Selectivity and focus can sort the wheat from the chaff
Hedge funds looking to launch in Europe should be selective in their infrastructure investment, identify credible target client groups and understand the importance of concise marketing material which clearly outlines their unique selling point.
Cowen’s London-based prime brokerage and cap intro team outline some of the challenges emerging hedge funds may face. Colin Bridges, Director, suggests that “funds often try to do too much too soon. They can spend many thousands of dollars on an institutional grade setup for Day One, but if they’re just managing friends and family money, that may not necessarily be needed up front. Having the ability to adapt and improve infrastructure over time as needs demand is important.”
Lawrence Obertelli, Director, comments that although start-up managers should plan for an institutional mindset at the outset, this doesn’t necessarily mean overspending on Day One. “They need to have in mind and in the business plan exactly what the build-out will look like in the first 3-5 years. To name a few key areas of focus: robust pre/post infrastructure, depth of personnel (key-man risk), policy documentation and business continuity planning.”
This is of particular relevance given the gap in capital raising being witnessed in Europe. “Capital raising and early stage investing though increasing in popularity, is lagging in Europe,” explains Sam McMurray, Vice President. “This in turn makes it harder for a fund to reach a marketable size for Europe.”
“True Day One money is scarce in Europe, unless you receive a seed, which themselves are few and far between. Therefore, funds must market away from Europe and/or spend the first six months building a track before marketing proactively. Also, if you’re launching with only a small level of capital, it probably makes sense to scale down your infrastructure and focus on performance. Waiting to get to a desired larger AuM level before starting is also not advised, as often times timing is everything and being able to accept an investment when it’s available is key.” McMurray continues.
He also says new funds need to select the appropriate investor groups to focus on: “All-to-often new managers chase the very largest global pension funds that typically cannot allocate to them. Family offices, HNWIs and FoFs would be a better place to start.” He recommends any offshore structure should concentrate on targeting traditional offshore investor regions such as the UK, Switzerland and the US. Getting to know the right family offices can also be advantageous as according to McMurray: “This is the sub-sector of allocators most likely to possess the ability to move early and, equally importantly, fast.”
Another point of focus for start-up hedge funds, according to McMurray, should be their marketing material. He notes some may underestimate the importance of getting this right: “Managers should have a concise (2-4 page) teaser in addition to the full deck. Both need to clearly outline the manager’s USP.” He adds funds need to be “more cognisant of marketing and the regulation around distribution now than ever before. They have to be increasingly smarter now when approaching investors so as to both comply with regulations and have a wrapper that suits different investor types.”
Across the broader hedge fund universe, the development of alternative service providers is apportioning start up hedge funds a number of benefits. Firms like Cowen, which provide alternative investment management and investment banking services, allow European start-ups the perks they would get by working with bulge bracket firms but with greater care and service for smaller players. Bridges and Obertelli point out: “A fund with a 24 month track record, which has been at $50m for 18 months, may not get as much cap intro attention at a bulge as it would at Cowen, for example.”
Discussing the strategies which are currently appealing across Europe, McMurray says low net strategies tend to be more in demand in Europe compared to directional funds. “Increasingly, European allocators particularly the seeders, consider sector funds, ,” he says, “Within the equity long/short space, healthcare as a sector has garnered the most interest, with TMT probably coming in second. In the credit arena, there’s more of an interest for Fixed Income Relative Value compared to the US.”
According to McMurray one of the main focuses of investors is the value or alpha a hedge fund can provide. This has been driving the so-called “Quantamental” movement as funds with a quant or systemic angle rise in appeal. He explains that it’s also worth noting that European investors tend to be a lot more sensitive around liquidity than their counterparts in the US and Asia. “Therefore, the proliferation of alternative UCITS funds gives them a greater bargaining chip.”
The issues around liquidity in Europe are arguably driven by regulatory developments, which have also impacted other areas of the start-up landscape. Bridges elaborates: “AIFMD has put increasing focus on having a robust infrastructure and has controlled how funds market in Europe. EMIR and MiFID reporting has also put greater transparency demands on client’s trading activity like never before.
“It’s important to remember that a start-up has a similar level of regulatory requirements as an established manager with billions of Euros under management. In view of this, managers need to carefully reflect on their level of working capital and consider paying for certain items themselves in order to maintain a palatable TER.”
McMurray adds that in Cowen’s understanding, European funds trying to register with the SEC as of 2019 are being stymied as they cannot provide data assurances. “The SEC is concerned the companies won’t be able to give them necessary data. This means fundraising limitations are being imposed – for instance, recently one of our funds failed to gain SEC registration on the back of GDPR data protection rules. This is in talks with a US endowment which usually writes managed account tickets of USD40 million. Given this SEC hiccup, the max ticket the fund manager can accept is of USD25 million.”
Director, Prime Brokerage Sales, Cowen
Lawrence Obertelli is a Director in Prime Brokerage Sales at Cowen. Over the last 14 years he has worked with Hedge Funds, Asset Managers, Proprietary Trading Firms, Family Offices, Brokers and Intermediaries of all sizes. Helping them with every aspect of Prime Brokerage, Securities Finance, Custody & Clearing and Listed Derivatives. Prior to joining Cowen, he worked at Global Prime Partners (GPP), Societe Generale and ING, always within the Prime Brokerage sphere. He holds a Bsc in Economics from University of London.
Director, Prime Brokerage Sales, Cowen
Colin Bridges is a Director in Prime Brokerage Sales at Cowen, where he focuses on providing financing solutions to hedge funds, family offices, asset managers, and proprietary traders. Colin joined Cowen to help launch their London offering in 2016, and previously worked at BNP Paribas on their Equity Finance team. Having worked within Prime Brokerage for the last 11 years, Colin helps funds at all stages of their life cycle; from start-up to established, with a particular focus on European-based managers. He holds an BSc in Business Administration from University of Bath.
Vice President, Capital Introduction, Cowen
Sam McMurray is a Vice President on Cowen’s Capital Introduction team, which he joined in July 2018. Based in London, he is responsible for building relationships and sharing ideas with European and Asian based allocators. Prior to joining Cowen, he was an Investment analyst at Tesco Pension Investments, on the alternatives team. He graduated from the University of Birmingham with a BSc Degree in Economics, and is a CAIA charterholder.