Start-up hedge funds should consider coders – here’s why…
Getting technology infrastructure correct on day one – and avoiding cutting corners despite budgetary pressures – is vital for start-up and emerging hedge funds, and staff with coding and tech backgrounds offer a “big step forward” during the initial launch period.
The closing panel session of day one of this year’s HedgeweekLIVE North America Emerging Managers summit delved into the evolving tech infrastructure and IT concerns that new managers face.
Isaac Tak, portfolio manager at BCK Capital, a Stamford-headquartered special situations global equity-focused fund, and Russell Safirstein, partner at Anchin, discussed the importance of technology and data in aligning front-office and back-office systems, and explored budgetary and security concerns during the early stages of a start-up hedge fund.
“Managers thinking about how to build their business today should be considering a data strategy in as much as they’re considering a research strategy or a trading system strategy,” said Tak, who, in addition to investing, also has responsibility for coordinating business development and data analytics projects at BCK Capital. He pointed to the benefits of building certain proprietary tools which strengthens portfolio analysis including, for instance, ESG factor monitoring.
Tak suggested one key piece of advice for start-up hedge funds in the process of building their research, analytics and back-office operations is to hire at least one person with a coding or technology background.
“That will give you a big step forward,” Tak noted. “I'm not suggesting that everyone needs to be a quant shop – clearly that’s not who we at BCK Capital are. But I do believe that if you have a data mindset, you can find ways to improve your day-to-day business – how you manage your portfolio, how you manage your risk, and how you communicate your strategy with your investors.”
He explained how this approach helped protect the firm during the GameStop trading frenzy in late January, which saw several hedge fund short-sellers suffer agonising losses as online amateur retail investors pushed up the price of the Texas-based video game retailer.
“We ran a screen across our entire portfolio, we looked at short interest and other characteristics that we thought may expose us to a short squeeze, and replaced those things pretty quickly,” Tak noted. “We didn’t completely avoid the pain, but there was a lot of pain we did avoid which was all possible through having that data mindset and being able to run a screen on our portfolio.”
The session also wrestled with the continued tech challenges centred around IT and data, and underlined the importance of having a cybersecurity roadmap, particularly in light of remote working and the increased prevalence of cloud-based operations. Speakers also explored how front office technology can more effectively be connected and aligned with back- and middle-office reporting and compliance systems.
Safirstein urged managers to plan not only for today, but also for tomorrow.
“Think two, three, five years down the road. What information are going to need to ensure, as you build out your systems and the interfaces between the front and back office, is going to be available to you? From an analytics perspective, make sure you’re tagging your data and structuring your data the right way. That’s going to help you immensely down the road.”
He also zeroed in on many of the budgetary constraints that loom over hedge funds during their nascent stages. He pinpointed cybersecurity as an ongoing major risk, adding that even the smallest of start-up managers on few people’s radars may yet be targeted by bad actors.
“Understanding what the practical elements are, and where you get the most bang for your buck are critical,” Safirstein said of emerging managers’ tech spend.