September 30, 2015 Leave a comment
If successfully launching and managing a hedge fund is on your radar, you want to have a few key pillars in place. These pillars will not only assist in your fund’s first steps of its life cycle, but they will support the stable, necessary foundation that you can rely on into the future.
Pillar #1 – You
You need to be entrepreneurial. As the manager of a hedge fund, you are a small business owner that offers the service of providing a return on capital. Hedge funds are not immune to the same issues that any other small business faces. External service providers can handle many responsibilities associated with managing your fund – and it is absolutely necessary to outsource a handful of key responsibilities – but internal, administrative duties that are naturally associated with running any type of business fall on your shoulders. Make sure you have the mindset to handle it. If not, you can always remain a trader and do managed accounts for your friends and family.
Honesty, integrity, transparency, and open communication have to come natural to you. Investors want to know you as an individual, not just as a money manager. Truly understanding a manager’s character outside of the office speaks volumes as to how they act and think in the office.
It is important to be humble. Have the ability to talk about your unsuccessful investments and what you learned from them. As a consummate student with an open mind, every opportunity becomes a chance to learn. Everyone wants to talk about their high performing months, but very few ever discuss what they were able to learn from negative months. If you do this, it will speak volumes. I can count the number of managers that have done this with me on one hand.
Pillar #2 – Strategy
Placing yourself in a bucket – i.e. long/short, relative value, convertible debt arbitrage, venture capital, real estate, etc. – and discussing what assets you trade is not enough for a strategy explanation. You need to have a repeatable, proven process in place. What makes your process unique when comparing yourself to your manager peers? What are your acceptable drawdowns? What are your plans if/when your drawdowns ever get out of their acceptable range? You need to be the, or one of the, highest level experts in your field.
Pillar #3 – Performance record
The longer your track record, the better as it proves that your strategy has been successful under various market conditions. Time is your friend here.
If you do not have a performance record with live capital – back tested results do not have the same effect as real money – you can always start one yourself once you are comfortable with your strategy. This can be done via a separately managed account or an incubator. There are pros/cons to each of these options.
Pillar #4 – External Service Providers
Every fund has to have relationships with external service providers. As a manager, you should not view these relationships as avenues to get specific deliverables achieved, but as key, consultative members of your team to assist in your fund’s growth. Providers that you work with need to have the capability of working with you long after you launch. The lawyers, auditors, administrators, custodians, brokers, marketers, website developers, content writers, IT, infrastructure, and business intelligence software providers can save you capital, and/or assist in raising capital. It is important to form the right partnerships with the best firms for your particular fund. Each fund launch is incredibly unique.
Pillar #5 – Marketing
Growth is a marathon, not a sprint. How you should market your fund is dependent upon where your fund is in its life cycle and its AUM. Regardless, there are a handful of points that you can take with you throughout your fund’s growth.
It is imperative to have a clear, concise pitch. Utilizing a 3-point technique is a simplistic way to achieve this. What are three bullet points that you want your listener to walk away with? These points should speak to your fund’s strategy in addition to what makes your investment processes unique compared to your industry peers. Make them direct and easy to remember.
If your message cannot stress and point to evidence that you have a repeatable investment process that has been proven over different market conditions, then you may need to go back to the drawing board. Your trading philosophy cannot be too dependent on a couple of key conditions. What if these conditions change? Your investment process is your playbook and you have to have it filled with plays for different market conditions. August 2015 is a perfect example. If you were managing a fund at this time and you were flat or in the black, then pat yourself on the back. Know your hedging techniques and understand how you can protect your fund from atypical drawdowns.
Investors prefer to invest in a strategy that they can understand versus one that is complex even it offers higher returns. Make sure that you can explain your strategy to a novice so to ensure you are sticking to your pitch and your core message. You can always fill in the details and answer technical questions in subsequent conversations.
Scalability is important to touch upon under this marketing heading as well. Actions that are difficult to scale as they require a large amount of time – i.e. reading through large company filings, traveling to have face to face meetings with company executives, etc. – in order to scale a strategy that relies on actions such as these, you will have to hire a team of analysts. This can get quite expensive in short order unless you run a large enough fund in which the management fee (usually up to 2%/year) can cover it. For an emerging fund, though, this is not the case.
When is the best time to launch a fund is a common question. Q1 of every year is a collective time to officially launch; the holiday season is over and investors start looking over their portfolio to decide where they want to allocate for the year. Therefore, managers will want to start the launch processes late Q3 / early Q4. This ensures that all relationships are engaged, proposals are signed, marketing material is written, deliverables are complete, and entities are formed by Q1 of the following year. You want everything to dovetail with each other so you are marketing a complete package by the time you want to bring investors into the fund. It is also prudent to have engagements signed with your service providers prior to the new year because if they are going to raise their rates, it will likely take effect Q1.
Trevor L. Zeh has connected and collaborated with managers for going on 5 years to establish hedge funds; CPOs/CTAs; Forex funds; futures funds; incubator funds; offshore funds; private equity funds; real estate funds; venture capital funds; registered investment advisors; Bitcoin funds; and cannabis funds.
His consultation is focused on providing the reputable and transparent infrastructure necessary to attracting and marketing to investors. Mr. Zeh has strategic partnerships with the world’s leading alternative investment service providers and professionals including hedge fund and private equity fund attorneys, auditors, administrators, custodians, marketers, IT/infrastructure professionals, and business intelligence software providers.
Mr. Zeh works with emerging managers to bring their fund to fruition. His launch processes are efficient, dependable, and tailored to your specific needs.
You can contact Mr. Zeh at 1-631-252-5702 for a complimentary consultation.