Incubator platforms: the benefits of infrastructure and distribution

Start-up hedge fund managers face conflicting issues today. On the one hand, managers are acutely mindful of the need to control capital expenditure. Rising costs of regulation and compliance challenge the ability to build traction in funds. On the other hand, funds realize the importance of having an institutional-quality infrastructure from day one, an expensive proposition, in order to appeal to increasingly demanding institutional investors.

So how should managers counteract the opposing forces of reducing costs to stay lean and mean yet still present themselves as a serious business? One option gaining popularity is the incubator platform, which provides an entire infrastructure, a risk management framework and takes care of all service provider agreements. The incubator platform leaves the manager to focus on one core task: running the investment strategy.

London-based Trium Capital, situated on Gresham Street in the City, has recently developed the Trium Multi-Manager Alliance, a platform aimed at early-stage hedge fund managers. The TMA platform provides managers a collaborative environment where operational and fund distribution needs are taken of. Offering a state-of-the-art trading floor, a new hedge fund team can plug in and start trading, achieving the dual aim of keeping operational costs low while using a institutional-quality infrastructure.

Simply put, we provide an extended team and trading floor infrastructure for each manager giving them a footprint of a well-run institutional hedge fund. We have a risk management team, a great COO, legal and compliance, and a large middle office,” explains Gareth James, Group CEO of Trium Capital, who continues:

Unlike the "hedge-fund-hotel" model, which outsources various control functions for less cost than in-house, we offer the concept of an alliance. If you take two smaller hedge funds who decide to rent the same office, have a common COO, risk management system, and a common middle office, our offering will help both funds to punch above their weight.

What we do is facilitate that mindset. Most requirements that make managers institutional do not need to be exclusively owned. It’s all about creating economies of scale. We also create a distribution footprint. Our platform is effectively an alliance of early stage managers but the distribution synergies go far beyond the infrastructure facilities.”

Infrastructure benefits of the TMA platform

While the TMA platform is explicitly alliance-based, new managers should be under no illusion that they can simply turn up at the front door and expect to be welcomed with open arms. The process is a two-way decision-making process: both the fund manager and Trium have to decide that joining the platform will be mutually beneficial. The other managers on the platform, four of which are currently enabled and trading, also have input. 

A new manager should be prepared to impress and ensure their investment strategy is well articulated and has potential to raise assets and appeal to investors.

James says that what Trium looks for in a manager is the right mix of experience and a well-developed investment strategy which will appeal to investors. “We look at it from a trading perspective: is the trading style of these traders ultimately going to be successful? Investors look at a whole host of factors but ultimately it boils down to the investment strategy.”

Diversity of strategies at Trium is imperative so that all managers can grow and support each other.

We don't want managers clashing. The TMA platform is very much an alliance so it’s really important that all the managers get along and feel part of a collective,” says James.

If a manager has just come back from an investor meeting in Sweden, for example, and it hasn’t gone well, the manager can benefit from talking to his fellow manager sat next to him to explain what happened. Everyone can learn from each other. That sharing culture is vital.

"The concept of sitting in an attic in Mayfair, never talking to anyone in the outside world, is not a very productive way to run a start-up business.”

Regardless of whether a manager has just finished their business plan, is yet to raise any assets, or is already a regulated entity, Trium will bring them on to the TMA platform with the express aim of strengthening both the commercial potential of the individual manager and the platform as a whole.

In many respects, the TMA platform is similar in concept to a multi-strategy shop such as industry behemoth Millennium Management. Whereas each investment team within a multi-strategy firm runs money from the same pool of capital, on the TMA platform each manager remains fully autonomous.

We feel the optimal number of managers is 15 or 16 members on the platform. We will create the necessary Chinese walls but the key is about feeling part of a wider group. Each group has its own identity. It’s their own business,” confirms James.

Trading/Front office

The TMA platform is prime broker agnostic and honours pre-existing prime brokerage agreements. Conversely, if managers wish to avail themselves of the prime brokerage relationships, they can leverage the ones Trium already has in place. The benefit to this is that a new manager can gain access to prime brokers that might otherwise not be available to them.

The advantage with us is that prime brokers see us as one asset pool,” says James. “However, we don’t force the manager to go into a pre-defined prime brokerage relationship. It’s a case of us collectively agreeing with the manager what is the best option for them based on who they are and what is their AUM.”

Trium has its own risk management and back-office teams in place to support managers in their investor and regulatory reporting needs and distribution capabilities. Done on a stand-alone basis, the process can be a daunting and expensive exercise. James estimates that a start-up manager might be able to support themselves, operationally speaking, with approximately 100 million dollars, but they would typically require assets in excess of 500 million dollars to support themselves from a branding and distribution perspective.

Trium’s dedicated sales team offers each manager the opportunity to benefit from the collective strength of the platform by presenting a menu of investment opportunities to potential investors. Investors might not consider a standalone start-up manager. However, they are more likely to be reassured knowing that each manager presented on that menu operates independently on a common platform using a common risk management system, common governance controls etc. This makes asset raising a potentially easier exercise.

The distribution service that we offer points to the power of alliances, which we believe is the only way for smaller managers to get the best distribution footprint possible,” says James.

We see ourselves as offering the right model for people who want to grow and become independent not just operationally, but from a distribution standpoint. We model ourselves around the likes of Brummer who have a similar model and who have managers that remain with them, even though they have north of one billion dollars in assets under management. They don’t need Brummer to keep the lights on and pay the salaries. They need Brummer because they have a great distribution name and model.”