In the second instalment of his monthly blog, Joel Press, formerly a senior partner and Head of the Global Hedge Fund Practice at Ernst & Young, and a leading voice on hedge fund operations and co-ordination services, talks through how to go about building a successful team and putting the right infrastructure in place…
In the second instalment of his monthly blog, Joel Press, formerly a senior partner and Head of the Global Hedge Fund Practice at Ernst & Young, and a leading voice on hedge fund operations and co-ordination services, talks through how to go about building a successful team and putting the right infrastructure in place…
Building the team and infrastructure is essential to the long-term success of any hedge fund management business. There is no cookie cutter approach to this. Every founder/portfolio manager has his own personal view on what his business should look like and how it should operate.
Typically, I will work with a client up to one year ahead of the launch date for their Fund. A lot of effort goes into getting everything right, including how to think about internal infrastructure (depending on expected AUM size, and size of the team). The PM needs to be realistic about AUM expectations and the impact of differing AUM on staffing and operating costs because of the impact on management company structuring. It’s never been harder to launch than it is today and potential investors do look at how you will structure your organisation as well as looking at your portfolio strategy and performance.
A key part of that infrastructure process is building the right team. Hiring the best people is never an easy process, it requires patience and honesty; sometimes the person you think is the best candidate will not necessarily mean they are the right fit for the firm, culturally speaking. It is important to focus on skill sets, both technical and the ability to work within a team. As you add members to your team the process becomes like putting a puzzle together, trying to insure that the personalities are compatible and additive to the organisation, and that does not necessarily mean that everyone must come from the same background and experience.
The PM needs to think about who he is, how he wants to present himself when he goes out and markets to investors. The PM must consider what the appropriate fees are in the current climate for the strategy, and what additional people are needed to support the investment process. Does the PM need an analyst, a second portfolio manager? Will there be a second partner running the firm alongside the PM? If it is an equal partnership, who will be taking the lead on decision-making?
Governance of the firm is a critical factor. The PM has to understand the internal responsibilities so that there is no ambiguity around how decisions are made when speaking to investors. It is a key component to building the team.
The first three or four months ought to be spent putting together your strategy, thinking about how you will present it…and remember, it’s not just about how you make money, it’s how you control it. What are your risk parameters? How do you view market risk, business risk, employee risk? You need to think through all those issues so that when investors ask questions, you are able to answer them in a thoughtful way.
Infrastructure today is more important than ever before because investors are questioning everything, as they should, and you have to be able to satisfy their questions by having the right non-investment team, and vendors – prime brokers, technology and risk vendors, auditors, administrators, compliance specialists – supporting the firm properly. As the possible vendors for each category are narrowed down to just a few options, I work with clients to negotiate vendor costs to insure the fees are fair and reasonable for their specific situation.
One of the key vendor relationships in the infrastructure will be your prime broker. The first question I ask a client is: Where is your best relationship and who do you know better? The second question is: What are you trading, and who trades it best? You might decide to have one firm as your PB but do the majority of trade execution with another firm. Both the larger PBs and smaller PBs serve many types of funds. You should consider which firms work best with your strategy and AUM.
Today, outsourcing and the whole ‘plug and play’ model is something any new manager should certainly consider. Outsourced trading has become much more prevalent, especially in equities; less so for fixed income and derivatives trading. The PM will need to decide: Do I hire an internal trader or can I outsource it? Understand what your needs are as the PM and this will help to build the infrastructure from a trading, management and risk point of view.
Also, as part of the team building exercise with clients, I won’t just recommend the right law firm; I’ll go further than that and recommend which partners within the law firm would be the best fit for the business again considering strategy, expected AUM, and personalities.
In today’s world, the non-investment team within a hedge fund is almost as important as the investment team. If you don’t have the right CFO, and they don’t present themselves correctly from a due diligence perspective, you’re going to fail.
Depending on the size of the launch you might be looking at additional PMs, analysts and partners potentially coming on board, as well as a CEO, a marketing officer, a risk officer and a technology officer/CTO.
For the COO, and other operations people, selection often comes down to the quality of their knowledge and their ability to fit in with the current members of the team.
You don’t necessarily have to be close friends with the COO and CFO but you’ve got to be able to enjoy talking to them and to be comfortable in each other’s company, in addition to trusting their judgement. After all, in the first three years of a start-up, you’re going to be in close contact with the non-investment team – so if you don’t like talking to them, trust them or there’s no personal connection at all, do not hire them!
Another important aspect to building the team that needs to be considered in the months prior to launching the fund is how you plan on paying people you hope to hire. Understanding the parameters of what is “market” in your strategy in your location is a key starting point.
Are you going to use what is called a ‘jump ball’, part of which is fixed salary, part of which is discretionary bonus? Will only investment people be eligible for the jump ball, and not non-investment people? Will that bonus be solely dependent upon investment return? Do you consider guarantees for the first years of the fund? And will you be willing to fund those guarantees personally if needed?
I will often go through these issues with a client two or three times so that when the PM finally makes a decision, they know it is the right decision for them and not anybody else.
At the end of the day, even if people interview well, they might not necessarily be a good fit for the firm. You’ve got to trust yourself enough to never look back at your decisions because at the time, they were the right ones to make. Trust your gut in terms of how people will or will not fit into your firm.
There are no right or wrong answers to this. When I work with people there are only better answers.
And that’s why there is no cookie cutter approach to this team building exercise, ahead of the Fund launch.
