By George Ralph, RFA – Start-up hedge funds have a lot to think about; from the crucial raising of initial capital and building up a client base, to finding the right team of people and ensuring that everything you are doing is fully compliant with every regulatory requirement.
Investopedia lists the key areas of concern for hedge fund start-ups as; building a competitive advantage, defining a clear strategy, raising capital and seed capital, pulling together a comprehensive marketing and sales plan, addressing risk management, ensuring compliance and organising legal assistance and deciding whether to use a prime broker. With my CTO hat on, I’ve unpicked these to demonstrate how technology can underpin the operations of a start-up and drive success.
Find a competitive edge
Technology and digital services are shaping the way start-ups operate, and savvy firms are using technology to gain a crucial competitive edge. Start-ups are in a unique position over established firms, in that they can pick and choose the technology that suits them best, without having to consider legacy hardware and software that might not meet the needs of the business. Many firms choose cloud services to underpin their service delivery, with a cost/benefit analysis often tipping the decision in favour of on-demand services with no investment in infrastructure needed.
However, be wary of over-provisioning the IT estate, which could bring inflated costs and might be unappealing to potential investors. A robust, forward-thinking technology strategy can be a great selling point. Choose the right technology partner, who understands the specific challenges you are facing, is fully compliant with the current and imminent regulations in your region and can scale with your firm, as you grow.
Define a clear strategy and a solid sales and marketing plan
Start-ups need a clear strategy around investment to attract and retain investors and to set out clear parameters for the internal team. Staff will feel supported and empowered to make decisions in line with the strategy and investors will feel more confident when committing to long term investment plans. By being transparent and open, and by exposing investors to the science and solid decision-making process behind the investment strategy, firms will build stronger and more trusting client relationships. Investors will be attracted by slick pricing and analytics data, trading and clearing systems and timely, secure communications.
Improve recruitment and HR processes
Use technology to streamline recruitment and hr operations, broadening the pool of skilled resources, hiring the best talent and enabling a hyper mobile workforce, which can be geographically spread but can collaborate digitally. Staff will be attracted to a firm which offers flexible, mobile working and a bundled, secure, digital workspace which contains everything the fund manager or trader needs could be a big selling point for staff.
Manage risks carefully
Investors need to know that you take risk management very seriously. Risks come in many shapes and sizes but IT risks are prominent right now, with high profile data breaches happening daily and high instances of phishing, hacking and malicious attacks across businesses of all sizes. The financial services sector will always be a prime target for cyber criminals, and businesses need a multi-faceted plan in place to categorise and deal with risks.
According to the Ipsos Mori Cyber Security Breaches Survey published in April 2017, only 33% of senior managers have a formal policy which covers cybersecurity risks and only 11% have a cyber security incident management plan in place. Plans should include detailed infrastructure mapping, with weaknesses highlighted and mitigated against with appropriate tools. Where outsourced services meet in house, ensure these are not weak spots. User behaviour is a particular risk, with the most common cybersecurity attacks coming in the form of phishing attacks, which opened the door to viruses, spyware and malware, identity and ransomware, as happened with WannaCry and NoPetya. Users can be protected with software, but this needs to be backed up with robust policies and procedures, regular training and spot testing.
Make sure you can carry on trading and operating, even when incidents occur. Ensure data is replicated and backed up. Build resilience into your infrastructure, so that if the worst happens and your firm or your providers’ firms are attacked, that you can simply switch across to the backup and carry on. To do this, whether your IT is situated on, or off site, you need a robust DR and Business Continuity plan which takes each element of your infrastructure, prioritises it in order of importance and outlines what happens if it goes down for whatever reason. Understand how quickly you need to be up and running again, and what the margin of data loss can be, if any. Include outsourced services, and check that your providers’ DR and BC policies are in line with your needs and expectations.
Ensure compliance
With the two major pieces of regulation coming into effect in early 2018 and an already complex regulatory landscape, there is a lot for start-ups to take on board. The EU General Data Protection Regulation (GDPR) represents the most significant change in global privacy law in 20 years. GDPR places important new obligations on any business that handles the data of individuals living in the EU, independent of where the business is located. The second regulation, and one which is absolutely critical for financial services firms, is MiFID II. MiFID II adds an extraordinary reporting and data collection burden onto buy and sell side firms, and will require a thorough overhaul of systems, policies and procedures in order to comply. The technology elements of these two pieces of legislation are huge, and when commissioning systems initially, make sure they can meet the requirements.
Decide whether to use a prime broker
As outlined by Investopedia the prime broker is an integral part of many start-up businesses’ operations and isn’t a decision that should be taken lightly. Many prime brokers offer advice and guidance in areas which lie outside the traditional brokerage operations, and some have relationships with established technology partners who can provide best advice on the technology you should be using.
Technology isn’t just about equipment these days. It underpins everything your firm does, and can drive or put the brakes on your business growth. Put technology on the agenda at board level, and adopt a technology first approach, to quickly see how it can positively impact on every aspect of your start-up business.
