Jack Seibald, co-head of prime brokerage at Marex; James Catalano, a partner at Citrin Cooperman; Chris Mendez, senior counsel at Crowell & Moring; Edward Tedeschi, President & Chief Operating Officer of PB Investment Partners who has helped set up hundreds of hedge funds; Robert Ansell, Director of Business Development at Opus Fund Services and Bruce Frumerman, president and CEO of Frumerman & Nemeth, discussed the ins and outs of starting and running a hedge fund —from easily overlooked back-office functions, to critical regulatory issues everyone should be aware of, both before and after launching. The discussion was facilitated by Robert Akeson, a managing director at Riverside Management Group.
Below are some key takeaways from the conversation (scroll down to access the full webinar):
Starting and running a successful hedge fund requires more than just a good investment idea. From due diligence and seed investments to the role of prime brokerage in supporting emerging managers, following are a few of the biggest takeaways that industry experts shared at last week’s MAIN event:
Think Like a Business Owner:
Launching a fund means becoming a business owner, not just a portfolio manager. Before doing anything else, it is crucial to understand the business owner role, outline a business plan and articulate a fund’s unique selling proposition. It is also essential to understand the business risks and how they can impact your own life.
- Document the partnership agreement and exit plan upfront, especially if launching with multiple principals.
- Conduct a thorough “whiteboard” session to outline the business plan, a realistic timeline and operating capital needs.
- Be sure to outline a clear investment process that can be easily understood by investors.
Legal & Tax Considerations:
There are three main legal and tax considerations that need to be considered by anyone launching a new fund –the fund itself, the management company and the principals.
- It is important to consider a fund’s domicile and choose the right jurisdiction, based on investors’ tax considerations, particularly foreign tax liabilities.
- Fund administrators are a key factor in a fund’s success, responsible for managing investor services, accounting, treasury and both middle and back-office functions. Managers need to do their homework and be sure to choose wisely.
- Legal services are another key area and should be selected carefully. Look for cost-effective legal services with strong track records documenting and outlining a fund’s legal structure.
- Carefully review employment agreements and IP ownership with prior employers prior to launching.
COO vs. a CFO:
New and emerging hedge funds need more than just a chief financial officer –someone managing the organization’s finances, they need a chief operating officer –an individual dedicated to the firm’s operations as a whole. A COO brings a diverse skill set, including financial management, operational efficiency, and negotiation skills, which are crucial for startups. Nascent firms with limited funds that are unable to bring on someone for both roles would be better served by solely binging on a COO, versus only having a CFO.
- Unlike a CFO, a COO is someone able to multitask and manage different aspects of the business, such as reducing costs and avoiding high run rates.
- A strong COO candidate is someone who can handle both operational and financial tasks effectively. Responsibilities of a COO should encompass working with law firms to negotiate master agreements and credit support annexes, managing service providers and balancing the books.
Choose Service Providers Carefully:
Service providers should be chosen not just based on pricing, but on technology and service quality. A good service provider should be able to provide high levels of automation and a dedicated service team.
- A big picture approach is essential to the selection of service providers. Building a strong relationship with service providers is essential and should be a determining factor in which organizations a firm chooses, versus pitting service providers against one another to try and land the lowest pricing.
- If service providers are chosen carefully, a firm’s founder can lean on them for expertise in running the business so that they are free to focus their efforts on trading and investment.
Raising Capital:
It is imperative to have a clear fundraising strategy.
- Know your target investor audience and be realistic about the challenges of raising capital, particularly in the current environment. Seeking to raise capital without a strong track record is challenging and increases the need for a compelling strategy to differentiate a fund from the competition.
- A good prime broker can be helpful in supporting capital raising efforts.
- Founders should maintain majority ownership of a fund, as nobody will ever care about a firm’s success as much as its founder.
- The discussion includes the need to articulate a clear edge or unique selling proposition to justify starting a business.
Hiring Decisions:
New and emerging hedge fund firms should be careful not to over-hire and should focus on bringing on versatile employees able to handle multiple roles.
- Partnership agreements, including exit strategies, should be clearly outlined and documented from the very beginning.
- Contingency planning, including the departure of a partner –whether retirement, or passing away, should be clearly outlined. Inadequate succession planning could result in undesirable situations that can hurt a firm, such as having a partner’s spouse take over.
- Firms should carry life insurance policies to protect against the death of a key partner.