Start-ups to keep cost under control
In the current challenging capital raising environment, emerging hedge funds need to juggle a number of priorities, including having a clear business plan and building a strong track record. But a key element in determining a start-up hedge fund’s fate is keeping a close eye on expenses.
“You want to keep your expenses under control, because if these are too high, then your performance comes under pressure,” explains Joris Groot, Business Development Manager Europe, Circle Partners.
He says cost needs to be considered in several crucial decisions start-up hedge funds need to make, for example choosing their service providers. “They can choose to go with a big prime broker, which might be the right choice from a reputational perspective but can have a significant impact on their total expenses if the prime broker’s minimums are not met,” Groot adds.
The choice of a fund domicile can also have bearing on a hedge fund’s total expenses. The regulatory developments in a jurisdiction like the Cayman Islands, where all funds must now hire an auditor and apply for registration with the regulator, can incur additional cost. “Funds need to make the right decision in this regard,” notes Groot, “If you can’t keep your cost level under control then it’s not feasible to launch.”
The group of investors a start-up fund aims to target will also influence the choice of jurisdiction. “Start-ups need to ask themselves where their target investors are based because that will ultimately decide where they will domicile the fund,” says Groot.
Fall-out in a post-Brexit environment could also have an impact on start-up hedge fund domiciliation. Groot comments: “The exact outcome of Brexit and how it effects marketing into Europe and the impact it has on the AIFMD will make a huge difference to start-up hedge funds. We do see more attraction in onshoring in Luxembourg for example, driven by the uncertainty of Brexit and the implications of its effect on AIFMD.”
Groot also comments on the current difficulties funds may face in raising capital: “Capital raising is going to be the biggest challenge for all new start-ups. It is a difficult time for hedge funds in general but the institutionalisation of the product has seen money flow into the bigger hedge funds rather than into the smaller and new launches.”
The uncertainty around capital allocated and committed is also resulting in funds taking longer to go to market. Groot says: “We do see that people are taking much longer to launch; it definitely takes longer to get the expected capital so we advise hedge fund managers not to over-predict their capital raising capabilities because it definitely takes longer than they may expect.”
In order to go to market faster, emerging hedge funds need to make sure they have their committed capital in place. Then, service providers, like Circle Partners which aims to provide fund administration specifically catering for emerging funds, aim to do everything in their power to help with this. Groot elaborates: “We counsel on service providers that would be a good fit, with quality in mind. We can accommodate a banking solution which is one of the biggest challenges for a lot of them, which helps.”
The Circle Partners’ client service model aims to be hands-on and provide clients with dedicated teams who are responsive, accessible and deliver a proactive service. The firm commits to taking a flexible approach to services delivery, tailoring its service solutions to the specific needs of the individual client.
Groot goes on to outline the different business aspects start-up hedge funds need to plan for when setting themselves up: “A lot of people underestimate the work that needs to go into launching a hedge fund. It’s more than just setting up a fund – you’re setting up a company. You need to think of your IT, location, staffing, appointing a fund administrator, prime broker and all the service providers. All of this needs to be done while keeping an eye on your investment strategy, building your performance and track record. You’re running a business, and this is something start-ups need to keep in mind.”
Managers with less than EUR100 million in assets might struggle to find the right third party partners to work with. This is an area in which Circle Partners can assist. Groot explains: “We’re an independently and privately owned fund administrator and so we are agnostic to all other providers in the whole structure of the fund. We work alongside them and help them make the right choices. For example, we can easily let these smaller, newly launched hedge funds make use of our network, introduce them to the right prime broker, the right lawyer and support them in getting the right operational support in place.”
Another discussion Groot says he has with start-up hedge funds, is around domiciliation, where the potential pitfalls are and where they can find pockets of opportunity: “We’ve recently regulatory changes coming into force in the Cayman Islands and BVI. These developments haven’t been positive for the emerging manager landscape. These start-ups are all looking for a supportive domicile for their funds and the additional compliance and regulatory pressure leads to a significant cost burden, which in turn is not a great driver for success to launch.”
Circle Partners aims to shed light on issues such as these, which emerging managers may not have been previously aware of.
Despite the potential hindrances in launching a new hedge fund, Groot believes a distinctive investment strategy can take a new fund over the line: “You need to know what you’re pitching. If you have a unique, niche investment strategy then there is always opportunity to go for it.”
Differentiating oneself in a crowded market is another determinant of a start-up hedge fund’s success. Groot advises: “Don’t under predict your expenses and don’t over rate your capital raising capabilities. There are a lot of funds out there trying to raise capital and even the bigger hedge funds are aiming for money from high net worth individuals and family offices. Everybody is trying to fish in the same pond so you need a clear message on who you are, what you want to do and what makes you different. And if you can’t get across that message then you will have difficulty in raising capital.”
Business Development Manager, Circle Partners
Joris Groot is Business Development Manager at Circle Partners for the European business. He joined Circle Partners in 2017 after spending more than 15 years in various sales and relationship manager roles at ABN AMRO Bank and Fortis Bank.