how to start a hedge fund

FEATURING Apex Fund Services // Bloomberg // GVTH Advocates // HedgeStart // Linear Investments // One Ten Associates // Options IT // Parex PR

REGULATIONNavigating growing legislative concerns with emerging managers

CAPITALHow difficulties raising day-one investment are driving innovation

TECHNOLOGYThe increasing importance of IT set-ups during the launch process

HOW TO START A HEDGE FUND IN THE EU 2013

WEEKHFMS P E C I A L R E P O R T

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NEW YORK CITY DUBLIN LONDON CHICAGO GRAND CAYMAN BOSTON www.HedgeServ.com

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Untitled-2 1 12/12/2012 15:29

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H F M W E E K . CO M 3

REPORT EDITOR Roberto Barros T: +44 (0) 20 7832 6543 REPORT WRITER Jon Yarker T: +44 (0) 20 7832 6541 [email protected] HFMWEEK HEAD OF CONTENT Tony Griffiths T: +44 (0) 20 7832 6622 [email protected] PRODUCTION EDITOR Claudia Honerjager SUB-EDITORS Rachel Kurzfield, Eleanor Stanley CEO Charlie Kerr GROUP COMMERCIAL MANAGER Lucy Guest T: +44 (0) 20 7832 6615 [email protected] PUBLISHING ACCOUNT MANAGERS Edward Taylor +44 (0) 20 7832 6616 [email protected], Tara Nolan +44 (0) 20 7832 6612 [email protected], Shona Lynch +44 (0) 20 7832 6614, [email protected] CONTENT SALES MANAGER Richard Freckelton T: +44 (0) 20 7832 6593 [email protected] OFFICE MANAGER Fay Muddle T: +44 (0) 20 7832 6524 [email protected]

HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group © 2012 all rights reserved. No part of this publication may be reproduced or used without the prior permission from the publisher

Published by Pageant Media Ltd LONDONThavies Inn House, 3-4 Holborn Circus, EC1N 2HA , London T +44 (0) 20 7832 6500 NEW YORK 240 W 37th Street , Suite 302, NY 10018 T +1 (212) 268 4919

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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 BarrosREPORT EDITOR

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4 H F M W E E K . CO M

H O W T O S T A R T A H E D G E F U N D I N T H E E U 2 0 1 3 C O N T E N T S

MARKETING

POSITIVE RELATIONS THROUGH COMMUNICATIONHenrietta Hirst of Parex PR explains why effective marketing from the outset will set hedge fund managers a league apart

FUND SERVICES HEDGING FROM THE STARTUlf Svensson of Bloomberg LP talks to HFMWeek about what start-up hedge fund managers should consider

FUND SERVICES

ADAPTING TO CHANGEPeter 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

RECRUITMENT

HIRING THE COO CAN BE THE HARDEST DECISIONCOOs 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

FUND SERVICES

HITTING THE GROUND RUNNINGStarting 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

PRIME BROKERAGE

OUTSOURCING FOR SMALLER HEDGE FUNDSJerry 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

TECHNOLOGY

CHECK YOUR PLAYBOOK EXPIRATION DATEWith 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

LEGAL

RISK MANAGEMENT IN SECURITIES FINANCING PROGRAMMESSimon 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

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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.

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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 [email protected]

A robust businessinfrastructure built

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HedgeStart Partners LLP, St Albans House, 57/59 Haymarket, London SW1Y 4QX T. +44 (0)20 7484 3900 www.hedgestart.com

Untitled-2 1 12/12/2012 15:35


H O W T O S T A R T A H E D G E F U N D I N T H E E U 2 0 1 3

Hedge funds, once the darlings of the � nan-cial 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. � is re-establishment, or

evolution, has meant that many hedge fund � rms have made signi� cant investments in compliance and legal as well as their operations and technical functions. Histori-cally, 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, e� ective 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. Con� dence in the hedge fund sector has been return-ing this year. According to Hedge Fund Research, by the end of Q3 of 2012, asset levels had bounced back up and hedge fund capi-tal increased $183bn to a record $2.19trn. And now that the rules of marketing hedge funds are becom-ing 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.

� ere is, of course, no geographical constraint in look-ing for investors, but the changes in the regulatory land-scape will a� ect the marketing of funds in the EU and o� -shore. When looking to target investors, emerging hedge fund managers should do extensive research on their in-vestor pro� le: many investors prefer to remain o� shore and use unregulated hedge fund structures while others, in particular European investors, are increasingly invest-ing through Ucits and other similar EU-based structures. � erefore, 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 Eu-rope. � e 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, a� er 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 bene� t is that under these new regula-tions, 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 ge� ing bigger: there are already plenty of European investors prepared to in-vest in onshore hedge funds (unlike UK investors, many European in-stitutional investors face penalties if they invest in o� shore hedge funds). � ere are also many pension funds that are in the process of expanding their investment strategies to in-clude hedge funds or increase their existing hedge fund allocations.

But with global hedge fund indus-try assets concentrated in the largest � rms (HFR data shows that 65% of total industry AuM is with the 5% of � rms that each individually manage $5bn or more), the smaller funds are

losing out. What this means in practice is that since the � nancial crisis there has been a polarisation of hedge fund investors.

SIZE MATTERSAs 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). � is is not only because those have a large asset base, but also because the investors require strong liquidity and o� en more main-stream strategies in order to comply with the restrictions of their investment mandates. At the other end of the spec-trum, many medium to small size investors – including family o� ces and high-net-worth individuals – are more open to investing with smaller managers; those niche and emerging managers that o� er more distinctive strategies. Since the � nancial crisis, it seems that accessing the second group has become more di� cult.

DESPITE INTENSE COMPETITION WITHIN

THE INDUSTRY, EMERGING MANAGERS HAVE GOOD REASON TO

BE OPTIMISTIC

”

HENRIETTA HIRST OF PAREX PR EXPLAINS WHY EFFECTIVE MARKETING FROM THE OUTSET WILL SET HEDGE FUND MANAGERS A LEAGUE APART

POSITIVE RELATIONS THROUGH COMMUNICATION

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.

006_007_HFMHow2EU_ParexPR.indd 6 12/12/2012 16:04


M A R K E T I N G

�e reality is that generating capital is di�cult without a proven track record of either indepen-dent performance or in raising assets. And once a hedge fund has tapped into family, friends and per-sonal contacts, they need to venture further a�eld for more substantial assets.

�is can be a signi�cant stumbling block as the high-net-worth individuals, family o�ces 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 collateral-together with the manager’s ability to communi-cate a consistent, clear and concise message that will catch the investors’ eye.

In order to market a fund e�ectively, from the beginning managers should ascertain their posi-tion in the marketplace, build market awareness of the funds and prove to potential investors how their strategies di�erentiate from others. �is should be integrated across all business activities in order to reinforce the message and market positioning. Emerging hedge fund managers need to research each tar-get investor and work out if the characteristics of the strat-egies they run �t with the asset allocation pa�erns of their target investors.

Once this has been done, the external marketing can begin. And this involves a panoply of possibilities: regu-lar update le�ers to a wide but relevant distribution list; a comprehensive website that includes useful information on the investment focus, the team, and uploads of up-to-date 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 pro�le. �e 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 in-formation. Managers should take advantage of this.

�en, it’s all about the networking. Quali�ed in-vestors 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 ge�ing out there. Hosting seminars, a�end-ing and speaking at family o�ce gatherings, inves-tor conferences and other platforms can be part of the mix. Becoming a member of AIMA and sign-ing up to the best practice standards of the Hedge Fund Matrix, (a joint initiative of AIMA, HFSB, IOSCO, MFA and the Asset Managers’ Commit-tee 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 li�le known track record for the foresee-able future there will be signi�cantly fewer opportunities for raising capital. �e 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

”

006_007_HFMHow2EU_ParexPR.indd 7 11/12/2012 18:36



The launch of a hedge fund is an exciting time, with entrepreneurial energy in the air. How-ever, the fund launch space is incredibly dif-� cult for start-up managers, with a lack of available capital, heightened regulation and crowded marketplace to all take account for.

� erefore, the need for technology solutions and support is key, as Bloomberg’s Ulf Svensson explained to HFMWeek.

HFMWeek (HFM): � e hedge fund industry has expe-rienced rapid changes in recent years, with tighter regu-lation, increasing operational costs and more demand-ing investors. What are the key elements of advice you would give a start-up manager in this environment?

Ulf Svensson (US): � e hedge funds industry is more structured and regulated today, so while hedge fund man-agers continue to launch new busi-ness ventures, they have to do so with these considerations in mind. An excel spreadsheet, an o� ce 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 regu-lations and guidelines. Before managers can accept outside in-vestment 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 invest-ment market, hedge funds need to di� erentiate them-selves from the thousands of others seeking new capital. Ongoing success depends on a hedge fund manager’s abil-ity to articulate and defend the fund’s investment strategy, explain its risk pro� le, and ensure transparent detailed, consistent communication with investors. � e 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.

HFM: What products and services can Bloomberg provide hedge funds?

US: � e products and services Bloomberg provides hedge

funds are categorised in three groups: � e 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 integrat-ed into the � rm’s existing systems; and enterprise trading, risk and compliance systems.

Our data solutions, for the desktop and enterprise sys-tems, provide reliable, fast and � exible solutions, which support hedge fund trading strategies across all asset classes. Bloomberg also o� ers multi-asset class electronic trading capabilities, order management platforms, port-folio and risk analytics, asset valuation tools for complex � nancial 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.

HFM: Why should hedge funds consider Bloomberg a trusted market data provider and tech-nology partner?

US: Founded in 1982, the Bloom-berg Professional service is licensed by 310,000 business and � nancial professionals globally. Bloomberg provides the hedge fund commu-nity with reliable, real-time and his-

torical data, market-moving news and analytics, and trad-ing tools that support investment decisions and activities. Bloomberg also o� ers execution and order management platforms for multiple asset-classes, instant communica-tions tools, industry research and news.

Bloomberg applies rigour to standardising and cleans-ing its data sets, which is one of the reasons Bloomberg is trusted to provide timely, accurate, consistent and com-prehensive data products to hedge funds and other invest-ment professionals. � e breadth and depth of our data library, the � exible way that Bloomberg products can be adapted and integrated into a global infrastructure and the company’s decades of industry experience are major dif-ferentiating factors.

HEDGE FUND MANAGERS KNOW THAT IT DOESN’T

REQUIRE MUCH TO HAVE THE BLOOMBERG

PROFESSIONAL SERVICE SET UP AND RUNNING

”

ULF SVENSSON OF BLOOMBERG LP TALKS TO HFMWEEK ABOUT WHAT ISSUES START-UP HEDGE FUND MANAGERS SHOULD CONSIDER

HEDGING FROM THE START

Ulf Svenssonis 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.

008-009_HFMHow2EU_Bloomberg.indd 8 12/12/2012 16:46


F U N D S E R V I C E S

One of the reasons hedge funds choose to implement Bloomberg technology in the front, middle and back o�ce 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 trad-ing platform has to be a simple and painless pro-cess for hedge fund managers. Bloomberg o�ers a simple, e�cient and comprehensive suite of prod-ucts and services that make the job of se�ing up a hedge fund easier.

HFM: What types of information and informa-tion delivery system are available to Bloom-berg clients and how can the way a start-up manager chooses to consume information help/hinder their business development?

US: Bloomberg is capable of delivering data from the front o�ce to the back o�ce, in real-time or periodically to alleviate some of the pressures on hedge fund manag-ers. If traders are using Bloomberg on their desks, then it makes a lot of sense to use Bloomberg data in the middle and back o�ce as well. When all systems in the food chain inside a hedge fund, or other buy-side �rm, are using the same data, managers avoid discrepancies and unnecessary reconciliation between the trading �oor, middle o�ce and back o�ce.

HFM: How do Bloomberg’s hedge fund solutions apply to the wide range of hedge fund professionals (independent asset managers/family o�ces, private equity �rms, prime brokers) who are potentially inter-ested in se�ing 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 criti-cal to a hedge fund’s business.

In 2011, Bloomberg released a technol-ogy package designed for start-up hedge fund managers that need to manage fund strategy, risk and compliance, STP trade se�lement, portfolio analysis, order man-agement and electronic trading connec-tions. Bloomberg’s Hedge Fund Tool Box – called HBOX – enables users to access Bloomberg’s global, multi-asset, broker-neutral execution management system (EMSX) platform, as well as Bloomberg Tradebook, Bloomberg’s agency broker. HBOX connects to all major prime bro-kers and fund administrators, provides compliance and audit reporting, pre-inte-grated data and execution tools and real-time P&L and exposures.

Bloomberg also updates technical ca-pabilities, processes and analytics in an-ticipation of market changes and customer

needs. We are able to roll out product enhance-ments virtually overnight on a global scale.

For example, to support the new European short-selling regulations that took e�ect in No-vember, Bloomberg worked with regulators to produce a de�nitive industry benchmark, which classi�es whether certain assets should be consid-ered ‘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 se�ing 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 dis-cussed and what impression and bene�t would you hope delegates leave with?

US: �e 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. �e most recent event cov-ered 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 ad-ministrators, lawyers, hedge fund investors gather to ad-dresses the concerns of new and existing managers. In ad-dition to o�ering access to the top industry in�uencers and informative panel discussions, the event also enables sector-focused networking opportunities and resources. n

BLOOMBERG OFFERS A SIMPLE, EFFICIENT AND

COMPREHENSIVE SUITE OF PRODUCTS AND SERVICES THAT MAKE THE JOB OF SETTING UP A HEDGE

FUND EASIER

”

008-009_HFMHow2EU_Bloomberg.indd 9 12/12/2012 16:46

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Untitled-7 1 02/04/2012 15:55




The hedge fund industry has undergone sig-ni�cant 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 se�ing 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 lo-cal know-how.

HFMWEEK (HFM): What are the key points a man-ager should have in mind when starting a hedge fund?

Peter Hughes (PH): �e 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, en-counter 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 di�erent fund structures available should be studied so as to mitigate risks of possibly not being successful.

HFM: What are the biggest chal-lenges when starting a hedge fund speci�cally in the EU?

PH: �e biggest challenges revolve around establishing a cost-e�ective way of se�ing up the structures needed and meeting the regulatory requirements in the EU. It is more expensive se�ing up EU structures compared to the traditional Cay-man, Bermuda, or BVI structures. �ere 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 se�ing up in the EU, managers need advice on the best structure and domicile in order to make them at-tractive in capital raising terms. Once that is de�ned, man-

agers should create the most cost-e�ective way of se�ing up, through fund platforms, hosting vehicles, and through compliance.

At Apex we want to make sure that we are the �rst 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 �nding the right so�ware to do their trading,

�nding middle-o�ce solutions, providing them with cloud hosting for their own IT infrastructure, and so forth.

�e way we phrase it to manag-ers is: you look a�er hiring an of-�ce that you want to be in and a�er managing portfolios and raising money for your strategy, we will do the rest to help set up in a cost-e�ective, yet robust way.

HFM: With increasing demands from investors and regulators, the hedge fund industry is in a di�erent place than it was 10 years ago. What are investors to-day 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 impor-tant to make sure that you tick all of the boxes for alloca-tors. You need risk management solutions, proper order management systems, and a portfolio management sys-tem. 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.

THE BIGGEST CHALLENGES REVOLVE AROUND

ESTABLISHING A COST-EFFECTIVE WAY OF SETTING

UP THE STRUCTURES NEEDED AND MEETING

THE REGULATORY REQUIREMENTS IN THE EU

”

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

ADAPTING TO CHANGE

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.

011_012_HFMHow2EU_Apex.indd 11 12/12/2012 16:05


1 2 H F M W E E K . CO M


Investors want transparency and liquidity. �e be�er liquidity a fund manager can provide to in-vestors, the be�er it is. We don’t o�en 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 deal-ings, or daily dealings? Why make it monthly, or quarterly? �is 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 ge�ing more delivered by �rms like Apex.

HFM: What are the biggest regulatory chal-lenges facing start-up hedge funds in the EU?

PH: �e biggest challenge is making sure that regu-latory 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 �nancial requirements. �ey need to have good initiative to make sure the requirements can be met, without crippling them in terms of costs. �at is the world we live in, and we need to be able to adapt to that.

HFM: What trends do you expect to de�ne the start-up sector in the next three to �ve years?

PH: It is di�cult to say, but I think start-ups will run leaner businesses in the next year. In three to �ve years, we have to make sure managers have �exible models in place.

�e 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,

you still have to provide the same quality that in-vestors expect, or you will not get allocations.

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. Emerg-ing markets credit is a very popular strategy. Managers are moving slightly away from the clas-sic long/short equity model and there is a grow-ing 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. �ey 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: �e challenges will always be having in place the right structures to be able to a�ract 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 a�er funds of any size, any structure, and in any domicile and do the work locally. We have teams lo-cated close to where any of these start-ups will be. n

THE CHALLENGES WILL ALWAYS BE HAVING IN PLACE THE RIGHT

STRUCTURES TO BE ABLE TO ATTRACT INVESTORS,

WITHOUT SPENDING HUGE AMOUNTS OF MONEY

”

011_012_HFMHow2EU_Apex.indd 12 12/12/2012 16:05

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Untitled-4 1 12/12/2012 17:44



The chief operating o� cer (COO) hire in any start-up hedge fund is typically the � rst ‘non-investment hire’ the � rm will need to make.

We have seen the evolution of the impor-tance of this hire change from it simply being a ‘need’ to now being just as essential as hav-

ing a high quality investment team. � e track record and pedigree of the COO will be the � rst 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’ ap-proach to introductions through various networks/suppli-ers that exist in the sector.

We recognise this hire can be dif-� cult to make, since the person re-sponsible for assessing the skillsets of the COO has invariably always hired investment professionals but has rarely been involved in hiring a non-investment individual. � ere-fore, assessing the relevant skill-set of the individual can come with challenges.

� e purpose of this article is to provide some speci� c guidance on the thought process required when considering a COO while recognis-ing that this hire is ultimately indi-vidual to the situation of the start-up; so there is no one right answer to the hiring of a COO.

� e following are three key areas to consider when thinking about hiring the COO:

1. SIZE OF THE FUND LAUNCH� is 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 relation-ships and people

• Greater than a $250m launch will typically want to at-tract someone from a larger hedge fund, as the launch

will need that type of pedigree to cope with the com-plexities of this size of launch

2. WHAT SKILLS ARE REQUIRED?� e COO will typically need knowledge in � nance, tax, operations, compliance, technology and legal.

� ere is a perception that the COO needs to be a quali-� ed accountant, the rationale being that investors feel comfortable with a COO who is professionally quali� ed to create a strong control environment. � e 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 sys-

tems? – If yes, a more technology-savvy COO is needed

• Is middle o� ce – across opera-tions and NAV production – the biggest worry? – If yes, someone with pedigree in dealing with middle o� ce is needed

• Is there a strong need for in-house knowledge on the legal, compliance, as well as tax & � nance side, without having to outsource this advice?

– If yes, a quali� ed accountant/lawyer is the best place to � nd this broad skill-set.

Addressing some of these key issues upfront will help in assessing how relevant the background of the COO is to the start-up.

� e 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 speci� c about what they want.

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

”

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

HIRING THE COO CAN BE THE HARDEST DECISION

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

014_015_HFMHow2EU_OneTen.indd 14 12/12/2012 16:06


R E C R U I T M E N T

Our advice has always been: the more speci�c 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/quali�cations�is does not always tell the full picture but it

can be used as a di�erentiator 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�e companies individuals have worked for in

the �rst �ve years a�er university invariably de-�ne 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.

CONCLUSIONIt should be stressed that when thinking of this hire it is unrealistic to expect it to solve all the needs on the non-investment side – invariably, COOs will always need a

small team around them to ensure all core areas are ap-propriately controlled and managed.

�e hiring of a COO of a start-up fund can be the hard-est 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 as-sessing 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 di�erent 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 head-hunter to help shortlist candidates based on the per-sonality 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 �rm – a�er 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

”

014_015_HFMHow2EU_OneTen.indd 15 11/12/2012 18:44

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Untitled-1 1 23/10/2012 14:47


H O W T O S T A R T A H E D G E F U N D I N T H E E U 2 0 1 3 F U N D S E R V I C E S

As 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 di� -cult, competition between managers more

intense and as a result investors are faced with a lot more choice. So how can a � edgling fund get started and over-come these hurdles? HFMWeek sat down with Ma� hew Wilson, managing partner of alternative investment con-sultancy � rm HedgeStart, to � nd out more.

HFMWeek (HFM): How do you perceive the start-up hedge fund climate in the UK? What are the biggest obstacles?

Ma� hew Wilson (MW): � e absolute, number one chal-lenge is raising capital. It’s probably always been the big-gest obstacle. Even a decade ago I used to say that the three most dif-� cult aspects to cover when start-ing a � rm were raising the capital, � nding the right o� shore directors and choosing a name. While the la� er two haven’t become any eas-ier in the past few years, undoubt-edly raising money has become exponentially harder.

I think what is also really impor-tant 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 hap-pens with the fund managers who fail is that they don’t ap-proach their new venture as a business. Someone will walk away from a prop trading desk to set up a hedge fund for the � rst time and will be con� dent 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 prop-erly 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 � exibility that our clients need. Our preferred management structure is gen-erally a limited liability partnership, probably with a UK company as a member of the partnership. � is is very simple and straightforward, and importantly creates li� le 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 o� shore elements to the structure are warranted from day one, but only if there are clear indications that the circumstances under which it is bene� cial are there from the start or actually likely to occur – and even then it is o� en 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 con-cerned about the impending Alter-native 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 lobby-ing initiatives such as those of the Alternative Investment Manage-ment 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 in-vestment management operates properly. In respect of this, most hedge fund regulation tends to be just codi� ed good business practice. With the right pragmatic and practical ad-vice, all of these things – no ma� er how terrifying they may seem – can be dealt with. � e industry will � nd its solutions to the AIFMD.

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,

REGARDLESS OF THE CONDITIONS YOU FACE,

YOU NEED TO BE SMART ABOUT HOW YOU SET UP

YOUR OPERATION

”

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

HITTING THE GROUND RUNNING

Matthew Wilson managing partner, founded HedgeStart in 2000. Previously he was CFO/COO at a $1bn long-short spin-out 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.

017-018_HFMHow2EU_Hedgestart.indd 17 12/12/2012 16:08


H O W T O S T A R T A H E D G E F U N D I N T H E E U 2 0 1 3 F U N D S E R V I C E S

some people will still endeavour to go it alone without con-sultancy assistance. �ere 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 consult-ing 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 un-derstand the questions being asked. You could write a 16-page 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. �is 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-vili�ed 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 �ve years’ time – since those are the ques-tions 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 infra-structure within their organisation to handle all of the pe-ripheral functions or they keep their business more lean and outsource these roles. Building a hedge fund opera-tion is largely an issue of taking standard industry compo-nents, and pu�ing them together in an integrated fashion to create a business. We have the perspective to know how these pieces �t together.

HFM: Has this need changed as a result of the evolving regulatory, market and investor conditions?

MW: �e industry has grown exponentially, although more recently at least the rate of growth has been more subdued but nevertheless with healthy new activity. �e 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. �is itself has introduced more rigorous due diligence and higher operational standards as a given, as well as perhaps some degree of bureaucracy.

�e 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 in-vest 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 invest-ment. 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 cli-ent base. �ey know we are interested in building rela-tionships within the industry and aiding start-ups is a means to an end and allows us to develop a long-run-ning relationship.

�e service we do for most start-ups is the FSA ap-plication, 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 signi�cantly less startling. n

017-018_HFMHow2EU_Hedgestart.indd 18 12/12/2012 16:08

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 [email protected]

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©2012 Bloomberg L.P. All rights reserved. 51362041 1212

Untitled-2 1 12/12/2012 15:28



Idon’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. � ese are very di� cult times for smaller or start-up hedge funds and we o� en face this dilemma. We are frequently ap-proached by new funds se� ing up for the � rst

time, or even mid-sized funds being squeezed at both ends under current market conditions who are looking for new homes.

Investors have di� erent expectations nowadays – cau-tion and suspicion are the leading in� uences on how investors look at a new or smaller fund. � ey have been burned and do not wish to experience the same again. For emerging funds, the days of � ashy o� ces in the heart of Mayfair are more likely to put o� investors than impress them. � ey 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.

� e issues are almost wholly the same – how can we build a track record, or even stay a� oat with reduced AuM and having to incur signi� cant costs to maintain a hedge fund under current regulations (with increasing supervi-sory demands and reporting requirements)? Fixed costs and overheads can quickly overwhelm the earnings poten-tial of even quite successful smaller funds.

Simply put: costs are too high to sustain the level of in-vestment. You need time to build or prove a track record, and resources and skills outside of the fund advisory func-tion are costly. In terms of what needs to be in place, there is FSA registration and ongoing reporting and manage-ment, as well as middle- and back-o� ce se� lement and operational issues that need a� ention (and cannot be ignored). Also, technology is expensive but essential (us-ing Bloomberg data, for example), websites and marketing

materials need building and signing o� , and rents in Lon-don are high. On top of all this, raising capital for smaller funds is impossibly di� cult in current market conditions.

� ere are ways of addressing all of these issues to keep costs down and manageable. � ere is a tendency for groups of smaller funds to get together with boutique in-dustry experts to create innovative and e� ective solutions. � is 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. � is approach avoids many of the costs, expen-sive learning curves and pitfalls of se� ing up and running a smaller fund. By sharing resources you can radically re-duce overheads to increase your chance of success or sur-vival, and maybe even more signi� cantly open up doors to capital introduction by working with others.

� e importance of working with ‘mini’ prime brokers who o� er consolidated services (including o� ce space,

BY SHARING RESOURCES, YOU CAN RADICALLY REDUCE OVERHEADS TO

INCREASE YOUR CHANCE OF SUCCESS OR SURVIVAL

”

“

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

OUTSOURCING FOR SMALLER HEDGE FUNDS

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.

020_021_HFMHow2EU_LinearInvestments.indd 20 12/12/2012 16:09


P R I M E B R O K E R A G E

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. �e smaller fund is very impor-tant – 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 manage-ment and performance fees. What are you going to do?

A start-up or emerging fund has all the same is-sues, with maybe a few more headaches piled on. It is very easy to erode signi�cant chunks of the initial set-up capital on establishment costs, legal fees, admin, back o�ce and premises.

But, in both circumstances, there are now bet-ter ways of radically reducing those overheads and �xed costs at the same time as pulling in appropri-ate knowledge and infrastructure. Virtually all of your non-core cost can be turned into some form of outsourced variable cost.

�e whole issue of raising new capital is a com-plete nightmare at the moment. It’s especially dif-�cult for the smaller funds, as they are �ghting the multiple issues of investor con�dence (or lack of): indecision, fear, uncertainty, downturn exhaus-tion 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 speci�-cally 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 �nd managers with talent and ideas, helping them get on with the process of building value while we deal with the detail and the cost. �e approach can manifest itself in many ways and each individual situation involves a selection of options, which are speci�cally suited to each environment and level of de-velopment.

As a ‘mini’ primebroker, we work with smaller funds and, by tying up with a number of industry experts in sev-

eral �elds, 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, run-ning back/middle o�ce functions, providing o�ce space and trading facilities, and FSA registration and compliance services – all of which we can sup-ply 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 in-house capital introduction experts who are com-pletely focussed on the smaller funds and working constantly on relationships with specialist fam-ily o�ces 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 diversi�ed investments on behalf

of our investors from seed capital to next stage growth.In some cases, we will partner with ventures where syn-

ergies 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. �e concept is one which is a�racting a great deal of a�ention. 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 signi�cant force for growth in the industry.

In summary, it is vital that you streamline your costs and operational structures to minimise outgoings and op-timise 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 o�ces are than expecting to see marble and glass in the heart of Mayfair.

It is now possible to set up very cost-e�ective operations by sharing expertise and working with prime brokers who focus on smaller funds. Everything can be shared: o�ces, FSA licence, o�shore entities (SPC structure), advice, admin and even capital introduction – all without giving away your ownership or independence. It’s worth explor-ing what could be done to radically reduce your costs, es-pecially 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

”

020_021_HFMHow2EU_LinearInvestments.indd 21 12/12/2012 16:09



Perhaps 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 technol-ogy 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 disrup-tion that presents new means of addressing these require-ments and of changing the economics of your business – something which may be less than obvious.

SCEPTICS WELCOMEOne 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 � nd ourselves uniquely positioned to shed light on the ma� er given our heritage. We have 20 years of experience in providing managed technology solutions to the capi-tal markets, and we were the � rst provider to o� er a hosted, man-aged and multi-tenant technology platform (in other words, a cloud) speci� cally for the alternative in-vestment community in 2002. Over those 10 years of operating a private � nancial cloud, we’ve de-veloped a number of deeply held convictions on the subject.

BUSINESS IMPER ATIVES & IMPACTLet’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 con� dence: Investors are looking for assurances to the operational stability and soundness of the managers they entrust. Cloud providers with mature, proven and professionally audited proce-dures – a� ested to by way of a Type 2 SOC 3 report – not only instill con� dence in their customers, but

also enhance the pro� le of the customers to their investors by allowing them to enjoy and assert their possessions of those same SOC 3 accreditations. � is can be leveraged as a competitive advantage among one’s peers with discerning investors.

2. Minimise business risks: In the context of a � rm’s technology platforms and operations, resiliency and availability pose signi� cant risks both in terms of sys-tems and, most critically, sta� . High quality providers will certainly demonstrate superior design in techni-cal architecture, which enables the high availability so vital to a solid operational platform. But equally importantly, these providers can hire and motivate talented sta� in all the key disciplines involved in today’s highly evolved technology systems and focus them on a single cohesive platform. Be it through ex-pertise in Linux, Windows, or network, storage and database administration, leading providers can wield the critical mass of resources necessary to withstand turnover and routine sta� absences, all within a single

set of hardened repeatable business processes and a uni� ed platform proven over years of production cycles and a broad customer base.3. Address regulatory & due diligence requirements: Regulatory authorities and inves-tors alike present challenging – and not uncommonly changing and ex-panding – expectations concerning the maintenance and availability of the � rm’s data, be it correspond-ence, positions and transactions, books and records or otherwise. Best in class providers can clearly articulate a data management plat-form capable of exceeding today’s

requirements to ensure the � rm is prepared to re-spond no ma� er how stringent future expectations might be.

4. Optimise expense control: Market volatility and the many external forces a� ecting the fate of any fund manager’s assets under management threaten the stability of the � rm’s pro� tability, unless they can manage their costs in line with revenues. Cloud ser-vice 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

”

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

CHECK YOUR PLAYBOOK EXPIRATION DATE

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.

022_023_HFMHow2EU_OptinIT.indd 22 12/12/2012 17:04


T E C H N O L O G Y

ing of technology infrastructure in line with prevailing conditions and business demands.

DETERMINANTS OF SUCCESSWhile cloud adoption o�ers such bene�ts, choos-ing 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, giv-en 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 uni�ed system and the processes supporting it. Progressive service providers will continually seek to adopt inno-vative technologies and techniques, but only as enhancements to a time-tested proven system and with great care to manage the change process. Fur-thermore, they will have a track record of pro�table and reputable business operations to earn your trust in their long term viability.

2. Capital markets expertise & applications: As ho-mogenous as many of the IT components we lever-age may be, the capital markets industry presents a myriad of niche requirements, which cannot be properly supported without subject ma�er knowl-edge and experience. Be it market data quality and exchange reporting obligations, FIX connectivity, or regulation-driven storage requirements, service pro-viders must provide industry focus and a seasoned team equipped to provide a comprehensive service experience. Be�er yet, providers should present a broad array of supported partner applications and content to address the front-to-back needs of the cli-ent under one service provider ‘umbrella’, and o�er direct access to trading destina-tions in market co-location centres.

3. Architectural and systems quality & uni-formity: System availability and resiliency is a ma�er of critical concern to all customers and yet all too easily underinvested in or poorly designed by the provider. Service provider of-ferings must be validated to ensure all critical systems are deployed in geographically dis-tributed resilient pairs with detailed backup and recovery systems and procedures. Just as important, the provider’s platform should be uni�ed and coherent, and therefore capable of being properly administered at scale.

4. Privacy: Regulators and investor expecta-tions, as well as intellectual property protec-tion concerns, call for rigorous measures to isolate and protect client data – be it stored or in transit. Beyond taking obvious meas-ures such as operating a private network and implementing the �rewalls and access con-trol policies one would expect, discerning customers will again look for audited asser-tions of data privacy enforcement measures.

In addition, they will expect a more rigid data pro-tection model than the one o�ered by public cloud providers such as Amazon Web Services, and will require data segregation techniques and dedicat-ed hardware operating in the speci�c data centre countries they desire.5. Price predictability: All managed service ar-rangements call for a delicate balance of capabili-ties and associated costs between customer and provider, and it’s all too common to see commer-cial models that expose customers to the undue risk of an uncapped consultancy charge model. Best-in-class providers will o�er customers a high degree of price transparency and predictability in the form of �xed service pricing. By removing the threat of ‘nickel and diming’, these set service pro-viders adopt simple �xed subscription pricing and assume the risk of cost volatility themselves, and rightly so given that the service provider is be�er

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 pro-vider to meet a client’s expectations, they must be �-nancially incented to perform as well. Clients should expect rigorous, quanti�able service level agreements which ensure any pain they endure is shared by the service provider where they feel it most: in their wal-lets.

OPTIONS AT YOUR DISPOSAL�e fact is, cloud service providers are capable of ge�ing investment �rms up and running more quickly, cost e�ec-tively and con�dently than was previously possible. With a contemporary understanding of the choices available to you, you will be be�er placed to execute your playbook than ever before. n

EXPERIENCED INFRASTRUCTURE

MANAGERS KNOW ALL TOO WELL THAT IT’S ONLY WITH HARD-EARNED EXPERIENCE THAT A GIVEN PLATFORM

CAN ACHIEVE HIGH QUALITY

”

022_023_HFMHow2EU_OptinIT.indd 23 12/12/2012 17:04

Compliance Expertise For Asset Management Firms

Complyport is a leading regulatory compliance consultancy which provides bespoke, practical solutions to the asset management industry.

� FSA authorisation assistance � Ongoing compliance support � 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 �rms.

With the regulatory landscape constantly evolving in Europe, the US and Asia, Complyport ensures you are prepared for the challenges ahead.

CONTACTS

UKJon WedgburyEmail: [email protected]: +44 (0)20 7399 4133

Martin Herriot Email: [email protected] Tel: +44 (0)20 7399 4980

JerseyJohn PallotEmail: [email protected] Tel: +44 (0)1534 626 144

www.complyport.com

hfmWeek_fullpage_cmyk_20121122.indd 1 21/11/2012 14:40:39Untitled-2 1 12/12/2012 15:31


H O W T O S T A R T A H E D G E F U N D I N T H E E U 2 0 1 3 L E G A L

Undoubtedly, 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 ra� of regula-

tions rather than focussing on maximising returns. � e 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 � nancial system through a number of risk transformation � -nancial market techniques, includ-ing repurchase agreements, securi-ties lending and securitisation) due to the liquidity shock that can be sustained in runs on the system. � ese may be exacerbated by mar-gin calls, defaults and the pursuant appropriation of collateral.

Many hedge funds operating a long/short strategy use securi-ties lending as an arbitrage tool,

or simply to appropriate securities to sell short; other in-stitutions use repurchase agreements (repo) as a secured � nancing 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 a� ention 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 non-involuntary defaults). In addition, the move to T+2 se� lement means that funds have less time to source equivalent securities, which in illiq-uid market conditions and particu-larly for illiquid securities, leaves li� le margin for error.

� is means that a robust risk management system must be em-ployed to ensure that an asset man-ager 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 Lend-ing Association) and the Global Master Repurchase Agree-ment (GM� – produced by the International Capital Markets Association), respectively. � ese agreements and the various relevant annexes have been cra� ed and tweaked over a number of years by industry proponents, taking into account a number of nuances speci� c to those transactions. � is provides a great deal of operational certainty as to the accepted legal mechanisms of the transaction.

� e importance of legal opinions supporting the nature of such a transaction so as to avoid re-characterisation as an outright sale into a secured � nancing transaction is paramount in avoiding legal complications in the event of a default. � e 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

”

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

RISK MANAGEMENT IN SECURITIES FINANCING

PROGRAMMES

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.

025_026_HFMHow2EU_GVTHLaw.indd 25 12/12/2012 16:18


H O W T O S T A R T A H E D G E F U N D I N T H E E U 2 0 1 3 L E G A L

ments and speci�c provisions relating to the coun-terparty relationship.

Ne�ing and set-o�, for example, are an impor-tant part of this. Ne�ing is not automatic under the master agreements and must be opted in – this provides two main bene�ts:

i) the grouping of transactions between coun-terparties in various transactions under a single le-gal document, which would allow for the transfer for net balances on re-margining, thereby leading to greater transactional e�ciency;

ii) �e other is the bene�t for the purpose of capital adequacy. By way of summary, exposures to counterparty credit risk under CRD/Basel is a�orded the greatest collateral e�ciency in trad-ing book transactions and treated as single balances due to either party’s capability of being ne�ed 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% con�-dence level, meaning the importance of an appropriate collateral management infrastructure and collateral opti-misation has become a cornerstone of sound risk manage-ment practice. Furthermore, the Financial Stability Board issued their comments on the shadow banking sector and is calling for liquidity cover ratios and net-stable-funding-ratios similar to the requirements for credit institutions under Basel III.

A way to further reduce the burden of regulatory capi-tal is through mitigating counterparty risk by engaging a central counterparty clearinghouse (CCP). Since the �nancial crisis, regulators have sought to bring over-the-counter (OTC) bilateral transactions out of the shadows in light of severe mispricing of risk and massive accumula-tions of counterparty credit positions, as was the case with Lehmans Brothers and MF Global.

CCPs signi�cantly reduce the extent of credit exposure in clearing and se�lement by e�ectively 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 sin-gle 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 bal-ances due would be ne�ed 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 indi-vidual counterparties separately. Multilateral ne�ing al-lows us to maximise the e�ectiveness of collateral posted by singularly eliminating the need for separate accounts, reducing back o�ce 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 di�erent CCPs to avoid the default of a single CCP, albeit very unlikely.

�e full extent of EU regulation is yet to be felt and un-doubtedly will provide challenges in the future. Neverthe-less, a prudent approach to risk management, particularly in relation to regulatory capital, will provide added reas-surances to both the fund managers and their respective investors as to liquidity of the fund and consequently en-sure that it is protected to some extent from ‘runs’ on the market. Ensuring that an adequate mix of legal documen-tation 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

A PRUDENT APPROACH TO RISK MANAGEMENT WILL PROVIDE ADDED

REASSURANCES TO BOTH FUND MANAGERS AND

THEIR RESPECTIVE INVESTORS

”

025_026_HFMHow2EU_GVTHLaw.indd 26 12/12/2012 16:19

Outstanding Global Fund Administration SolutionsAny fund size, fund structure, fund strategy, fund domicile

apexfundservices.com

Peter HughesGroup Managing DirectorTel: +44 7780 [email protected]

Thalius HecksherGlobal Head ofBusiness DevelopmentTel: +1 786 877 1923

Untitled-2 1 11/09/2012 14:19

- 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

Independence Commitment

Independence Commitment

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LONDON

Phillip Chapple

42 Brook Street, London

W1K 5DB

United Kingdom

Tel: +44 (0) 203 170 8811

[email protected]

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Mike Kirby

Fleming Court, Fleming’s Place

Mespil Road, Dublin 4

Ireland

Tel: +353 1 668 7684

Fax: +353 1 668 7696

[email protected]

NEW YORK

John Pagano

260 Madison Avenue, New York

New York 10016

USA

Tel: +1 646 216 2096

[email protected]

KB Full page MAG ad.indd 1 27/09/2010 11:17:35Untitled-2 1 12/12/2012 15:38

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