Establishing a hedge fund, let alone attaining the necessary investment track record to entice allocators, is a challenging proposition. The cost of setting up a hedge fund has skyrocketed amid growing regulation and investor demands for institutional-standard infrastructure. Citi's 2014 Hedge Fund Industry Operating Metrics Survey estimated managers required a minimum of USD310million in AUM to ensure their two per-cent management fee covered all of their operational and regulatory overheads.
It is arguable this figure is too high, although most market participants would still put that break-even threshold between USD100million and USD150million. The problem is compounded as institutional investors are bound by strict risk mandates which contractually prohibit them from gaining excessive exposure to a single hedge fund.
Building an investment track record is essential for any manager to solicit meaningful institutional capital. One of the biggest challenges new-launch managers face when exiting proprietary trading desks at major banks is that their former employers are often reluctant to disclose an audited track record of performance. Building a track record from scratch at a fund can take two years, and a lot of cost. Utilising a managed account platform is one way managers can build up an investment track record without incurring all of the regulatory and operational overheads that come with it.
Linear Investments allows emerging managers to leverage its managed account platform, enabling them to utilise multiple managed accounts, instead of building up a fund. This allows the manager to build up a track record, and grow its business so that eventually it can market to institutional investors and demonstrate solid performance.
One of the core benefits of this MAP is that it is wholly regulated by the Financial Conduct Authority and obviates the need for managers to go through various regulatory registration exercises, many of which can prove time-consuming and distracting to their day-to-day money managing activities. The FCA approval process can take upwards of six months, with huge amounts of documentation requirements and advice from legal counsel. This can be expensive, and an enormous burden when managers are trying to get their feet off the ground.
Linear's Malta-based platform is also wholly compliant with UCITS and the Alternative Investment Fund Managers Directive (AIFMD), enabling managers to attain compliance without having to undergo the upheaval themselves. A study by BNY Mellon estimated initial AIFMD compliance for the average asset manager could cost anywhere between USD300,000 and USD1million.
Having a MAP to provide this regulatory umbrella for AIFMD and UCITS makes enormous economic sense. Furthermore, MAPs such as the one offered by Linear Investments will provide managers with pre- and post-trade risk management. This negates the requirement for managers to build or buy these systems or infrastructures internally, allowing them to focus on attaining alpha and developing a strong track record, which will help showcase their talent in today's tough capital raising environment.
It is critical that emerging hedge fund managers are not stifled by their managed account platforms, a situation that can sometimes arise at banks.
Having a boutique MAP can allow emerging managers to gain access to investors that will actually allocate to them, such as family offices or High-Net-Worth-Individuals (HNWIs); organisations that Linear Investments has cultivated and has relationships with. As such, it is crucial managers look towards a provider which can offer them flexibility and high-quality service, and allow them to grow AuM to institutional levels.
