This week on the blog, RFA UK Managing Director George Ralph shares five ways hedge fund start ups can gain a competitive edge.
1) With a great investment strategy
Great hedge funds need a great investment strategy. Global macro, equity hedge, event driven, relative value strategies, distressed securities- it doesn’t matter as long as your chosen strategy has been proven to work time after time and can be articulated to investors. How can you get an investor to put their trust and cash into your fund if you can’t explain how your fund will outperform the competition?
2) By auditing your fund’s performance
Many investors will consider an auditor as an essential part of their due diligence when selecting a fund to invest in. The chosen auditor should be experienced, with a solid reputation in the sector, which can then be used as a selling point.
3) With scrupulous regulatory compliance
Alongside the essential elements of setting up a new hedge fund, such as securing investment, developing an investment strategy, employing a team, finding premises and building the right infrastructure, you have to navigate the complex world of compliance. With investors preferring centres with strict regulations (obviously feeling that their capital is better protected), new hedge funds may find that working closely with an outsourced compliance partner helps them to meet the requirements of regional regulations such as AIFMD, FCA reporting, OTC clearing and reporting, Short Selling Regulation and the imminent MiFID II directive. For start up hedge funds, an outsourced Chief Compliance Officer might be the solution, but consider that whilst the independence of the COO is one of their greatest assets, they must also be sufficiently embedded in the firm to be effective. Ensure also that they are transparent in their investigations and tests, to allow you to demonstrate the process to the authorities.
4) Using technology to get a competitive advantage
Start ups are in a unique position over established firms in that they can pick and choose the technology that suits them best, without having to consider legacy hardware and software that might not meet the needs of the business. Making the decision to use the cloud is simpler, with a cost/benefit analysis often tipping the decision in favour of on-demand cloud services. Start up firms should be wary of over-provisioning their IT estate, which could bring inflated costs and might be unappealing to potential investors, however, a robust, forward thinking technology strategy can also be a great selling point. Choose the right technology partner, who understands the specific challenges you are facing, is fully compliant with the current and imminent regulations in your region, and can scale with your firm as it grows.
5) By managing risks carefully
Investors need to know that you take risk management very seriously. Risks come in many shapes and sizes, but the most obvious being limiting the exposures that a fund can take, either via automation software, or processes that are built into the trade execution system. Market risks can be studied, dissected and planned for, with rigorous testing. Business or operational risks can include ensuring that your business plan is viable and robust enough to allow the firm to prosper, solid plans for raising more capital, and having achievable growth plans. All of these risks make for a very busy Chief Risk Officer, who should be proactive, independent and largely autonomous in order to be effective.