BVI: the new home of the start-up hedge fund manager
By Simon Gray, BVI Finance – A new generation of hedge fund managers are looking to make a name for themselves. But starting a fund, raising money and managing a back office can be a gruelling task even for the most talented rising stars.
The main challenge for a start-up hedge fund manager is that institutional investors are looking for a three-year track record before they even consider investing, while alternative sources of funding expect at least 12-18 months of experience.
So how do new fund managers go about achieving this track record without drowning under the operational costs and constraints of running an investment management business?
This is where the BVI comes in with flexible rules and products designed not to be an administrative burden, thus attracting a new generation of managers who want to make a name for themselves and fast.
Desire to strike out alone
There are many reasons a fund manager may want to strike out on their own. Firstly, remuneration – there is often a desire to divide up interest more equally, rather than seeing the majority go to the most senior figures in an established hedge fund.
There are also perceived benefits around career progression and future succession which come from designing a fund from scratch and discarding the structural boundaries of older firms.
In order to achieve this, however, start-up managers need to be able to work in an environment that allows for flexible fund and underlying business structures, which is precisely the reason why the BVI has become such an attractive destination for first-time hedge fund managers.
Start-ups are bucking the trend
Another big driver in start-up managers striking out alone is the fact that start-up funds are particularly attractive to investors.
Recent data from Preqin found that nearly three-quarters of hedge fund investing institutions would consider investing in funds with assets of USD300 million or less. In fact, it was found that 524 investors are already invested in a fund with a track record of three years or less despite general assumptions around the need to be more established in this regard.
Such funds are attractive because they produce significantly better returns compared to the wider hedge fund industry, delivering a five-year annualised return of 12.22 per cent compared to 8.98 per cent for small first-time funds, according to Preqin.
Structured to support start-up success
Despite this, the faster a start-up manager can get moving the better. Thus, by using a BVI incubator fund or an approved fund, a new manager can set up without having to appoint local directors or local functionaries, as well as there being no requirement for a local auditor sign off on the fund’s accounts.
What’s more, while a start-up hedge fund may be looking for millions in investment, it will also be looking to keep outgoings low so the fact that the BVI offers low start-up and ongoing fees is a welcome boost for hedge managers.
Finally, for managers looking to develop a fresh approach to investing, they can set up their funds in the BVI with maximum flexibility. Directors or shareholders can amend the constitutional documents of a BVI fund, providing a degree of flexibility for restructuring. Also, it is worth noting that BVI funds have no regulatory restrictions on investment policies or on performance and other fee arrangements.
While it may be tougher than ever to start a hedge fund, for those who hit the ground running and begin building some steam via the BVI, they are quickly able to realise returns and start to develop their own reputation.
And while the BVI can’t necessarily guarantee returns, it can certainly guarantee a friendly environment for new hedge funds managers looking for any help they can in making it on their own.