As any hedge fund manager will attest, choosing the right service providers for your fund will be critical to your fund’s success. For many fund managers—particularly managers launching their first funds—hiring an experienced hedge fund consultant to serve as an independent resource and sounding board during the fund formation process is invaluable.
Below is a guest post on the subject by Trevor L. Zeh, an independent hedge fund consultant we work with often. For more information regarding Trevor’s services, please see his contact information below the post.
Starting Your Hedge Fund
Like any other small business endeavor, there are many avenues you can take to opening your hedge fund. Many aspiring hedge fund managers are already employed directly in the financial services industry by financially advising clients, trading managed accounts, or acting as a portfolio manager on behalf of an institution. That is why time is the most valuable resource. Allowing a hedge fund advisor to quarterback the launch process can not only save valuable time allowing the soon-to-be manager to continue with his daily responsibilities, but this guidance is usually coupled with cost savings as well. Before partnering with a consultant, there are a handful of pointers to keep in mind.
Independent advisors equal value. There are a litany of boutique hedge fund services firms and large institutions with hedge fund launch divisions that you can work with to open your fund. These launch companies often act as a pipeline for the associated/parent company’s core services and products. The advice you receive can be tainted as the advisor’s goal is to launch your fund with their employer’s best interests in mind, not yours or your investors. This consultant-like guidance is often marketed as a “value add” service by the ancillary division, but in reality, it is simply a sales channel. These relationships can be valuable if you know without a shadow of a doubt that you want to work with the specific firm. If you want unbiased advice not tied to any one firm or product in particular, working with an independent advisor represents the purest path to launch.
An independent advisor has the ability to essentially cooperate with any vendor on your behalf since they are not fettered to an employer’s partnerships. This capability represents a clear, external perspective. Consultants know in what situations certain service providers shine and where their weaknesses lie. Prospective hedge fund managers that are not leveraging a consultant’s direct experience of working with various service providers have to rely on marketing materials and initial interviews with lawyers, administrators, auditors, custodians, IT/infrastructure vendors, etc. to make a decision. An advisor’s value is compounded further if he/she has worked with a substantial amount of funds with similar characteristics such as yours (AuM, strategy, length of track record, etc.). Successfully growing a hedge fund around the parameters of the alternative investment industry’s best practices is easiest done through independent guidance that has done it many times before with different service providers, vendors, and partners.
Your consultant can be your most important business relationship for your fund. This single connection leads you to your fund’s best-suited service providers and advises on what deliverables from these providers to sign off on. Managers can sometimes get caught up in the dream of running a large fund instead of focusing on the proven fundamentals that can realistically assist them in achieving their goals. For example, when managers feel like they have something special they often want it marketable to everyone. This is not the correct strategy. I have worked with a handful of managers that immediately want to launch a master-feeder or a mini-master fund structure as this would allow their strategy to be investable by the majority of global investors. I often talk managers out of doing this in the early stages of their fund’s growth. It is better to start small and to build the fund around the initial traunch of committed investors versus launching various entities for potential investors that are not even committed yet. You can always expand your operations. I always advise doing this once it is to the benefit of the fund and when the proper amount of capital is present to do so.
This leads me to my next point: after launching your fund, market to those outside your front door. I witness many emerging managers wanting to attend national and global conferences, reaching out to institutions, chasing that dream. This blanket marketing approach is trudging uphill in true form. Not only does it cost thousands of dollars in travel expenses and conference tickets, but it represents a large amount of your time. Time that would be better spent connecting with firms and individuals within driving distance. I guide managers to have a laser-focused approach when marketing their fund post recent inception. How large of an allocation can your fund handle compared to your fund’s current AuM? $5m? $10m? $25m? Figure out that amount (investors often do not want their subscription to represent >10% of the fund’s total AuM, unless it’s a potential seeding arrangement), then focus your attention on the investors that are actively seeking the unique factors that are representative of your fund within the subscription amount your fund can handle. Face-to-face meetings are invaluable. Market in a way that will allow you to have a close, personal relationship with your potential investors versus having to book a plane each time a meeting is called for.
Cost is certainly a factor that managers need to keep an active eye on. Some startup fund managers I have worked with want to initially hire the largest, internationally recognizable service providers as they believe it will assist in their marketing efforts. This may be beneficial if you already have strong relationships with institutional investors that require this of you, but for the great majority of fund launches, you will not see a ROI doing this. It is often best to hire boutique, specialized providers. Not only are their costs reflective of their boutique-like size, but their servicing, deliverables, and advice often rival, and sometimes even surpass, that of the larger firms. There are many smaller providers that have a phenomenal name and reputation in the space. Your fund can always naturally grow into the larger firms when the times comes. In the meantime, hire the specialized providers that are prepared and willing to grow with you.
It is also helpful to note that you will want to work with an independent consultant that is entrepreneurial. After all, launching a hedge fund is synonymous with launching a small business, so collaborating with a consultant who is open minded and has small business acumen is invaluable for laying the foundation to grow your fund.
Trevor L. Zeh has connected and collaborated with managers for going on 5 years to establish hedge funds, incubator funds, and various pooled alternative investment vehicles.
His consultation is focused on providing the reputable and transparent infrastructure necessary to attracting and marketing to investors. Trevor has capital-saving strategic partnerships with the leading alternative investment service providers and professionals including hedge fund and private equity fund attorneys, auditors, administrators, custodians, marketers, IT/infrastructure professionals, and business intelligence software providers.
Trevor works with start-up and emerging managers to bring their funds to fruition. His launch processes are efficient, dependable, and tailored to your specific needs.
You can contact Trevor at 1-646-820-5720 for a complimentary consultation. His experience and a handful of references can be found on his LinkedIn profile,www.linkedin.com/in/trevorlzeh.