There are a multitude of costs that a start-up alternative fund manager faces today, especially with respect to those looking to establish a hedge fund under AIFMD. From regulatory costs and waiting to receive FCA authorisation, to office and IT and staffing costs, the amount of burn capital that managers initially account for can rapidly disappear down the drain.
Which is why Linear Investments is proving to be a whole lot more than merely a boutique prime broker. In short, Linear has spent a number of years building out its trading and risk management systems to provide start-ups with a full front to back service offering, from execution through to prime brokerage, custody and settlement.
Linear can offer start-ups a "hedge fund hotel' solution within its recently expanded offices in Victoria, London, an FCA regulatory umbrella where managers can operate as appointed representatives, outsourced trading services and the expertise of a dedicated capital introduction team. As Jerry Lees (pictured), Chairman, Linear Investments, explains: "Our capital introduction team focuses on connecting our managers to specialist investors who are looking at start-ups with a view to potentially providing seed capital.
"We actually have a joint venture with a USD750 million multi-manager hedge fund and we are in the process of raising USD200 million with them for the Linear Seeder Fund. In addition, we are discussing a USD40 million seeding arrangement with a European investment bank and we are discussing a further EUR500 million multi-strategy seeder with finds coming from European institutional investors.
"We can therefore support start-up managers from the front-office to the back-office and provide an effective route to capital raising."
Rather than try and become a client of a tier one prime, managers who use boutique primes like Linear benefit from pooled assets, whereby Linear aggregates the AUM of all its hedge fund clients into an omnibus account.
"We have 150 clients, of which 50 or so are hedge funds (the others being brokers and banking clients). It took us the best part of three years to build the prime brokerage part of Linear's business, putting in place all the trading systems, risk management systems etc.
"Within the omnibus account we are fully hedged. We pull our clients' assets together into one account. Our appointed global prime broker trades with us on that one account with USD500 million or so in assets. We're doing USD200-300 million a day of equity trading and upwards of USD800 million a day of fixed income and futures trading so the commission fees we pay to underlying brokers are favourable. This allows us to give managers a more competitive pricing structure than they would get if they were individual clients of a bank prime," explains Lees.
This economy of scale gives start-up managers the financing and leveraging that they need, the stock lending that they need, to trade their strategies with a high-touch level of support from Linear's team that small managers simply do not get at larger tier one primes.
Currently, Linear has 45 to 50 prospective clients in the pipeline, of which Lees anticipates half will be taken on as clients.
"Right now we are working to significantly increase our balance sheet. That will allow us to take on larger hedge funds and support larger trading positions. That's where we see the next stage of Linear's evolution within the prime brokerage space," concludes Lees