How to start a hedge fund in Europe

Jerry Lees – Published in HFM June 2014

Linear brings together the skills and expertise that hedge funds need, within an integrated platform solution.  This approach will significantly reduce your operational costs and bring you to market faster and more efficiently.

Linear achieves this by integrating; Capital Introduction, Prime Brokerage and custody Services, Execution, DMA and Trading desk, middle/back office operations and a regulatory umbrella.  You can select the services you require or take the package as a total solution.

Launching a new hedge fund in 2014, or even maintaining an emerging fund, can appear a daunting task, especially when considering the wave of regulatory requirements and investors scrutiny for operational transparency.  Funds with a team of less than 5 people will find it increasingly more difficult to meet requirements.  But there are new opportunities for fund managers to tick all these boxes without getting bogged down in procedures, thanks to the emergence of a new breed of service providers that can provide institutional expertise, especially for smaller funds below $100m.

The focus for regulators has been to ensure that the numerous and complicated processes around running a Hedge Fund are carried out by people with relevant expertise.  Previously small funds with a minimal number of employees collectively responsible for running research, trading, operations, risk, compliance and raising capital has led to concerns around accuracy and transparency for the end investor.  Part of the spirit of the raft of regulatory changes, including AIFMD, are focused on providing transparency to investors.  This is why it is more important than ever before for hedge fund managers to ensure that they utilise the full spectrum of service providers, that can bring independent expertise to the funds overall operations.

Many of the key components of running a start-up fund can and should be more effectively outsourced to allow focus on the core investment decisions.  Take for example raising Capital, getting in front of numerous potential investors is a difficult and time consuming process.  Working with a specialist who will be marketing for multiple clients will give a significantly greater reach and access and they will be able focus on the right targets.  Other areas that are obvious targets for outsourcing include execution desk, where appropriate.  Why tie up cost on the expensive task of manning an internal execution desk and all the technology and back-up required when this can be managed by a specialist who may have access to better rates and more brokers.  Then of course there is the regulatory burden faced by the whole industry, which is destined to get more onerous and complex.  It is essential that you have a strong compliance function and capability to deal with the regulatory reporting and management requirements, not to mention appropriate capital.  This function is frequently outsourced to specialists such as Linear who can wrap these services into a package under the PB structure which will be very cost effective for a smaller fund especially.  The other advantage of using a compliance/Appointed Rep structure under a larger entities umbrella is that the whole process of getting authorised is significantly speeded up from nine to twelve months down to around four to six weeks.  The fund can then migrate to their own structure in due course whilst focussing on track record in the meantime.

Investors that come to Linear looking for opportunities to invest into emerging managers on our platform have increasingly focused their due diligence around ‘operational excellence’.  They are seeking assurances that that people with the right skill sets are actively involved, on a day to day basis, in the numerous post trade processes.  This also frees up the time of the manager to focus on what he or she is best at, which ultimately is generating alpha for investors.

At Linear we spend a significant proportion of the overall due diligence process on new managers going through the intricate stages behind every trade.  In this regard Linear is able to help it’s clients identify each stage and ensure that careful consideration has been given to establish an institutional approach to fund management from launch.

Suggested topics to then go on to discuss in more detail;

-Importance of operational reconciliation procedures, which can appear mundane but are critical in ensuring an accurate NAV for investors.  How using a company such as Linear can provide a level of comfort to investors

-HF managers finding investors that are looking to invest day 1, seed capital funds are now a critical part of and new HF manager’s agenda