrastructure can be more challenging for
emerging managers, not just because of a lack of experience when it comes to
outsourcing, but also because large amounts of initial investor capital can be
sliced away on establishment costs.
Across the board, reduced AuM means funds are tightening their belts in
order to fulfil heightened technology, legal and admin requirements. And while
establishing a track record takes time, the right risk management solutions need
to be in place from day one to gain investor trust.
When it comes to overheads, this trust is acquired through transparency,
regulatory compliance and caution. This, in turn, will only be in place if
managers fully understand the technology platforms available to them, make
sure the right employees are hired, and choose outsourcing partners who
provide effective and innovative solutions.
With the EU’s Alternative Investment Fund Managers Directive coming into
play in 2013, it will prove to be a year of change. And while there will certainly
be a number of challenges for emerging managers, signs point to increased
investment in start-up funds. This HFMWeek How to Start a Hedge Fund in the
EU 2013 report covers a wide range of topics that will be high on the agendas of
emerging fund managers, and hopefully offers a guide for driving business and
evolving with the times.
Roberto Barros
REPORT EDITOR
HEDGEFUNDMANAGER
HFMWEEK
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H F M W E E K . CO M 3
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CONTENTS
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
06
MARKETING
POSITIVE RELATIONS THROUGH
COMMUNICATION
17
FUND SERVICES
HEDGING FROM THE START
Ulf Svensson of Bloomberg LP talks to HFMWeek about what startup hedge fund managers should consider
11
20
FUND SERVICES
Peter Hughes of Apex Fund Services talks to HFMWeek about the
main points a start-up manager should keep in mind when setting
up a hedge fund in the EU
14
22
HIRING THE COO CAN BE THE HARDEST
DECISION
COOs are playing an increasingly important role within start-ups, as
investors want to have an individual in place with the background
to handle the complexity of regulation and governance. Mush Ali
of One Ten Associates explains the main factors that should be
considered when hiring a COO
PRIME BROKERAGE
OUTSOURCING FOR SMALLER HEDGE FUNDS
Jerry Lees of Linear Investments explains the advantages of
working with a ‘mini’ prime broker in order to keep costs to a
minimum in this challenging environment of greater regulatory
burdens and increasing investor demand
ADAPTING TO CHANGE
RECRUITMENT
HITTING THE GROUND RUNNING
Starting out as a new hedge fund management firm can be a
daunting task with the industry constantly evolving and growing.
So to get an idea of the challenges these start-ups face and how
they can circumvent difficulties, HFMWeek talked to Matthew
Wilson of Hedgestart about the importance a consultancy service
can have
Henrietta Hirst of Parex PR explains why effective marketing from the
outset will set hedge fund managers a league apart
08
FUND SERVICES
TECHNOLOGY
CHECK YOUR PLAYBOOK EXPIR ATION DATE
With cloud services becoming increasingly popular as a hedge
fund IT solution, Nigel Kneafsey of Options IT provides an overview
of the most important points to consider when selecting a
technology platform
25
LEGAL
RISK MANAGEMENT IN SECURITIES
FINANCING PROGR AMMES
Simon Borg Barthet of GVTH Advocates explains why, in the current
regulatory environment, having a robust risk management system
is crucial for managers - both from a legal and capital adequacy
point of view
4 H F M W E E K . CO M
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Integrated expertise for hedge fund start-ups
All successful hedge funds have a robust business infrastructure behind
them. HedgeStart has the skills and experience you need to build yours.
Our expertise covers a broad range of business requirements and we
understand how they fit together. Using these insights we provide our
services in an integrated way – working as part of your team to launch
and grow your fund.
Tax
Regulatory
compliance
A robust business
infrastructure built
around you.
Accountancy
IT and
communications
HedgeStart is ready to talk to you – please come to see us for an
informal and confidential conversation.
Contact Richard Jobling:
+44 (0)20 7484 3945
rjobling@hedgestart.com
HedgeStart Partners LLP, St Albans House, 57/59 Haymarket, London SW1Y 4QX
T. +44 (0)20 7484 3900 www.hedgestart.com
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H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
POSITIVE RELATIONS
THROUGH COMMUNICATION
HENRIETTA HIRST OF PAREX PR EXPLAINS WHY EFFECTIVE MARKETING FROM THE OUTSET WILL SET HEDGE FUND MANAGERS A LEAGUE APART
H
Henrietta Hirst
is a seasoned PR
industry leader with over
25 years’ experience
advising companies on
their international media
relations activities, profile
raising, stakeholder
communications and issues
management. She founded
specialist investment
management sector PR firm
Parex PR in 2005, having
previously worked for UPC
across Europe and Ludgate
Communications in the
Americas.
edge funds, once the darlings of the financial markets, have taken a beating over the
past few years. With their performance
records and reputations severely dented,
many funds have had to re-establish
themselves. This re-establishment, or
evolution, has meant that many hedge fund firms have
made significant investments in compliance and legal as
well as their operations and technical functions. Historically, marketing has not enjoyed the same recognition as
a critical market support function.
However, with an arid fund raising
environment and ever-intensifying
competition for investor assets,
effective marketing and PR is, at
last, becoming elevated to the ‘top
table’ as a requisite discipline for
fund managers.
Despite intense competition
within the industry, emerging
managers have good reason to
be optimistic. Confidence in the
hedge fund sector has been returning this year. According to Hedge
Fund Research, by the end of Q3
of 2012, asset levels had bounced
back up and hedge fund capital increased $183bn to a record
$2.19trn. And now that the rules of
marketing hedge funds are becoming clearer through the AIFMD (and the JOBS Act in the
US) hedge funds will be able to integrate a marketing and
communications strategy from the outset.
There is, of course, no geographical constraint in looking for investors, but the changes in the regulatory landscape will affect the marketing of funds in the EU and offshore. When looking to target investors, emerging hedge
fund managers should do extensive research on their investor profile: many investors prefer to remain offshore
and use unregulated hedge fund structures while others,
in particular European investors, are increasingly investing through Ucits and other similar EU-based structures.
Therefore, investor interest will ultimately depend on the
structure of the fund.
Nevertheless, one growing trend as a result of the
AIFMD is towards re-domiciling funds onshore in Europe. The AIFMD applies to hedge funds with over €100m
under management, but the advice to any start-up hedge
fund with less than that is to structure the fund in such a
way as to comply with these rules.
Even now, after several years and many versions,
the AIFMD continues to cause controversy, with
much of the debate played out in the press. But as the
Directive starts to be implemented by EU member states,
the opportunities are emerging too.
Firstly, a clear benefit is that under these new regulations, promoting a fund onshore in the EU will mean that
investors have some protection.
Secondly, the EU market for hedge
fund investments is big and getting
bigger: there are already plenty of
European investors prepared to invest in onshore hedge funds (unlike
UK investors, many European institutional investors face penalties if
they invest in offshore hedge funds).
There are also many pension funds
that are in the process of expanding
their investment strategies to include hedge funds or increase their
existing hedge fund allocations.
But with global hedge fund industry assets concentrated in the largest
firms (HFR data shows that 65% of
total industry AuM is with the 5% of
firms that each individually manage
$5bn or more), the smaller funds are
losing out. What this means in practice is that since the financial
crisis there has been a polarisation of hedge fund investors.
DESPITE INTENSE
COMPETITION WITHIN
THE INDUSTRY, EMERGING
MANAGERS HAVE
GOOD REASON TO
BE OPTIMISTIC
”
SIZE MATTERS
As the situation stands in 2012, institutional investors
tend to allocate assets to the larger and longer established
hedge funds (those with AuM of over $5bn). This is not
only because those have a large asset base, but also because
the investors require strong liquidity and often more mainstream strategies in order to comply with the restrictions
of their investment mandates. At the other end of the spectrum, many medium to small size investors – including
family offices and high-net-worth individuals – are more
open to investing with smaller managers; those niche and
emerging managers that offer more distinctive strategies.
Since the financial crisis, it seems that accessing the second
group has become more difficult.
6 H F M W E E K . CO M
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MARKETING
The reality is that generating capital is difficult
without a proven track record of either independent performance or in raising assets. And once a
hedge fund has tapped into family, friends and personal contacts, they need to venture further afield
for more substantial assets.
This can be a significant stumbling block as
the high-net-worth individuals, family offices and
seeders that should be the next port of call for
managers to market their funds are bombarded
with marketing proposals every day. So, it will
only be the well-planned marketing strategy with
appropriate well thought out support collateraltogether with the manager’s ability to communicate a consistent, clear and concise message that
will catch the investors’ eye.
In order to market a fund effectively, from the
beginning managers should ascertain their position in the marketplace, build market awareness
of the funds and prove to potential investors how
their strategies differentiate from others. This
should be integrated across all business activities
in order to reinforce the message and market positioning.
Emerging hedge fund managers need to research each target investor and work out if the characteristics of the strategies they run fit with the asset allocation patterns of their
target investors.
Once this has been done, the external marketing can
begin. And this involves a panoply of possibilities: regular update letters to a wide but relevant distribution list;
a comprehensive website that includes useful information
on the investment focus, the team, and uploads of up-todate multimedia factsheets. Concise and high quality pre-
sentation documents with relevant data (including
calculations where necessary) and an excellent
pitch by a well-trained, authoritative and articulate
spokesperson will be equally essential in raising
the manager’s profile. The recently created JOBS
Act in the US means that SEC-registered managers
will have greater freedom in communicating with
potential investors and providing access to fund information. Managers should take advantage of this.
Then, it’s all about the networking. Qualified investors and their wealth advisers, as well as other
institutional asset allocators, are more likely to
take notice if they have met the manager – and this
means getting out there. Hosting seminars, attending and speaking at family office gatherings, investor conferences and other platforms can be part of
the mix. Becoming a member of AIMA and signing up to the best practice standards of the Hedge
Fund Matrix, (a joint initiative of AIMA, HFSB,
IOSCO, MFA and the Asset Managers’ Committee of the US PWG). Even speed dating for hedge
funds is becoming a popular option.
Undoubtedly, raising capital has never been harder in
this harsh economic climate, and for managers who have
only a short or little known track record for the foreseeable future there will be significantly fewer opportunities
for raising capital. The message for all start-up hedge fund
managers is to realise that marketing and communications
is no longer a bolt-on function. It has to be an integral
part of the business model and regardless of track record,
managers must continue to build positive relationships
through the many channels of communication available
to them. n
QUALIFIED INVESTORS
AND THEIR WEALTH
ADVISERS, AS WELL AS
OTHER INSTITUTIONAL
ASSET ALLOCATORS ARE
MORE LIKELY TO TAKE
NOTICE IF THEY HAVE
MET THE MANAGER
”
H F M W E E K . CO M 7
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H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
HEDGING FROM
THE START
ULF SVENSSON OF BLOOMBERG LP TALKS TO HFMWEEK ABOUT WHAT ISSUES START-UP HEDGE FUND MANAGERS SHOULD CONSIDER
T
he launch of a hedge fund is an exciting time,
with entrepreneurial energy in the air. However, the fund launch space is incredibly difficult for start-up managers, with a lack of
available capital, heightened regulation and
crowded marketplace to all take account for.
Therefore, the need for technology solutions and support is
key, as Bloomberg’s Ulf Svensson explained to HFMWeek.
Ulf Svensson
is head of business
development for
Bloomberg’s Enterprise
Products and Solutions
(EPS) business where he
focuses on developing and
implementing technology
solutions for the hedge
fund sector. He is based in
Bloomberg’s London office.
HFMWeek (HFM): The hedge fund industry has experienced rapid changes in recent years, with tighter regulation, increasing operational costs and more demanding investors. What are the key elements of advice you
would give a start-up manager in this environment?
Ulf Svensson (US): The hedge funds industry is more
structured and regulated today, so while hedge fund managers continue to launch new business ventures, they have to do so
with these considerations in mind.
An excel spreadsheet, an office and
several million dollars in AuM are
not enough to open a new fund,
much less ensure its long-term
success.
Fund managers have no choice
but to keep abreast of new regulations and guidelines. Before
managers can accept outside investment and raise money, due
diligence needs to be conducted,
business continuity plans need to
be developed, and a compliance
process implemented.
In today’s challenging investment market, hedge funds need to differentiate themselves from the thousands of others seeking new capital.
Ongoing success depends on a hedge fund manager’s ability to articulate and defend the fund’s investment strategy,
explain its risk profile, and ensure transparent detailed,
consistent communication with investors. The hedge fund
manager is not just a trader or a portfolio manager - he or
she is managing business operations, IT infrastructure,
risk, investor relations and compliance.
funds are categorised in three groups: The Bloomberg
Professional service (or the terminal), which includes
real-time and historical market data, news and analytics;
market data solutions, which can be licensed and integrated into the firm’s existing systems; and enterprise trading,
risk and compliance systems.
Our data solutions, for the desktop and enterprise systems, provide reliable, fast and flexible solutions, which
support hedge fund trading strategies across all asset
classes. Bloomberg also offers multi-asset class electronic
trading capabilities, order management platforms, portfolio and risk analytics, asset valuation tools for complex
financial instruments, and price discovery platforms for
non-exchange traded instruments.
Hedge fund managers know that it doesn’t require
much to have the Bloomberg Professional service set up
and running; it’s a simple implementation. When it comes
to the data backbone – or what
feeds every desk across the hedge
fund organisation – Bloomberg can
deliver reference and premium data
as a data licence arrangement or as
a real-time feed.
HEDGE FUND MANAGERS
KNOW THAT IT DOESN’T
REQUIRE MUCH TO
HAVE THE BLOOMBERG
PROFESSIONAL SERVICE SET
UP AND RUNNING
HFM: Why should hedge funds
consider Bloomberg a trusted
market data provider and technology partner?
US: Founded in 1982, the Bloomberg Professional service is licensed
by 310,000 business and financial
professionals globally. Bloomberg
provides the hedge fund community with reliable, real-time and historical data, market-moving news and analytics, and trading tools that support investment decisions and activities.
Bloomberg also offers execution and order management
platforms for multiple asset-classes, instant communications tools, industry research and news.
Bloomberg applies rigour to standardising and cleansing its data sets, which is one of the reasons Bloomberg is
trusted to provide timely, accurate, consistent and comprehensive data products to hedge funds and other investment professionals. The breadth and depth of our data
library, the flexible way that Bloomberg products can be
adapted and integrated into a global infrastructure and the
company’s decades of industry experience are major differentiating factors.
”
HFM: What products and services can Bloomberg
provide hedge funds?
US: The products and services Bloomberg provides hedge
8 H F M W E E K . CO M
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FUND SERVICES
One of the reasons hedge funds choose to
implement Bloomberg technology in the front,
middle and back office is because hedge fund
managers are generally already familiar with the
Bloomberg Professional service from having used
it as an institutional trader or analyst. Choosing a
trusted market data provider and front-end trading platform has to be a simple and painless process for hedge fund managers. Bloomberg offers a
simple, efficient and comprehensive suite of products and services that make the job of setting up a
hedge fund easier.
HFM: What types of information and information delivery system are available to Bloomberg clients and how can the way a start-up
manager chooses to consume information
help/hinder their business development?
BLOOMBERG OFFERS A
SIMPLE, EFFICIENT AND
COMPREHENSIVE SUITE OF
PRODUCTS AND SERVICES
THAT MAKE THE JOB OF
SETTING UP A HEDGE
FUND EASIER
US: Bloomberg is capable of delivering data from the
front office to the back office, in real-time or periodically
to alleviate some of the pressures on hedge fund managers. If traders are using Bloomberg on their desks, then it
makes a lot of sense to use Bloomberg data in the middle
and back office as well. When all systems in the food chain
inside a hedge fund, or other buy-side firm, are using the
same data, managers avoid discrepancies and unnecessary
reconciliation between the trading floor, middle office and
back office.
HFM: How do Bloomberg’s hedge fund solutions
apply to the wide range of hedge fund professionals
(independent asset managers/family offices, private
equity firms, prime brokers) who are potentially interested in setting up a business?
US: Hedge funds generally invest in multiple asset
classes. Even if a fund is an equity shop, it still needs to
know what’s going on with eurozone bonds, for example.
Bloomberg’s vast database of content and
data coverage, across asset classes, is critical to a hedge fund’s business.
In 2011, Bloomberg released a technology package designed for start-up hedge
fund managers that need to manage fund
strategy, risk and compliance, STP trade
settlement, portfolio analysis, order management and electronic trading connections. Bloomberg’s Hedge Fund Tool Box
– called HBOX – enables users to access
Bloomberg’s global, multi-asset, brokerneutral execution management system
(EMSX) platform, as well as Bloomberg
Tradebook, Bloomberg’s agency broker.
HBOX connects to all major prime brokers and fund administrators, provides
compliance and audit reporting, pre-integrated data and execution tools and realtime P&L and exposures.
Bloomberg also updates technical capabilities, processes and analytics in anticipation of market changes and customer
”
needs. We are able to roll out product enhancements virtually overnight on a global scale.
For example, to support the new European
short-selling regulations that took effect in November, Bloomberg worked with regulators to
produce a definitive industry benchmark, which
classifies whether certain assets should be considered ‘liquid’ or ‘illiquid’. Previously, prime brokers
only had to organise assets as ‘general collateral’ or
‘hard-to-borrow’ collateral.
Bloomberg caters to the variety of active and
discretionary managers setting up businesses. For
such an established product, Bloomberg’s ability to
be nimble and react to changing markets is a key
strength. Although Bloomberg is standardised in
cost and content, it is highly customisable based
on approach.
HFM: How successful are Bloomberg’s hedge
fund conferences and events? What topics are discussed and what impression and benefit would you
hope delegates leave with?
US: The annual Bloomberg LINK Hedge Funds Summit
convenes managers and investors in New York for what
has become one of the most important annual gatherings
of the hedge fund community. The most recent event covered the impact of the European debt crisis on the global
markets and deconstructed the drivers of equity market
volatility. Panel discussions at the Summit also discussed
how the new regulatory environment and US election
would impact the market place and hedge fund success.
Bloomberg also hosts an invitation-only start-up hedge
fund event in London where 400 prime brokers, fund administrators, lawyers, hedge fund investors gather to addresses the concerns of new and existing managers. In addition to offering access to the top industry influencers and
informative panel discussions, the event also enables sectorfocused networking opportunities and resources. n
H F M W E E K . CO M 9
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Untitled-7 1
02/04/2012 15:55
FUND SERVICES
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
ADAPTING TO CHANGE
PETER HUGHES OF APEX FUND SERVICES TALKS TO HFMWEEK ABOUT THE MAIN POINTS A START-UP MANAGER SHOULD KEEP IN MIND WHEN
SETTING UP A HEDGE FUND IN THE EU
T
Peter Hughes
is group managing director
at Apex Fund Services Ltd.
He founded Apex in 2003
and it is now one of the
world’s largest independent
fund and private equity
administration companies.
The success of its ‘Global
Reach, Local Presence’
strategy has led to the
opening of 28 Apex offices
around the world.
he hedge fund industry has undergone significant changes in the past couple of years,
with tighter regulation, increased investor
demand and higher operational costs now all
factors that start-up managers need to take
into account when setting up a hedge fund.
Peter Hughes, founding and group managing director of
Apex Fund Services explains why emerging managers
need set-up solutions that are global reaching, but have local know-how.
HFMWEEK (HFM): What are the key points a manager should have in mind when starting a hedge fund?
Peter Hughes (PH): The key
point is to make sure you have
enough seed capital to launch. A
lot of people go through expenses
by heading up structures and then,
in the current environment, encounter the fact that capital never
arrives or gets delayed.
Making sure there really is an
amount of capital available, and
for managers to be realistic about
how much that might be, is crucial.
Also, the different fund structures
available should be studied so as to
mitigate risks of possibly not being
successful.
HFM: What are the biggest challenges when starting a hedge
fund specifically in the EU?
agers should create the most cost-effective way of setting
up, through fund platforms, hosting vehicles, and through
compliance.
At Apex we want to make sure that we are the first point
of contact for these new asset managers so we can drive
them through all of the steps in an unbiased way to make
sure they set up in the right way, and to give them as much
opportunity to raise the capital and be successful.
As we are present in several domiciles, we can point
people down a particular path. We try and create the right
solutions for them and it is not just from a fund structure
point of view, or fund administration point of view. It is
also about finding the right software to do their trading,
finding middle-office solutions,
providing them with cloud hosting
for their own IT infrastructure, and
so forth.
The way we phrase it to managers is: you look after hiring an office that you want to be in and after
managing portfolios and raising
money for your strategy, we will
do the rest to help set up in a costeffective, yet robust way.
THE BIGGEST CHALLENGES
REVOLVE AROUND
ESTABLISHING A COSTEFFECTIVE WAY OF SETTING
UP THE STRUCTURES
NEEDED AND MEETING
THE REGULATORY
REQUIREMENTS IN THE EU
”
PH: The biggest challenges revolve
around establishing a cost-effective
way of setting up the structures needed and meeting the
regulatory requirements in the EU. It is more expensive
setting up EU structures compared to the traditional Cayman, Bermuda, or BVI structures. There is also a question
of having a regulated asset manager and the compliance
demands around that, which are only going to become
more onerous.
When setting up in the EU, managers need advice on
the best structure and domicile in order to make them attractive in capital raising terms. Once that is defined, man-
HFM: With increasing demands
from investors and regulators,
the hedge fund industry is in
a different place than it was 10
years ago. What are investors today looking for when it comes to
choosing a start-up?
PH: Investors want to make sure
corners aren’t cut. Given the fact
that managers have increasingly
been looking for capital for several
years, investors have so much to choose from nowadays.
When you are starting out as a new manager, it is important to make sure that you tick all of the boxes for allocators. You need risk management solutions, proper order
management systems, and a portfolio management system. Also, you need to outsource administration and use
a credible broker because otherwise people won’t look at
you as a manager, as there is so much to choose from. You
can’t expect people to allocate to you as a manager if short
cuts have been taken.
H F M W E E K . C O M 11
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FUND SERVICES
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
Investors want transparency and liquidity. The
better liquidity a fund manager can provide to investors, the better it is. We don’t often see a one- or
two-year lock-up on a fund nowadays, as we may
have done historically.
If a strategy is liquid, why not give weekly dealings, or daily dealings? Why make it monthly, or
quarterly? This is being driven by investors and what
we do at Apex is make sure our portals will be able
to provide fund managers as well as investors with a
real-time snapshot of the risks associated with their
portfolios. Investors are asking for more, and they
are getting more delivered by firms like Apex.
HFM: What are the biggest regulatory challenges facing start-up hedge funds in the EU?
you still have to provide the same quality that investors expect, or you will not get allocations.
THE CHALLENGES WILL
ALWAYS BE HAVING
IN PLACE THE RIGHT
STRUCTURES TO BE ABLE
TO ATTRACT INVESTORS,
WITHOUT SPENDING HUGE
AMOUNTS OF MONEY
PH: The biggest challenge is making sure that regulatory demands are being met, which is expensive in
terms of compliance. With the AIFMD coming into
force, it is going to be more expensive for managers to meet
financial requirements. They need to have good initiative to
make sure the requirements can be met, without crippling
them in terms of costs. That is the world we live in, and we
need to be able to adapt to that.
HFM: What trends do you expect to define the start-up
sector in the next three to five years?
PH: It is difficult to say, but I think start-ups will run leaner
businesses in the next year. In three to five years, we have to
make sure managers have flexible models in place.
The hedge fund world is driven largely by the allocators
now and what they expect. Start-ups need to meet those
demands. Whether you have $10m AuM or $10bn AuM,
”
HFM: In terms of trading opportunities, which
markets are proving to be the most successful
for ‘nimble’ start-up managers and why?
PH: It is all very cyclical. We are seeing a large
demand for credit funds at the moment. Emerging markets credit is a very popular strategy.
Managers are moving slightly away from the classic long/short equity model and there is a growing demand for uncorrelated strategies – more
private equity strategies, plantation funds and
agricultural land funds, student property funds,
or insurance linked security funds, for example.
People are looking at uncorrelated returns, and
at diversifying away from just following the stock
market. They are building portfolios that give
good returns, but that aren’t linked to how the
markets are doing.
HFM: What can you see the next twelve months
holding for start-ups in terms of challenges and
opportunities?
PH: The challenges will always be having in place the right
structures to be able to attract investors, without spending
huge amounts of money. Certainly this is an area which we,
as a business, are looking at. Apex provides the solutions in
an intelligent and sophisticated way that is not expensive,
but which meet demands from investors and regulators.
Apex looks after funds of any size, any structure, and in
any domicile and do the work locally. We have teams located close to where any of these start-ups will be. n
1 2 H F M W E E K . CO M
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| FOCUSED EXPERTISE |
European and international media engagement &
stakeholder communications for investment management sector firms
Hedge funds, fund of funds, wealth managers, private equity,
property funds, end investors, intermediaries & sector service providers
Parex PR Limited
20 Fouberts Place, London W1F 7PL
telephone: +44 20 3195 9500
website: www.parexpr.com | email: info@parexpr.com
Untitled-4 1
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H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
HIRING THE COO CAN BE
THE HARDEST DECISION
COOS ARE PLAYING AN INCREASINGLY IMPORTANT ROLE WITHIN START-UPS, AS INVESTORS WANT TO HAVE AN INDIVIDUAL IN PLACE WITH THE
BACKGROUND TO HANDLE THE COMPLEXITY OF REGULATION AND GOVERNANCE. MUSH ALI OF ONE TEN ASSOCIATES EXPLAINS THE MAIN
FACTORS THAT SHOULD BE CONSIDERED WHEN HIRING A COO
T
Mush Ali
is director at One Ten
Associates – a specialist
hedge fund recruitment firm.
He qualified as a chartered
accountant before starting
his career in recruitment
nearly 10 years ago. A
specialist in the sector, his
expertise lies in finding
‘non-investment’ talent for
the hedge fund industry
and service providers
he chief operating officer (COO) hire in any
start-up hedge fund is typically the first ‘noninvestment hire’ the firm will need to make.
We have seen the evolution of the importance of this hire change from it simply being
a ‘need’ to now being just as essential as having a high quality investment team. The track record and
pedigree of the COO will be the first thing investors will
question, once they are aware of the investment team and
strategy of the business.
While the need for a well-regarded COO is key for a
hedge fund launch, the accessibility to them is greater than
it has ever been – from the traditional ‘head-hunter’ approach to introductions through various networks/suppliers that exist in the sector.
We recognise this hire can be difficult to make, since the person responsible for assessing the skillsets
of the COO has invariably always
hired investment professionals but
has rarely been involved in hiring a
non-investment individual. Therefore, assessing the relevant skill-set
of the individual can come with
challenges.
The purpose of this article is to
provide some specific guidance on
the thought process required when
considering a COO while recognising that this hire is ultimately individual to the situation of the startup; so there is no one right answer
to the hiring of a COO.
The following are three key areas
to consider when thinking about
hiring the COO:
will need that type of pedigree to cope with the complexities of this size of launch
2. WHAT SKILLS ARE REQUIRED?
The COO will typically need knowledge in finance, tax,
operations, compliance, technology and legal.
There is a perception that the COO needs to be a qualified accountant, the rationale being that investors feel
comfortable with a COO who is professionally qualified to
create a strong control environment. The validity of this is
split across the industry, and in essence there is no wrong
or right answer to this view.
We always advise fund managers to think about the
skills/knowledge that can be missing in the current
team – typically the answer is to cover everything on the
non-investment side. However,
this makes it hard to narrow down
on the type of background that is
required.
Some good questions to address
in order to narrow down the type of
employees a start-up fund manager
should look at:
• Do I need to set up complex systems?
– If yes, a more technology-savvy
COO is needed
• Is middle office – across operations and NAV production – the
biggest worry?
– If yes, someone with pedigree
in dealing with middle office is
needed
• Is there a strong need for in-house
knowledge on the legal, compliance,
as well as tax & finance side, without
having to outsource this advice?
– If yes, a qualified accountant/lawyer is the best place
to find this broad skill-set.
THE TRACK RECORD AND
PEDIGREE OF THE COO
WILL BE THE FIRST THING
INVESTORS WILL QUESTION,
ONCE THEY ARE AWARE OF
THE INVESTMENT TEAM
AND STRATEGY OF THE
BUSINESS
”
1. SIZE OF THE FUND LAUNCH
This will determine the nature of the COO required
• Less than a $100m launch needs more of a head of
operations/COO that can roll up the sleeves and
multi-task in the role
• Greater then a $100m launch is more likely to need
someone with a track record in managing relationships and people
• Greater than a $250m launch will typically want to attract someone from a larger hedge fund, as the launch
Addressing some of these key issues upfront will help
in assessing how relevant the background of the COO is
to the start-up.
The upside is that the talent pool for COO skills has
matured over the past 10 years to ensure start-up fund
managers now have the ability to be more specific about
what they want.
14 H F M W E E K . CO M
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12/12/2012 16:06
RECRUITMENT
Our advice has always been: the more specific the fund
manager can be about this need, the easier it is narrow
down the potential employees, ultimately saving time and
reducing the confusion around what the right hire for the
business is.
3. USING SPECIFIC BENCHMARKS TO ASSESS THE
QUALITY OF THE COO
• Academics/qualifications
This does not always tell the full picture but it
can be used as a differentiator if you are up against
a close decision between individuals. However, in
our experience it should never be the only factor
to consider.
• Previous institutions
The companies individuals have worked for in
the first five years after university invariably define their mind-set and approach as they progress
through their career. On top of this, assessing
their current roles and organisations is a natural
place to create judgements on the skill-set of an
individual.
small team around them to ensure all core areas are appropriately controlled and managed.
The hiring of a COO of a start-up fund can be the hardest hire to make, because a unique mixture of skillsets is
needed, which will always be individual to that
particular start up.
We have tried to provide some advice around
how to structure the thinking and approach to assessing COOs’ backgrounds, but the aspect which
cannot be measured is personality. As opposed to
the hiring of investment talent – which is a more
straight-forward and clear decision process – the
COO hire can be long and tedious because the
personality aspect is something which can only be
assessed when you have met the person.
In our time of specialising in this sector, we have
seen different tools being employed to assess the
quality of individuals. It could also be argued that
time can be saved by utilising the skills of a headhunter to help shortlist candidates based on the personality matches and relevance of his or her skills.
As this hire will also be critically assessed by the
investors, it is imperative that the fund manager
spends time structuring the thoughts around what
factors they want to focus on when considering this hire
for the firm – after all, a lot of time will be spent working
very closely with this individual! n
COOS WILL ALWAYS
NEED A SMALL TEAM
AROUND THEM TO
ENSURE ALL CORE AREAS
ARE APPROPRIATELY
CONTROLLED
CONCLUSION
It should be stressed that when thinking of this hire it is
unrealistic to expect it to solve all the needs on the noninvestment side – invariably, COOs will always need a
”
H F M W E E K . C O M 15
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a multi-jurisdictional
group of companies,
providing investment
fund formation,
administration &
valuation services.
Sales & Marketing:
Derek Adler
dadler@ifina.com
Group Headquarters:
Sam Bratchie
sbratchie@ifina.com
http://www.ifina.com
UK • BVI • Cayman • Malta • Hong Kong • Singapore • USA • Switzerland • Austria • Panama
Untitled-1 1
23/10/2012 14:47
FUND SERVICES
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
HITTING THE GROUND
RUNNING
STARTING OUT AS A NEW HEDGE FUND MANAGEMENT FIRM CAN BE A DAUNTING TASK WITH THE INDUSTRY CONSTANTLY EVOLVING AND
GROWING. SO TO GET AN IDEA OF THE CHALLENGES THESE START-UPS FACE AND HOW THEY CAN CIRCUMVENT DIFFICULTIES, HFMWEEK TALKED
TO MATTHEW WILSON OF HEDGESTART ABOUT THE IMPORTANCE A CONSULTANCY SERVICE CAN HAVE
A
Matthew Wilson
managing partner, founded
HedgeStart in 2000.
Previously he was CFO/COO
at a $1bn long-short spinout from Soros, where he
ran finance and operations
in London. He qualified
as a chartered accountant
with PwC in 1984 after
reading Chemistry at Oxford
University.
s the hedge fund industry has evolved, so
has the complexity of launching a fund.
What was once a relatively simple process
now faces some very high entry barriers.
Capital raising has become incredibly difficult, competition between managers more
intense and as a result investors are faced with a lot more
choice. So how can a fledgling fund get started and overcome these hurdles? HFMWeek sat down with Matthew
Wilson, managing partner of alternative investment consultancy firm HedgeStart, to find out more.
HFMWeek (HFM): How do you perceive the start-up
hedge fund climate in the UK? What are the biggest
obstacles?
Matthew Wilson (MW): The absolute, number one challenge is raising capital. It’s probably always been the biggest obstacle. Even a decade ago I
used to say that the three most difficult aspects to cover when starting a firm were raising the capital,
finding the right offshore directors
and choosing a name. While the
latter two haven’t become any easier in the past few years, undoubtedly raising money has become
exponentially harder.
I think what is also really important to note is that the majority of
fund failures are actually down to
operational issues. So, building
and maintaining a robust business
infrastructure is also absolutely key. What usually happens with the fund managers who fail is that they don’t approach their new venture as a business. Someone will walk
away from a prop trading desk to set up a hedge fund for
the first time and will be confident about the one thing in
their mind that needs to be done; managing the portfolio.
So what the trader needs to do is to make sure they have
the robust business infrastructure around them to properly support the activity they do best.
Regardless of the conditions you face, you need to be
smart about how you set up your operation and ensure
your model is scalable for what you want to achieve. With
this in mind, we generally advise our clients to keep things
as simple as possible in the beginning. However, in doing
so, we also have to be mindful of how a client might want
to develop the business as well as the constantly changing
tax and regulatory environment.
We therefore always focus on the flexibility that our
clients need. Our preferred management structure is generally a limited liability partnership, probably with a UK
company as a member of the partnership. This is very
simple and straightforward, and importantly creates little
excitement with the tax authorities. As the business grows,
we can create more tax advantageous structures alongside,
at a time when they are needed and by reference to what
still works at that time. Possibly offshore elements to the
structure are warranted from day one, but only if there are
clear indications that the circumstances under which it is
beneficial are there from the start or actually likely to occur
– and even then it is often only necessary to put in place
the framework elements as opposed to the full works.
Don’t try and build the empire before you build the city.
Some start-up managers are concerned about the impending Alternative Investment Fund Managers
Directive (AIFMD). I’m of the view
that the AIFMD’s bark will end up
worse than its bite, especially when
we look back on it in a few years’
time. Our approach has been, ‘watch
this space’ while supporting lobbying initiatives such as those of the
Alternative Investment Management Association. But what is the
AIFMD trying to do? Leaving
aside the original political agenda,
it is principally trying to ensure that
what has become an increasingly important subsector of investment management operates properly. In respect of this,
most hedge fund regulation tends to be just codified good
business practice. With the right pragmatic and practical advice, all of these things – no matter how terrifying they may
seem – can be dealt with. The industry will find its solutions
to the AIFMD.
REGARDLESS OF THE
CONDITIONS YOU FACE,
YOU NEED TO BE SMART
ABOUT HOW YOU SET UP
YOUR OPERATION
”
HFM: What are the operational options for hedge
fund start-ups? Why is there a need for outsourcing to
start-up hedge funds?
MW: Unless you’ve done it before, it is a lot easier to launch
if you talk to someone who has done it before. Nevertheless,
H F M W E E K . C O M 17
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H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
some people will still endeavour to go it alone without consultancy assistance. There is a lot of support out there from
prime brokers and they are doing a lot of the things now that
we were doing 10 years ago – in terms of the overall consulting support. So we have now focused around those parts of
the process the primebrokers don’t handle.
For example, take an Financial Services Authority
(FSA) application. Anyone can do an FSA application
themselves, as the forms are publicly available and easy to
download from the FSA’s website. However, just because
you have the form, doesn’t necessarily mean you will understand the questions being asked. You could write a 16page answer for a particular question, which could very
well contain the very information the FSA needs – except
that it is wrapped in 15 pages of information that they
don’t need to know. This then makes the whole process
unnecessarily longer for both parties involved.
Another area start-ups absolutely need help with is tax.
One thing for sure is that tax is not going to get any easier or
simpler as time goes on; indeed it will be the opposite. Quite
frankly, no tax inspector is likely to lose his job because he
busted the tabloid-vilified hedge fund manager who didn’t
get the right tax advice and made some honest mistakes.
Even where the rules don’t change, understanding how the
tax man interprets and enforces is absolutely crucial. We
also adopt the mind-set of what we think the tax man will be
asking in two to five years’ time – since those are the questions you will eventually have to answer, not today’s.
In the end, managers need to be able to concentrate on
what they do best. So, they either need to create an infrastructure within their organisation to handle all of the peripheral functions or they keep their business more lean
and outsource these roles. Building a hedge fund operation is largely an issue of taking standard industry components, and putting them together in an integrated fashion
to create a business. We have the perspective to know how
these pieces fit together.
HFM: Has this need changed as a result of the evolving
regulatory, market and investor conditions?
FUND SERVICES
MW: The industry has grown exponentially, although
more recently at least the rate of growth has been more
subdued but nevertheless with healthy new activity. The
investor community has matched this and itself become
much broader, as there is now a larger range of investors
and organisations trying to get into hedge funds. This itself
has introduced more rigorous due diligence and higher
operational standards as a given, as well as perhaps some
degree of bureaucracy.
The barriers to entry have also been raised through the
minimum amount of assets that investors want to deploy.
If I’m an investor, I might say my minimum ticket is $10m
and I don’t want to be more than 10% of the fund I invest in. So that means immediately I’m not going to look
for any funds unless they are at least $100m. If you’re a
hedge fund manager who is starting with nothing, it can
be much harder to achieve that primary level of investment. As a result of that, we are seeing a lot more in terms
of seeding deals.
HFM: How do your start-up hedge fund clients come
to you? And what services are you typically required to
provide for start-ups initially?
MW: Clients almost exclusively come to us via personal
referral and word-of-mouth activity in our existing client base. They know we are interested in building relationships within the industry and aiding start-ups is a
means to an end and allows us to develop a long-running relationship.
The service we do for most start-ups is the FSA application, closely followed by various elements of tax
structuring. As we are interested in building long-term
relationships, we have a vested interest in whether the
fund succeeds or not. Operational factors aside, if they
deliver performance they will succeed and if they don’t,
they won’t. But if they are smart, ensure they have the
right operational model and outsourced infrastructure in
place, this binary conclusion becomes significantly less
startling. n
18 H F M W E E K . CO M
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12/12/2012 16:08
BLOOMBERG FOR HEDGE FUNDS
GET THE SUPPORT YOU NEED EVERY STEP OF THE WAY.
Bloomberg can help you start and build a successful hedge fund.
Along with industry-leading technology, data and analytics, we can
connect you to experts in compliance, seeding, fund administration,
legal, prime brokerage and operations. From industry best
practices and market insights to world-class news and trading
solutions, we provide access to everything you need.
Find out more about the complete, end-to-end solution for starting
a hedge fund. Contact us at getconnected@bloomberg.net
©2012 Bloomberg L.P. All rights reserved. 51362041 1212
Untitled-2 1
12/12/2012 15:28
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
OUTSOURCING FOR
SMALLER HEDGE FUNDS
JERRY LEES OF LINEAR INVESTMENTS EXPLAINS THE ADVANTAGES OF WORKING WITH A ‘MINI’ PRIME BROKER IN ORDER TO KEEP COSTS TO A
MINIMUM IN THIS CHALLENGING ENVIRONMENT OF GREATER REGULATORY BURDENS AND INCREASING INVESTOR DEMAND
“
Jerry Lees
is CEO of Quant and
chairman of Linear
Investments. As global head
of Alternative Execution at
Cheuvreux, Jerry grew the
Electronic DMA, Synthetic
Prime Brokerage business
from the beginning, starting
the first AES service for the
group in Japan in 1998.
I
don’t know what I want – but I want it now!” said
Sir Henry at Rawlinson’s end, a great character
from an 80s radio show. These are very difficult
times for smaller or start-up hedge funds and we
often face this dilemma. We are frequently approached by new funds setting up for the first
time, or even mid-sized funds being squeezed at both ends
under current market conditions who are looking for new
homes.
Investors have different expectations nowadays – caution and suspicion are the leading influences on how
investors look at a new or smaller fund. They have been
burned and do not wish to experience the same again. For
emerging funds, the days of flashy offices in the heart of
Mayfair are more likely to put off investors than impress
them. They would prefer to feel the investment is going
into the fund austerity and a serious outlook, reassuring
clients about the fund’s survival are crucial.
The issues are almost wholly the same – how can we
build a track record, or even stay afloat with reduced AuM
and having to incur significant costs to maintain a hedge
fund under current regulations (with increasing supervisory demands and reporting requirements)? Fixed costs
and overheads can quickly overwhelm the earnings potential of even quite successful smaller funds.
Simply put: costs are too high to sustain the level of investment. You need time to build or prove a track record,
and resources and skills outside of the fund advisory function are costly. In terms of what needs to be in place, there
is FSA registration and ongoing reporting and management, as well as middle- and back-office settlement and
operational issues that need attention (and cannot be
ignored). Also, technology is expensive but essential (using Bloomberg data, for example), websites and marketing
materials need building and signing off, and rents in London are high. On top of all this, raising capital for smaller
funds is impossibly difficult in current market conditions.
There are ways of addressing all of these issues to keep
costs down and manageable. There is a tendency for
groups of smaller funds to get together with boutique industry experts to create innovative and effective solutions.
This has been the case for a long time in the US, where
‘mini’ prime brokers are very prevalent: there were 42,
at last count, operating in the country but hardly any in
Europe. This approach avoids many of the costs, expensive learning curves and pitfalls of setting up and running
a smaller fund. By sharing resources you can radically reduce overheads to increase your chance of success or survival, and maybe even more significantly open up doors to
capital introduction by working with others.
The importance of working with ‘mini’ prime brokers
who offer consolidated services (including office space,
BY SHARING RESOURCES, YOU CAN
RADICALLY REDUCE OVERHEADS TO
INCREASE YOUR CHANCE OF SUCCESS
OR SURVIVAL
20 H F M W E E K . CO M
020_021_HFMHow2EU_LinearInvestments.indd 20
”
12/12/2012 16:09
PRIME BROKER AGE
shared legal and other advisory services) and are focussed
on raising seed capital is that they are focussed entirely on
this area of the business. The smaller fund is very important – you are not relegated to the back of the queue as you
would be with a global prime broker (even if you make it
through the door!).
What happens, for example, when your investors
withdraw funds (often for reasons entirely unrelated
to your fund performance) and at the same time your
prime broker or custodian tells you they no longer want
to look after a fund of your size as it is too small, there is
not enough turnover, and not enough return to make it
worthwhile for them? To add to the pain, your service
providers and fixed costs are eating up your management and performance fees. What are you going
to do?
A start-up or emerging fund has all the same issues, with maybe a few more headaches piled on.
It is very easy to erode significant chunks of the
initial set-up capital on establishment costs, legal
fees, admin, back office and premises.
But, in both circumstances, there are now better ways of radically reducing those overheads and
fixed costs at the same time as pulling in appropriate knowledge and infrastructure. Virtually all of
your non-core cost can be turned into some form
of outsourced variable cost.
The whole issue of raising new capital is a complete nightmare at the moment. It’s especially difficult for the smaller funds, as they are fighting the
multiple issues of investor confidence (or lack of):
indecision, fear, uncertainty, downturn exhaustion and complete risk aversion. Whatever your
strategy, the investor will have a disaster anecdote to relate
that is directly comparable to yours.
An organisation such as Linear Investments is specifically geared up to help you through the stages of growth;
from early days to second- or third-stage seeding. Our
aim, and that of our partners, is to find managers with
talent and ideas, helping them get on with the process of
building value while we deal with the detail and the cost.
The approach can manifest itself in many ways and each
individual situation involves a selection of options, which
are specifically suited to each environment and level of development.
As a ‘mini’ primebroker, we work with smaller funds
and, by tying up with a number of industry experts in several fields, we become enablers at all levels. Tie-ins
with technology companies, administration and
operational support businesses, set-up specialists,
compliance outsource and legal means we can help
you select the best and most appropriate solutions.
Operationally, we use these services ourselves, running back/middle office functions, providing office
space and trading facilities, and FSA registration
and compliance services – all of which we can supply wrapped into commission.
Research and other support services can also be
tied in and your execution can be fully outsourced
under the same umbrella. In addition, we have inhouse capital introduction experts who are completely focussed on the smaller funds and working
constantly on relationships with specialist family offices and other investors interested in earlier
stage involvement in hedge fund growth strategies.
To do this we are in the process of adding a feeder
fund to manage diversified investments on behalf
of our investors from seed capital to next stage growth.
In some cases, we will partner with ventures where synergies are greatest and there are mutually clear objectives.
But overall, we are working in partnership with our funds
and it is up to you or them to select what suits your model
and at what stage. The concept is one which is attracting
a great deal of attention. We expect to build relationships
with 60 or more hedge funds over the next two years,
building on the multiple relationships we have in place
and expanding the network of funds and investors into a
significant force for growth in the industry.
In summary, it is vital that you streamline your costs
and operational structures to minimise outgoings and optimise the return from your AuM and performance fees,
which themselves are lower than they used to be. Investors
are more impressed by how you are managing costs and
how austere your offices are than expecting to see marble
and glass in the heart of Mayfair.
It is now possible to set up very cost-effective operations
by sharing expertise and working with prime brokers who
focus on smaller funds. Everything can be shared: offices,
FSA licence, offshore entities (SPC structure), advice,
admin and even capital introduction – all without giving
away your ownership or independence. It’s worth exploring what could be done to radically reduce your costs, especially if you (like many others) have seen a withdrawal
of investor capital or are in start-up mode. n
RESEARCH AND OTHER
SUPPORT SERVICES CAN
ALSO BE TIED IN AND YOUR
EXECUTION CAN BE FULLY
OUTSOURCED UNDER THE
SAME UMBRELLA
”
H F M W E E K . C O M 21
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H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
CHECK YOUR PLAYBOOK
EXPIRATION DATE
WITH CLOUD SERVICES BECOMING INCREASINGLY POPULAR AS A HEDGE FUND IT SOLUTION, NIGEL KNEAFSEY OF OPTIONS IT PROVIDES AN
OVERVIEW OF THE MOST IMPORTANT POINTS TO CONSIDER WHEN SELECTING A TECHNOLOGY PLATFORM
P
Nigel Kneafsey
is founder and CEO of
Options IT, a provider of
private financial cloud
services to the global
capital markets community.
Kneafsey launched Options
in 1993 as a provider of
outsourced IT services to the
investment banking industry.
Options IT now provides
market data and execution
connectivity to all major
markets, supporting more
than 130 firms globally.
erhaps you’re launching a new hedge fund,
spinning out or spinning up a new book,
or expanding your business in a direction
that calls for a fresh look at your technology platform. If that is the case, then stop
and take a look at the date on that playbook
you intend to use to make your choices; the fact is, if it’s
more than a few quarters old, it’s of limited value. Investor,
business and regulatory-driven requirements evolve from
one reporting period to the next. Yet the emergence of the
‘cloud’ business model possesses a new source of disruption that presents new means of addressing these requirements and of changing the economics of your business –
something which may be less than obvious.
SCEPTICS WELCOME
One can hardly be blamed for more than a modicum of
scepticism towards the hype and hyperbole associated
with the cloud, so let’s endeavor to separate fact from
fancy. At Options, we find ourselves uniquely positioned
to shed light on the matter given
our heritage. We have 20 years of
experience in providing managed
technology solutions to the capital markets, and we were the first
provider to offer a hosted, managed and multi-tenant technology
platform (in other words, a cloud)
specifically for the alternative investment community in 2002.
Over those 10 years of operating
a private financial cloud, we’ve developed a number of deeply held
convictions on the subject.
also enhance the profile of the customers to their
investors by allowing them to enjoy and assert their
possessions of those same SOC 3 accreditations. This
can be leveraged as a competitive advantage among
one’s peers with discerning investors.
2. Minimise business risks: In the context of a firm’s
technology platforms and operations, resiliency and
availability pose significant risks both in terms of systems and, most critically, staff. High quality providers
will certainly demonstrate superior design in technical architecture, which enables the high availability
so vital to a solid operational platform. But equally
importantly, these providers can hire and motivate
talented staff in all the key disciplines involved in
today’s highly evolved technology systems and focus
them on a single cohesive platform. Be it through expertise in Linux, Windows, or network, storage and
database administration, leading providers can wield
the critical mass of resources necessary to withstand
turnover and routine staff absences, all within a single
set of hardened repeatable business
processes and a unified platform
proven over years of production
cycles and a broad customer base.
3.
Address
regulatory
& due diligence requirements:
Regulatory authorities and investors alike present challenging – and
not uncommonly changing and expanding – expectations concerning
the maintenance and availability of
the firm’s data, be it correspondence, positions and transactions,
books and records or otherwise.
Best in class providers can clearly
articulate a data management platform capable of exceeding today’s
requirements to ensure the firm is prepared to respond no matter how stringent future expectations
might be.
4. Optimise expense control: Market volatility and the
many external forces affecting the fate of any fund
manager’s assets under management threaten the
stability of the firm’s profitability, unless they can
manage their costs in line with revenues. Cloud service providers can provide capacity on demand as an
operational expense, allowing for more dynamic scal-
HIGH QUALITY PROVIDERS
WILL CERTAINLY
DEMONSTRATE SUPERIOR
DESIGN IN TECHNICAL
ARCHITECTURE
”
BUSINESS IMPER ATIVES &
IMPAC T
Let’s get back to basics, then, and ask ourselves what the
most critical business imperatives governing technology
platform selection are, and consider how cloud providers
impact them.
1. Build investor confidence: Investors are looking for
assurances to the operational stability and soundness
of the managers they entrust. Cloud providers with
mature, proven and professionally audited procedures – attested to by way of a Type 2 SOC 3 report
– not only instill confidence in their customers, but
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TECHNOLOGY
ing of technology infrastructure in line with
prevailing conditions and business demands.
In addition, they will expect a more rigid data protection model than the one offered by public cloud
providers such as Amazon Web Services, and will
require data segregation techniques and dedicated hardware operating in the specific data centre
countries they desire.
5. Price predictability: All managed service arrangements call for a delicate balance of capabilities and associated costs between customer and
provider, and it’s all too common to see commercial models that expose customers to the undue
risk of an uncapped consultancy charge model.
Best-in-class providers will offer customers a high
degree of price transparency and predictability in
the form of fixed service pricing. By removing the
threat of ‘nickel and diming’, these set service providers adopt simple fixed subscription pricing and
assume the risk of cost volatility themselves, and
rightly so given that the service provider is better
positioned to manage those costs.
6. Performance incentive alignment: Beyond being
able to properly articulate and demonstrate a set of
processes and systems that position a service provider to meet a client’s expectations, they must be financially incented to perform as well. Clients should
expect rigorous, quantifiable service level agreements
which ensure any pain they endure is shared by the
service provider where they feel it most: in their wallets.
EXPERIENCED
INFRASTRUCTURE
MANAGERS KNOW ALL TOO
WELL THAT IT’S ONLY WITH
HARD-EARNED EXPERIENCE
THAT A GIVEN PLATFORM
CAN ACHIEVE HIGH QUALITY
DE TER MINANTS OF SUCCESS
While cloud adoption offers such benefits, choosing the right provider calls for a discerning review
across a number of dimensions.
1. Provider & platform maturity: Experienced
infrastructure managers know all too well that
it’s only with hard-earned experience that a
given platform can achieve high quality, given the complexity and continuing evolution
of modern computing architectures. Hence,
when weighing the quality of a cloud hosting
platform, there can be no substitute for the
production miles of a unified system and the
processes supporting it. Progressive service
providers will continually seek to adopt innovative technologies and techniques, but only
as enhancements to a time-tested proven system and
with great care to manage the change process. Furthermore, they will have a track record of profitable
and reputable business operations to earn your trust
in their long term viability.
2. Capital markets expertise & applications: As homogenous as many of the IT components we leverage may be, the capital markets industry presents
a myriad of niche requirements, which cannot be
properly supported without subject matter knowledge and experience. Be it market data quality and
exchange reporting obligations, FIX connectivity, or
regulation-driven storage requirements, service providers must provide industry focus and a seasoned
team equipped to provide a comprehensive service
experience. Better yet, providers should present a
broad array of supported partner applications and
content to address the front-to-back needs of the client under one service provider ‘umbrella’,
and offer direct access to trading destinations in market co-location centres.
3. Architectural and systems quality & uniformity: System availability and resiliency is a
matter of critical concern to all customers and
yet all too easily underinvested in or poorly
designed by the provider. Service provider offerings must be validated to ensure all critical
systems are deployed in geographically distributed resilient pairs with detailed backup
and recovery systems and procedures. Just as
important, the provider’s platform should be
unified and coherent, and therefore capable
of being properly administered at scale.
4. Privacy: Regulators and investor expectations, as well as intellectual property protection concerns, call for rigorous measures to
isolate and protect client data – be it stored
or in transit. Beyond taking obvious measures such as operating a private network and
implementing the firewalls and access control policies one would expect, discerning
customers will again look for audited assertions of data privacy enforcement measures.
”
OPTIONS AT YOUR DISPOSAL
The fact is, cloud service providers are capable of getting
investment firms up and running more quickly, cost effectively and confidently than was previously possible. With
a contemporary understanding of the choices available to
you, you will be better placed to execute your playbook
than ever before. n
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Compliance Expertise For
Asset Management Firms
Complyport is a leading regulatory compliance consultancy which provides
bespoke, practical solutions to the asset management industry.
ƒ FSA authorisation assistance
ƒ Ongoing compliance support
ƒ Special projects including s166 Skilled Persons Reports
Whether you are a boutique adviser or a global asset manager, our job is to help
you understand and meet your compliance and regulatory obligations.
Our experienced team includes many former regulators and industry
practitioners who have a proven track record of delivering
pro-active solutions to asset management firms.
With the regulatory landscape constantly evolving in Europe,
the US and Asia, Complyport ensures you are prepared
for the challenges ahead.
CONTACTS
UK
Jon Wedgbury
Email: jon.wedgbury@complyport.co.uk
Tel: +44 (0)20 7399 4133
Martin Herriot
Email: martin.herriot@complyport.co.uk
Tel: +44 (0)20 7399 4980
Jersey
John Pallot
Email: john.pallot@complyport.co.uk
Tel: +44 (0)1534 626 144
www.complyport.com
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LEGAL
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
RISK MANAGEMENT IN
SECURITIES FINANCING
PROGRAMMES
SIMON BORG BARTHET OF GVTH ADVOCATES EXPLAINS WHY, IN THE CURRENT REGULATORY ENVIRONMENT, HAVING A ROBUST RISK
MANAGEMENT SYSTEM IS CRUCIAL FOR MANAGERS-BOTH FROM A LEGAL AND CAPITAL ADEQUACY POINT OF VIEW
U
Simon Borg Barthet,
LLD, MSc, is an associate
at GVTH Advocates and is
knowledgeable on financial
market operations. Prior
to joining the firm, Simon
had been engaged in a
number of positions in the
financial services industry,
particularly insurance,
where he was exposed to
MiFID and IMD business,
UK FSA regulatory reporting,
Anti-Money-Laundering,
and pensions business.
ndoubtedly, the name of the game over
the next year is going to be managing
expectations – the scope of regulatory
changes on a European level will leave
many asset managers jumping through
hoops to try and satisfy a raft of regulations rather than focussing on maximising returns.
The AIFMD, EMIR, MIFID II/MIFIR and CRD are
just some of the regulations which will have an impact
on asset managers. To boot, a spotlight has been shined
on the so-called ‘shadow banking’
sector (the ‘unregulated’ system
which provides funding to almost
half of the financial system through
a number of risk transformation financial market techniques, including repurchase agreements, securities lending and securitisation) due
to the liquidity shock that can be
sustained in runs on the system.
These may be exacerbated by margin calls, defaults and the pursuant
appropriation of collateral.
Many hedge funds operating
a long/short strategy use securities lending as an arbitrage tool,
or simply to appropriate securities to sell short; other institutions use repurchase agreements (repo) as a secured
financing tool, especially now that unsecured credit lines
have dried up. Either way, runs on the system could trigger
mass recall of securities out on loans, resulting in managers
either having a position that becomes uncovered, which
garners unfavourable attention from regulators, or having
to close out positions by purchasing securities to cover the
loan at considerable loss to themselves; or worse, placing
them in default (as a consequence of unprecedentedly low
interest rates, the consequences of
failure to deliver have diminished,
which could lead to strategic noninvoluntary defaults). In addition,
the move to T+2 settlement means
that funds have less time to source
equivalent securities, which in illiquid market conditions and particularly for illiquid securities, leaves
little margin for error.
This means that a robust risk
management system must be employed to ensure that an asset manager is not caught out, both from a
legal and regulatory point of view,
as well as from a capital adequacy
viewpoint.
Typically, securities lending and repos are transacted
under the Global Master Securities Lending Agreement
(GMSLA – produced by the International Securities Lending Association) and the Global Master Repurchase Agreement (GMRA – produced by the International Capital
Markets Association), respectively. These agreements and
the various relevant annexes have been crafted and tweaked
over a number of years by industry proponents, taking into
account a number of nuances specific to those transactions.
This provides a great deal of operational certainty as to the
accepted legal mechanisms of the transaction.
The importance of legal opinions supporting the nature
of such a transaction so as to avoid re-characterisation
as an outright sale into a secured financing transaction is
paramount in avoiding legal complications in the event of
a default. The complex sets of rights and obligations must
be examined in light of the provisions of the master agree-
A ROBUST RISK
MANAGEMENT SYSTEM
MUST BE EMPLOYED TO
ENSURE THAT AN ASSET
MANAGER IS NOT
CAUGHT OUT
”
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LEGAL
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 3
ments and specific provisions relating to the counterparty relationship.
Netting and set-off, for example, are an important part of this. Netting is not automatic under
the master agreements and must be opted in – this
provides two main benefits:
A PRUDENT APPROACH
TO RISK MANAGEMENT
WILL PROVIDE ADDED
REASSURANCES TO BOTH
FUND MANAGERS AND
THEIR RESPECTIVE INVESTORS
i) the grouping of transactions between counterparties in various transactions under a single legal document, which would allow for the transfer
for net balances on re-margining, thereby leading
to greater transactional efficiency;
ii) The other is the benefit for the purpose of
capital adequacy. By way of summary, exposures
to counterparty credit risk under CRD/Basel is
afforded the greatest collateral efficiency in trading book transactions and treated as single balances due
to either party’s capability of being netted through a legal
document.
Strict regulatory capital calculations arising from CRD III
now requires that an investment services provider must
hold capital at 10-day Value at Risk (VaR) 99% confidence level, meaning the importance of an appropriate
collateral management infrastructure and collateral optimisation has become a cornerstone of sound risk management practice. Furthermore, the Financial Stability Board
issued their comments on the shadow banking sector and
is calling for liquidity cover ratios and net-stable-fundingratios similar to the requirements for credit institutions
under Basel III.
A way to further reduce the burden of regulatory capital is through mitigating counterparty risk by engaging
a central counterparty clearinghouse (CCP). Since the
financial crisis, regulators have sought to bring over-thecounter (OTC) bilateral transactions out of the shadows
in light of severe mispricing of risk and massive accumulations of counterparty credit positions, as was the case with
Lehmans Brothers and MF Global.
CCPs significantly reduce the extent of credit exposure
in clearing and settlement by effectively acting as the buy-
”
er to the seller and vice versa. Operationally, this
means that the network of transactions between
counterparties would all be transacted with a single party. For example:
• Counterparty A owes a net balance of €100 to
counterparty B
• Counterparty A owes a net balance of €200 to
counterparty C
• Counterparty A is owed a net balance of €250
from counterparty D
• Counterparty A owes CCP: €100 + €200 -
€250=€50
When transacted through a CCP, the above balances due would be netted out to Counterparty A
owing a single balance of €50 to the CCP, as opposed to
having to account for each set of transactions with individual counterparties separately. Multilateral netting allows us to maximise the effectiveness of collateral posted
by singularly eliminating the need for separate accounts,
reducing back office costs and potentially reducing the
need for collateral by up to 75%.
To boot, CCPs are heavily backed up by a collective
default ‘pot’, which would indemnify the participant of its
losses in case of a default of the counterparty. A market
participant can also reduce concentration risk by engaging
a number of different CCPs to avoid the default of a single
CCP, albeit very unlikely.
The full extent of EU regulation is yet to be felt and undoubtedly will provide challenges in the future. Nevertheless, a prudent approach to risk management, particularly
in relation to regulatory capital, will provide added reassurances to both the fund managers and their respective
investors as to liquidity of the fund and consequently ensure that it is protected to some extent from ‘runs’ on the
market. Ensuring that an adequate mix of legal documentation as well as relationship management with key service
providers is in place will bolster managers’ positions as a
beacon of prudence, especially in volatile and uncertain
markets. n
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Outstanding Global Fund Administration Solutions
Any fund size, fund structure, fund strategy, fund domicile
apexfundservices.com
Peter Hughes
Group Managing Director
Tel: +44 7780 997609
peterhughes@apexfunds.bm
Untitled-2 1
Thalius Hecksher
Global Head of
Business Development
Tel: +1 786 877 1923
11/09/2012 14:19
Independence
Commitment
Expertise
-
Establishment of Investment Funds
UCITS Management Support
Service Provider Selection
Provision of Directors
MLRO Services
Liquidations
-
Investment Manager Start-up
Operational Oversight
Due Diligence Preparation
Fund Re-domiciliation
Infrastructure Review /
Development
LONDON
DUBLIN
NEW YORK
Phillip Chapple
Mike Kirby
John Pagano
42 Brook Street, London
Fleming Court, Fleming’s Place
260 Madison Avenue, New York
W1K 5DB
Mespil Road, Dublin 4
New York 10016
United Kingdom
Ireland
USA
Tel: +44 (0) 203 170 8811
Tel: +353 1 668 7684
Tel: +1 646 216 2096
phillip.chapple@kbassociates.co.uk
Fax: +353 1 668 7696
john.pagano@kbassociates.ie
mike.kirby@kbassociates.ie
info@kbassociates.ie
www.kbassociates.ie
KB Full page
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