how to start a hedge fund in the eu 2015

Transcription

HFMWEEK
S P E C I A L
R E P O R T
HOW TO START A HEDGE
FUND IN THE EU 2015
COMPLIANCE
Facing regulatory challenges
PARTNERSHIPS
Working with the right people to grow your fund
TECHNOLOGY
Protecting and strengthening business functions
FEATURING Backstop Solutions Group // Bloomberg // Eze Castle
Integration // Eze Software Group // Finance Malta // Global Prime
Partners Ltd // KB Associates // Linear Investments // Macfarlanes LLP
// Maples Fund Services // netConsult
001_HFMHow2EU-2015_cover2.indd 7
16/09/2015 14:41
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Untitled-1 1
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16/09/2015 14:37
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 5
INTRODUCTION
T
his year’s edition of HFMWeek’s report How to
Start a Hedge Fund in the EU, is delivered in an
encouraging period for early-stage funds. Throughout
this report, a ‘healthy market’ for hedge fund launches
is acknowledged by industry members from an array
of different professional backgrounds. These industry
members provide insight on the greatest challenges
and opportunities facing new funds in the EU.
As is to be expected, technology is once again a major talking point in the
industry. Technological sophistication can provide start-ups with leverage to
compete with larger, established funds. But, perhaps more vitally, utilising
technology in an appropriate manner gives managers the tools to meet the
plethora of challenges they will face throughout the life of their fund.
Many of the challenges that funds face, from day one and beyond, are rooted
in regulatory compliance issues. This report provides advice and guidance on
how to meet these challenges efficiently and responsibly.
There are a number of key service providers that are essential for the success
of a fund. Working with the right people, from a technology provider to an
external fund administrator, can be the difference between sustained growth
and failure for a start-up fund. Industry members throughout this report
unanimously emphasise the importance of the right business partnerships for a
new fund, and they provide guidance for making the right decisions in this area.
The contributing individuals in this report bring together a vast amount of
expertise and experience. It is our hope that this year’s edition of HFMWeek’s
report How to Start a Hedge Fund in the EU will provide a unique source of
information and perspective, while encouraging the development and growth of
new funds throughout the EU.
Mike Sheen
Report editor
Published by Pageant Media Ltd
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H F M W E E K . CO M 3
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CONTENTS
05
FUND SERVICES
SOLUTIONS FOR AND BEYOND THE START-UP
STAGE
Palak Patel, global head of product development for Bloomberg’s
Asset and Investment Manager (AIM), talks to HFMWeek about how
choosing the right service providers can help fund managers meet
challenges through different stages of their fund’s growth
08
13
19
28
31
FUND SERVICES
CHOOSING A DOMICILE
RISK MANAGEMENT
STRATEGIC PARTNERSHIPS: THE OUTSOURCING
MEGA-TREND
FUND SERVICES
COMMON MISTAKES WHEN CHOOSING A CRM
Robert Goldbaum, vice president at Backstop Solutions Group,
talks to HFMWeek about the firm’s offering and what funds should
consider when choosing technology providers
THINGS TO CONSIDER
34
TECHNOLOGY
FUND SERVICES
INVESTORS ARE KEY
Peter Northcott, executive director at KB Associates, talks to
HFMWeek about the most important factors for emerging
managers to consider and what assistance his firm can offer
TECH SOLUTIONS TO EARLY-STAGE CHALLENGES
LEGAL
FINANCIAL SERVICES
Jerry Lees and Gary Newman, chairman and senior relationship
manager respectively of Linear Investments, discuss six key
issues facing emerging funds, and the emerging trend of strategic
partnerships
WORKING WITH THE RIGHT PEOPLE
Gerry Gualtieri, senior managing director of Eze Software Group, talks
to HFMWeek about the firm’s client-focused technology solutions
MAKING AN IT INVESTMENT IN YOUR FUND’S
FUTURE
Ivan Grech, head of business development at FinanceMalta, talks
to HFMWeek about Malta’s position as an EU domicile and what it
has to offer start-up funds
TECHNOLOGY
Colin Bridges of Global Prime Partners talks to HFMWeek about the
different challenges associated with launching a fund, and what the
right service providers can do to give new funds a competitive edge
16
25
CONSISTENT AND STABLE PLAYERS
Dean Hill, executive director at Eze Castle Integration Ltd, discusses
the importance of selecting the right business service providers,
and explains some of the key technology factors new funds must
consider when starting out in the EU
TECHNOLOGY
Phil Ashley, chief information officer at netConsult, talks to
HFMWeek about the key IT decisions start-up funds will make
FUND SERVICES
Stephen Lewis, European head of sales and relationship
management at Maples Fund Services, talks to HFMWeek about the
importance of working with the right service providers, and other
issues facing start-up funds in the EU
10
22
37
SERVICE DIRECTORY
BRINGING YOUR FUND TO MARKET
Simon Thomas and Sam Brooks of Macfarlanes LLP discuss the
factors European hedge fund managers need to consider when
bringing new products into the market
4 H F M W E E K . CO M
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FUND SERVICES
SOLUTIONS FOR AND BEYOND
THE START-UP STAGE
PALAK PATEL, GLOBAL HEAD OF PRODUCT DEVELOPMENT FOR BLOOMBERG’S ASSET AND INVESTMENT
MANAGER (AIM), TALKS TO HFMWEEK ABOUT HOW CHOOSING THE RIGHT SERVICE PROVIDERS CAN HELP FUND
MANAGERS MEET CHALLENGES THROUGH DIFFERENT STAGES OF THEIR FUND’S GROWTH
Palak Patel
leads global product
development for
Bloomberg’s Asset and
Investment Manager (AIM),
an enterprise trading,
compliance and operations
platform that serves the
investment management
community.
HFMWeek (HFM): What are some of the biggest challenges that face a manager looking to start a hedge
fund?
Palak Patel (PP): When you look at the backgrounds and
expertise of the managers that are starting hedge funds,
generally, these are people whose experience includes
picking stocks, managing portfolios and managing risk.
All of a sudden they are faced with challenges such as
picking office space, making sure
they have network communications, ensuring they implement
the right technology and hire the
right people to help them raise
capital. There is a myriad of operational challenges that a start-up
hedge fund has to face, and often
managers have little experience
of dealing with these operational
hurdles.
What we are doing at
Bloomberg is helping start-up
fund managers with the operational challenges and investment
challenges they are going to face.
In addition to helping managers
check all of the boxes on the technology and operational side of
running their business, we are also
providing tools that help them
make timely and accurate investment decisions.
Building the technology infrastructure to support a new hedge fund’s trading strategies
and operations can be a daunting challenge, so managers
must be highly selective when they choose technology
partners.
There are a number of different technology vendors out
there that help people solve very specific challenges that
managers are likely to face. But then there are technology
partners like Bloomberg that are uniquely positioned to
solve a number of different problems.
It is extremely important to choose the right technology
partner that is going to scale with the fund as it grows its
operations. When you start off with, for example, $25m to
$50m, you have a set of challenges. But as you grow and
you are managing closer to $100m up to $1bn, the level
of transparency of your operational control required by
investors increases. Working with the right technology
partner from the beginning can make a big difference for
start-up funds. Establishing the right technology foundation and working with the right team of people allows
managers to focus on their mandate and leave technology
issues to their technology partner.
Attracting capital is another fundamental challenge.
However, fund managers who can demonstrate they have
invested in a robust infrastructure to support their compliance, operations, and reporting
can position themselves at a distinct competitive advantage.
Often clients come to
Bloomberg looking for an operational tool and a technology tool.
But one of the things they also get
with Bloomberg is the benefit of
our community. The diverse community on our system and the
events we host provide opportunity to discuss capital and investment challenges with colleagues
throughout the industry.
ESTABLISHING THE RIGHT
TECHNOLOGY FOUNDATION
AND WORKING WITH THE
RIGHT TEAM OF PEOPLE
ALLOWS MANAGERS TO
FOCUS ON THEIR MANDATE
AND LEAVE TECHNOLOGY
ISSUES TO THEIR
TECHNOLOGY PARTNER
HFM: How can a new hedge
fund best handle all of the
demands from current and
pending regulations?
PP: Achieving regulatory compliance is paramount for any asset
manager, but can become more
difficult when you have deficient
technology resources or a piecemeal approach to addressing all of your requirements.
In addition to having the right technology that is going
to help hedge fund managers comply with regulation,
it is also important to have a technology partner that
has the resources to keep up with regulatory change. At
Bloomberg we have operations in the Americas, Europe
and Asia. With these operations comes well-resourced
regulatory teams. These teams not only help our Asset
and Investment Manager (AIM) business, but help us
understand what changes we need to make to our order
and execution management solutions, electronic trading
platforms and our analytics and data offerings. We benefit
internally from that scale, but in turn, our clients benefit
from the fact that we have a presence in almost every jurisdiction we operate in. We can ensure their technology is
able to keep up with regulatory change, as well as helping
”
005_006_HFMHow2EU15_Bloomberg.indd 5
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FUND SERVICES
them understand the changes that are going to
impact you in the future.
It is important to take a holistic approach to
compliance requirements. This holistic approach
comes from the realisation that client’s requirements are likely to change as they grow or enter
new asset classes, strategies or markets. Their technology should support the full spectrum of needs
such as pre-and-post-trade compliance, audit trail
reporting, transaction cost analysis and message
archiving so that they can have confidence that all
their bases are covered.
BLOOMBERG OFFERS A
SUITE OF SOLUTIONS FOR
START-UP FUNDS THAT
PROVIDES THEM WITH
A SOLID TECHNOLOGY
FOUNDATION SO THEY
CAN HANDLE DAY-TO-DAY
TRADING AND COMPLIANCE
ACTIVITIES
HFM: What is Bloomberg offering to hedge
fund start-ups?
PP: Bloomberg offers a suite of solutions for startup funds that provides them with a solid technology foundation so they can handle day-to-day
trading and compliance activities. These solutions
are designed to be scalable and flexible to accommodate future growth.
We aim to help start-up funds simplify investment
operations, reduce operational risk, and minimise upfront
infrastructure costs and long-term overhead. These are the
things that all funds need to consider, but are especially
important to funds in the start-up phase.
For start-ups, Bloomberg’s AIM product provides
multi-asset trade execution, portfolio management tools,
operations and regulatory compliance functionality. Our
compliance tools provide real-time pre-trade, post-trade
and end-of-day monitoring for client, firm and regulatory requirements. They include advanced rule building,
reporting and complete audit history, ability to monitor
and investigate trades and evaluate performance to ensure
compliance with best execution, mandates and authorised
counterparties and stocks, as well as conduct surveillance
to monitor adherence to regulations.
On the execution side, clients have access to our vast
order routing network, and deep integration with our
electronic trading systems including a market leading
Execution Management System in EMSX. From an operations perspective, we provide out of the box connectivity to multiple prime brokers and fund admins as well as
reconciliation tools. We give funds the tools required to
”
ensure accurate position data, allowing managers to make investment decisions from a single
screen.
HFM: How does your offering differentiate
itself? What can Bloomberg provide a startup fund that other technology providers cannot?
PP: Bloomberg offers a unique suite of capabilities for start-up funds that are largely delivered
through Bloomberg’s desktop, which fund managers and traders are generally already familiar
with, or as an auxiliary component. However,
to the hedge fund manager, we are delivering
everything they need in an integrated fashion and
through a single point of contact so they do not
have to deal with multiple vendors and technology solutions that are not compatible. The suite
of services includes professional-grade technology with a fully-managed, hosted infrastructure
backed by a global service and support team.
Even though we do not provide a consulting service, we
deliver our solutions with a consultative approach. Our
staff has experience of covering hedge funds of all different
sizes that trade across all different asset classes and have
different trading strategies. Our clients have the benefit
of being serviced by experienced staff, in a manner that is
beyond the standard, transactional approach.
One of our key strengths is our integration with the
Bloomberg Professional service, or terminal, and the community of professionals that exist on the terminal. This
provides access to our communication tools and our other
community tools combined with diverse liquidity pools
across multiple asset-classes. This combination is a key
differentiator for us in the market.
In addition, Bloomberg offers a fully hosted platform, so
there are no servers to manage or upgrade. Our platform
includes disaster recovery, mobile access and FIX connectivity to defined prime brokers and fund administrators.
What also must be taken into account, is the integration
of news and event information into our workflows. Through
the Bloomberg Professional service, hedge fund managers
have access to the data, news and analytics relied upon by a
community of over 325,000 subscribers globally. n
005_006_HFMHow2EU15_Bloomberg.indd 6
17/09/2015 11:24
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Untitled-1 1
16/09/2015 14:23
CONSISTENT AND
STABLE PLAYERS
STEPHEN LEWIS, EUROPEAN HEAD OF SALES AND RELATIONSHIP MANAGEMENT AT MAPLES FUND SERVICES,
TALKS TO HFMWEEK ABOUT THE IMPORTANCE OF WORKING WITH THE RIGHT SERVICE PROVIDERS, AND OTHER
ISSUES FACING START-UP FUNDS IN THE EU
Stephen Lewis is the
regional head of sales and
relationship management
in Europe at Maples Fund
Services. He has over 25
years of experience in the
financial services sector and
is responsible for oversight,
and expansion of the fund
administration and middle
office businesses across the
firm’s European offices.
HFMWeek (HFM): How encouraging would you say
the current market is for new hedge funds launching
in the EU?
Stephen Lewis (SL): From a service provider perspective,
the current market for new hedge fund launches is generally quite encouraging. But is also very much dependent
on a fund’s characteristics. Certain services provided by
fund administrators are unquestionably becoming natural
extensions of day-to-day fund operations, but as fund managers begin to view them as such, they are also becoming
far less willing to accept higher fees for what they believe
should be standard provisions. As a result, there tends to
be a particular size and level of activity that some larger
service providers would want to see before engaging with
a fund. Fortunately for some of the smaller funds and new
launches, there is a growing segment of mid-sized players
that can provide them with high
levels of service at a lower price
point to support their entry into
the market.
Regulatory approval is also a
major part of the work required to
get a new fund off the ground and
can be quite onerous. However,
the environment today is much
more promising than it used to
be with an increased number of
specialised service providers that
can help guide a fund through the
process.
employees, on average, are compliance professionals. That
does not even take into account information technology
and data management staff.
To help circumvent this trend, new launches can engage
with specialised service providers who take a holistic
view of the regulatory environment. In addition to helping reduce the significant regulatory risk that the current
environment presents, they can also provide the regulatory and data professionals, systems and advisory services
required to ensure compliance.
HFM: There are a number of factors that play an
important role in the success of a hedge fund. From
the fund administrator to the prime broker, auditor,
legal counsel, and technology provider, how important is it to work with the right key service providers?
SL: Service providers can unquestionably be an integral part of a
fund’s success. Beyond the solutions themselves, service providers differentiate themselves
by having a deep understanding
and appreciation of the proprietary elements of the systems and
operational needs that set managers apart, and maintain a commitment to fostering meaningful relationships with them. At Maples
Fund Services, we pride ourselves
on our philosophy of continuous
innovation and forward thinking,
built on the pillars of proven processes, experienced people and
flexible technology. We recognise
that a standardised approach to
outsourcing no longer applies and
service providers must be dynamic in responding to clients’ needs
as they evolve.
Additionally, service providers
can further add value by maintaining relationships with other providers of complementary services. As part of the Maples
group, we have access to legal expertise from international
law firm, Maples and Calder, and fiduciary services via
Maples Fiduciary, a division of MaplesFS. We also maintain relationships with a number of prime brokers, auditors and other key hedge fund service providers.
WE BELIEVE THAT FUND
ADMINISTRATORS TODAY
MUST MOVE AWAY FROM
THE TRADITIONAL SERVICE
PROVIDER ROLE TO BECOME
A TRUE EXTENSION OF
THEIR CLIENTS’ OPERATIONS
TO TRULY ADD VALUE TO
THE INVESTMENT DECISIONMAKING PROCESS
HFM: What are the greatest
regulatory challenges that new
funds will face in the EU?
SL: Simply being aware of the
multitude of regulations can be
one of the biggest challenges new
funds face. Once that awareness is
established, funds are then tasked
with understanding and executing
against each specific regulation,
a process that can be especially
daunting. Each structure and each strategy is faced with
different requirements and ongoing compliance to various
regulations, which often requires a significant investment
in infrastructure and operational resources. In fact, The
Cost of Compliance industry report produced by AIMA,
the MFA and KPMG, showed that 15% of hedge fund
”
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FUND SERVICES
HFM: What are the most important factors
new funds should consider when choosing a
hedge fund administrator?
SL: Selecting a hedge fund administrator requires
careful thought and consideration. There is also
a great deal of uncertainty for buyers of fund
administration services in the wake of recent
acquisitions, exits of major players and general
industry consolidation. Fund managers should
focus their search on consistent and stable players who can provide high quality service and
a high-touch experience. We believe that fund
administrators today must move away from the
traditional service provider role to become a true
extension of their clients’ operations to truly add
value to the investment decision-making process.
It is important for funds to consider their
future growth and evolution and how the service providers they engage with can continue to support
them as their needs change. For example, a new launch
may need a more basic set of services than a larger, more
established fund with more sophisticated requirements
IT IS IMPORTANT FOR FUNDS
TO CONSIDER THEIR FUTURE
GROWTH AND EVOLUTION
AND HOW THE SERVICE
PROVIDERS THEY ENGAGE
WITH CAN CONTINUE TO
SUPPORT THEM AS THEIR
NEEDS CHANGE
”
so an administrator that provides a comprehensive core offering that can be customised with
other ancillary services can be quite attractive.
HFM: How can the right hedge fund administrator help a new fund to succeed?
SL: Previously, service providers were simply
required to be timely and accurate but today’s
fund manager demands a more robust, comprehensive offering. A good fund administrator must now go above and beyond to provide
superior industry insight and expertise, demonstrate technological prowess and offer customisable solutions that meet the needs of each
individual client.
Perhaps most importantly, a relationship
with the right fund administrator should foster
trust and confidence. The fund administrator
should absorb as many operational pain points as possible so that the fund manager can focus on his core
competencies and singular goal of generating alpha for
investors. n
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WORKING WITH THE
RIGHT PEOPLE
DEAN HILL, EXECUTIVE DIRECTOR AT EZE CASTLE INTEGRATION LTD, DISCUSSES THE IMPORTANCE OF SELECTING
THE RIGHT BUSINESS SERVICE PROVIDERS, AND EXPLAINS SOME OF THE KEY TECHNOLOGY FACTORS NEW
FUNDS MUST CONSIDER WHEN STARTING OUT IN THE EU
HFMWeek (HFM): Are you seeing a healthy market
for new hedge fund launches in the EU?
Dean Hill (DH): Yes. I think going into 2016 we will
see an increase in terms of the amount of new hedge
fund launches across the UK and European markets. Not only are these launches coming more frequently, but their size, structure and launch AuM
is greater than anything we have seen in the last
two-to-three years. It is certainly on the uptake.
Dean Hill is executive
director of Eze Castle
Integration UK and also
leads the international
new business teams in
London and Asia. Mr.
Hill’s career in technology
started with one of the UK’s
largest telecoms providers
where he held numerous
positions from engineering
to business development
and account management.
HFM: What do you see as the greatest regulatory
challenges facing new hedge funds in the EU?
DH: Overall compliance and regulatory stipulations
driven down from the SEC and ultimately picked up by
the FCA are driving significant changes in the way that
new, and indeed existing, hedge
funds operate. Accountability
across business functions have
put an end to the days of ‘box
ticking’ in areas such as due diligence.
I think the biggest challenge
that COOs are now facing is
that they are now much more
accountable for areas of their
business and operations where
they may not have significant
insight. Technology, especially
the growing focus on cyber-security, is one such area. As a result,
choosing reputable and established outsource partners is key.
tions. We see a lot of service-provider companies coming into the market with little or no experience and no
concept of what it takes to service a client in such a
demanding and fast-paced environment.
Eze Castle Integration has been building up its reputation for over 20 years now. We will continue to do so
through our dedication of servicing to the alternative
investment industry.
What we are seeing across the market, in terms of
hedge-fund launches, is the selection of the right partners and providers across all aspects of the business is
absolutely critical.
HFM: How much of a consideration should cybersecurity be for early-stage funds?
DH: Cyber-security has been
the industry buzzwords for
2015. It will continue to be so
right through 2016 and possibly
beyond.
The most common cybersecurity threats that we are
seeing mainly consist of ‘spearphishing’ and other phishing
attacks on companies and individuals within those companies.
We have had clients that have
been attacked and we have seen
it happen to other companies in
the marketplace.
Cyber-security should be taken as a serious consideration for
any firm that could be perceived
as an easy target for fraudulent
or malicious attack.
Criminals are becoming more
and more sophisticated in their
approach to corporate fraud and extracting money from
victims. Security in any firm should be one of, if not
the highest, priority. It is important in order to protect
business, reputation and members of staff.
Again this comes back to selecting the right vendors
to outsource services to. It will have a direct impact on
security risks and averting these risks. At Eze Castle
Integration, for example, we have built layers of security
into our Eze Private Cloud solutions to help ensure
user data is protected from the data centre to the
desktop.
CYBER-SECURITY SHOULD
BE TAKEN AS A SERIOUS
CONSIDERATION FOR ANY
FIRM THAT COULD BE
PERCEIVED AS AN EASY
TARGET FOR FRAUDULENT
OR MALICIOUS ATTACK
”
HFM: There are a number of
factors that play an important
role in the success of a hedge
fund. From the prime broker to
fund administrator, auditor, legal counsel, and technology provider, how important is it to work with the
right key service providers?
DH: Selecting the right service providers is probably
the most important decision a new or established hedge
fund will make.
Competition in the market is at its highest at all levels. Funds are trying to attract institutional investment
from other regions, and investors are looking to work
with individuals with a solid pedigree and companies
that have a solid background in providing proven solu10 H F M W E E K . CO M
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TECHNOLOGY
HFM: What role are investors playing in shaping
technology decision-making?
DH: Investors are ultimately driving the initial success
and setting the precedent with new launches and established firms. All too often we advise funds not to cut
corners in their technology operations, as this has a
direct impact on the long-term success and reputability of their business. Investors expect firms
to maintain institutional grade IT environments
regardless of their size. The proliferation of private cloud services has had a marked impact in
levelling the playing field. But, we always caution
clients that there are differences between cloud
offerings so they must conduct due diligence
on the service providers to ensure all resiliency,
security and service level requirements are met
or exceeded.
Many funds fail because of issues like downtime on services or compliance issues. But the
main reason we see funds fail is because of a
lack of target investment to launch. This is often
driven by choices of funds over selection of service providers.
on other third parties to provide some or all of their solutions, as they effectively become an intermediator. This
creates a situation where they have little or no control
over the service being provided.
That is not the way Eze Castle Integration works.
We manage the Eze Private Cloud, for example, from
end to end so we can give clients confidence
that the solution will perform as promised.
Since selecting a technology partner is one of
the most important decisions a firm can make,
we encourage clients to conduct thorough
due diligence, which includes inquiring about
what services are outsourced. Once launched,
a start-up should also commit to conducting
annual risk assessments of their technology
partners.
NEWER TECHNOLOGY HAS
ENABLED FIRMS TO BE
MORE DYNAMIC IN THEIR
APPROACH AND NEW
BUSINESSES TO BE MORE
FLEXIBLE IN THE WAY THAT
THEY OPERATE
HFM: What is the single most important technology decision a new start-up will make?
DH: Today, there are many variations of technology
solutions in the market. COOs are often overwhelmed
with differences between private, public or hybridowned cloud solutions. Ultimately a fund is putting its
trust in an outsourced provider to deliver a service that
ensures the business is up-and-running at optimum performance levels for the longest time possible - You are
looking for 100% up-time.
The most effective way to achieve 100% up-time is to
select a service provider that has as much ownership and
control of the service that you are buying into as possible. Typically risk is added when a service provider relies
”
HFM: How can emerging managers leverage
technology as a competitive differentiator
against larger, more-established firms?
DH: Technology is a great talking point at any
level. Everybody uses technology on a daily
basis. As such, everybody has some kind of
understanding of it.
Established firms tend to rest on their laurels.
They think: ‘Well, it has worked for so many
years, why would we change it?’ Or ‘Why would we
adopt anything different?’
Newer technology has enabled firms to be more
dynamic in their approach and new businesses to be
more flexible in the way that they operate. If start-up
firms can demonstrate the same or better results through
technology, they have the ability to shock older, moreestablished, institutional firms to take note of what they
are doing.
Ultimately, it all comes down to profitability across
the business. Technology enables newer firms to achieve
this. n
H F M W E E K . C O M 11
010_011_HFMHow2EU15_ECI.indd 11
16/09/2015 10:34
Untitled-1 1
16/09/2015 14:32
FUND SERVICES
THINGS TO
CONSIDER
COLIN BRIDGES OF GLOBAL PRIME PARTNERS TALKS TO HFMWEEK ABOUT THE DIFFERENT CHALLENGES
ASSOCIATED WITH LAUNCHING A FUND, AND WHAT THE RIGHT SERVICE PROVIDERS CAN DO TO GIVE NEW
FUNDS A COMPETITIVE EDGE
Colin Bridges works
in hedge fund sales at
Global Prime Partners
Ltd. Having worked in
prime brokerage for the
past seven years, Bridges
focuses on providing equity
finance solutions to both
start-up and established
hedge funds across Europe.
HFMWeek (HFM): Are you seeing a healthy market for
new hedge fund launches in the EU?
Colin Bridges (CB): At the moment we are seeing quite
a healthy market. Over the last few years there has been
a lot written in the press about the difficulties of launching a fund, with increased regulatory pressures and costs.
However, what we are seeing is there are still opportunities
for the right kind of funds that have the right strategy and
the right alpha that investors are looking for. There is still
an opportunity to launch in a cost-efficient manner if you
have the right providers and the right infrastructure in place.
We find more funds are looking at alternative solutions
in order to facilitate their launches. There are more clients
using platforms, segregated portfolio companies, buying cell
structures from funds that are selling them, or going under
the umbrella of others to launch
and then looking to ‘spin-out’ and
take that track record along with
them when the time is right.
approach to securing initial investment. Always choose the
right time to approach each investor and make that meeting
count.
HFM: How important is it for new funds to work with
the right service providers?
CB: It is crucial to find the right service providers. We
would always recommend doing as much research as you
can and finding people you believe can really help your
business grow.
When you are starting a new fund, the key is to think
long term. Always be thinking two to three years down the
line, and not just a few months. You need to partner with
someone who you think will help your business grow over
the next few years.
You need the right kind of costbasis as well. You do not want to
be spending too much money too
soon. But at the same time it is not
about choosing the cheapest possible option. It is about choosing
the right firm that can be a partner
for you.
We have seen success focussing
on the start-up market as we have
much lower fee thresholds than a
lot of the investment banks have.
One of the key things for investors
will always be the total expense
ratio. If you are paying very high
minimum-fees to your providers,
just to open an account there, most
investors will actually prefer that
you use a provider that will give
you a more cost-effective solution.
So from the right prime broker
to the right fund administrator, it
is important to make these decisions early on and to survey
the markets as much as possible. Not all providers will work
for all strategies; some prime brokers will be better at some
strategies than others, some fund administrators will be better with some strategies than others. Do your research, get
out in the market and find out who are the right providers
for you.
YOU DO NOT WANT TO BE
MAKING DECISIONS, FOR
EXAMPLE, LIKE GOING
AFTER ANY AND ALL
INVESTORS. IT SHOULD BE
VERY MUCH A TARGETED
APPROACH
HFM: How difficult is it for new
funds to secure the initial investment they need to survive?
CB: It has always been difficult for
funds to get initial investment and
it continues to remain so. I think
the challenge for managers is to target the right kind of investors for
their particular strategy. You do not
want to be making decisions, for
example, like going after any and all
investors. It should be very much a
targeted approach.
What we have found is that,
generally, the most success is seen
in funds that have individuals with
a strong track-record from their
previous firm that they can sell to investors. But if you do
not have this, you can always start with friends and family
money. From there you can build up a strong track-record
to target institutional investors with in due course.
Obviously there are seeders and early stage investors
too. But a lot of investors will struggle to invest in people
unless they have a prior relationship with them. So if you
are spinning-out of a large fund and you have existing relationships with investors then it is easier than for someone
starting from scratch.
We would always suggest being very targeted in your
”
HFM: What regulatory challenges should new funds be
aware of when starting out?
CB: One of the most significant regulations of the last few
013_014_HFMHow2EU15_GlobalPrime.indd 13
16/09/2015 10:52
FUND SERVICES
HFM: What are the most important factors that can
help new funds compete with larger, well-established
funds?
CB: A lot of it is down to the alpha and where your strategy differentiates itself from other funds. One of the most
common mistakes a new launch makes is trying to be the
‘new version’ of established funds. Investors are not looking for a smaller version of something that is already set
up. They are looking for something different. All investors
are looking for diversity in their portfolios. It is
important for managers to really find their niche
and what they are passionate about.
In addition, choosing the right location for
your targeted investment base is important.
If you are targeting predominantly European
investors, you should probably be considering
an onshore jurisdiction. Whereas if you are targeting an investor base outside of the EU, an
offshore jurisdiction may be more suitable.
years has been AIFMD. Predominantly, this really affects
funds with over €100m in assets. Funds can still launch at
lower assets than that and not have to do the full registration.
It is, however, always prudent to think about the future.
The most successful funds are the ones that build a business that can easily adapt to changes in regulation. So when
the fund needs to be fully AIFMD ready, they can have the
structures in place so they can meet those requirements
with minimal cost.
Other things to consider, like EMIR reporting
and Dodd-Frank, means there is a lot greater scrutiny in terms of hedge fund reporting. Working with
the right service providers, particularly administrators and compliance firms, will help you navigate
this more easily.
In terms of a registering a new asset manager, the
FCA approval process of can be a six-nine month
process. Where possible, managers have gone down
the route of an appointed representative structure.
This is a good route for getting to market quicker.
SO FROM THE RIGHT PRIME
BROKER TO THE RIGHT
FUND ADMINISTRATOR, IT IS
IMPORTANT TO MAKE THESE
DECISIONS EARLY ON AND
TO SURVEY THE MARKETS
AS MUCH AS POSSIBLE
HFM: How can funds benefit from outsourcing
administrative aspects of the business?
CB: One of the key things for start-ups is not trying
to do too many things yourself.
When investors meet prospective managers, they
are keen for the managers to focus on the trading.
The COO or CFO can then be focussed on the
operational aspects of the business.
But as a start-up, you cannot always handle everything inhouse. Particularly things like legal or compliance aspects.
These are the things you should be looking to outsource to
experts as much as possible.
From a fund administration perspective, obviously the
administrator is doing things for you like calculating Net
Asset Value. But they can also help with reporting or handle
your middle office as well. These are obligations that every
fund manager has. However, you may not necessarily want
to handle it all in-house, let alone pay for an additional staff
member to handle it. You can wrap these obligations into
your service providers fees.
”
HFM: How much of a consideration should
cyber security and technology infrastructure
be for start-up funds?
CB: It is definitely important. Cyber-security
and other technology-related issues are something that you need to make decisions about
very early on, in terms of building the right infrastructure. If you are on a platform or if you are
going it alone, you need to work with a good
tech company that can back-up all of your data, have the
appropriate firewalls and other kinds of safeguards in
place.
From a brokerage perspective, if systems go down you
can always send in a trade order. But if all of your internal
data is lost, this can be very costly. It is worth paying a
little bit more to ensure you are being served by an IT
company that can adequately protect you.
Ultimately, investors will always look at new launches
and emerging funds, managers just need to build their
business intelligently in order to sell themselves in the
best possible light. n
013_014_HFMHow2EU15_GlobalPrime.indd 14
16/09/2015 10:52
structured
for
success
Exceptional Growth for Malta’s Fund Industry
For two consecutive years, Malta has been coveted with Europe’s ‘Best Domicile’ award at the Hedge
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This success was made possible by Malta’s highly favourable business environment. This includes the role
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Untitled-1 1
J2649 - Segment Advert 273x203.indd 1
16/09/2015 14:29
22/07/2015 12:15
TECH SOLUTIONS TO
EARLY-STAGE CHALLENGES
GERRY GUALTIERI, SENIOR MANAGING DIRECTOR OF EZE SOFTWARE GROUP, TALKS TO HFMWEEK ABOUT
THE FIRM’S CLIENT-FOCUSED TECHNOLOGY SOLUTIONS
Gerry Gualtieri is
responsible for new sales,
business development, and
client service in EMEA for
Eze Software. He has more
than 25 years of industry
experience. Gerry joined
the company in 2009 and
served as chief executive
officer of Tradar until the
formation of Eze Software
Group in 2013.
HFMWeek (HFM): What are some key issues startup hedge funds are facing in the EU? How can technology help address these issues?
Gerry Gualtieri (GG): I think that the days of taking
only a few days to get a hedge fund up and running are
over. There is a pre-launch process, which takes longer
due primarily to the need for regulatory approval and
also because of the need for partner selection.
Even from the early days of a fund there are a number of things that need to be considered in order to run
the operation. This involves processes such as end-ofday reporting, reconciliation with
counterparties and increasingly
the requirement to run a shadow
NAV. Traditionally, that last aspect
would involve using a hedge fund
administrator. But what we are
seeing is more investors encouraging funds to deal with it in-house.
The role that technology plays
is that the appropriate provider
will have solutions that are preconfigured to handle issues such
as reporting and reconciliation
framework. So for a start-up
fund, technology can assist in
providing the framework to deal
with these early-stage issues. In
addition, there may be a scale
achievable using this technology
that does not require increasing
headcount. This is particularly
desirable in the early days of a
fund, where you do not want to
have lots of people.
tion. So it is an execution management tool that provides
access to electronic trading, along with operational support and robust client support service.
The sophistication around technological requirements can change over time. I think it is important not
only to consider if a technology provider can meet your
needs of the day, but to consider whether the provider
will continue to be able to do so as your fund develops. This may mean more sophisticated trading tools,
greater exposure and cash management or compliance
issues. Our start-up clients can scale up to the full Eze
Software Investment Suite, which
includes order management,
execution management, portfolio
management, data management,
compliance, and commission
management applications, serving the full range of investment
management needs for a large
asset manager.
More than ever, the needs and
requirements of investors are driving fund decisions. We have had
situations where a fund has contracted with us because an investor wanted to know that they had
a market-leading platform.
WE HAVE BEEN DOING THIS
A VERY LONG TIME AND
WE HAVE AN OUTSTANDING
REPUTATION FOR SERVICE.
ONE OF THE KEY THINGS
WE ARE ABLE TO PROVIDE
THROUGH OUR SERVICE
TEAM IS A LOT OF
BEST-PRACTICE
CAPABILITIES
HFM: What are some key
trends in start-up and emerging hedge fund technology in
the EU?
GG: One trend is multi-asset class
capabilities, rather than pure equity, and the majority of our clients
actively trade in FX as well.
In addition, I would consider the ‘time-to-market’
issue to be a trend, in terms of establishing the fund. This
is substantially longer than it was two to three years ago.
”
HFM: What are some key capabilities start-up hedge
funds should look for in a technology platform and
provider?
GG: Initially, it depends on what kind of fund they are.
So for example, if they are starting as a Ucits fund, then
compliance capability is key. But I think from day one,
you need to be able to run your operation, in terms of the
issues previously discussed.
From the trading and execution perspective, for startups Eze Software Group provides a specific offering
called JumpStart. It provides what is effectively a combination of order and operations management with execu-
HFM: What is Eze Software Group’s focus in the
start-up hedge fund space in the EU?
GG: We pride ourselves on having an offering that’s
highly scalable. We continue to work on asset-class
expansion and we currently support in the region of
150 different classes across the platform. But there are
always nuances in terms of how they are traded and
workload required.
016_017_HFMHow2EU15_Eze.indd 16
16/09/2015 10:28
TECHNOLOGY
As a result, currently 450 of our staff of around 1,000
are involved in producing product. These product production roles include product management, QA and core
development. So most of resources are either focused on
building products or expanding products. This enables
us to roll out the solutions we do.
We are a little bit different in the start-up space in that
we can accommodate one- or two-man operations and
provide them with solutions, but at the same time we
are also able to scale out to a full range of hedge funds
of larger size.
We have been doing this a very long time and we have
an outstanding reputation for service. One of the key
things we are able to provide through our service team
is a lot of best-practice capabilities. One of the things we
try to do, particularly on the start-up side, is share our
experiences with clients of what we have seen with other
clients. We try to focus on preconfiguring as much as we
can. This makes it as easy for clients as possible to get
into production.
We are very well-positioned and we do a very good
job, not just in terms of technology but also in providing
advice to clients and helping them get up and running as
quickly as possible.
HFM: What’s next for Eze Software Group?
GG: We came together two years ago as a series of
independent companies with independent offerings.
They have now all been fully integrated from a data and
workflow perspective into a full Investment Suite. This
means providing seamless integration between execution management, order management, portfolio management, data, compliance and commission management
tools, serving the full range of functions seamlessly. For
instance, we recently integrated our EMS and OMS compliance capabilities, which means traders can use the
robust compliance capabilities of the OMS without having to leave the EMS environment. Creating a seamless
workflow continues to be the focus for us.
In technological terms, our next stage of development
involves moving all of our capabilities to a cloud platform. This a strategic multi-year project already well
underway. From a technology perspective we see that
moving towards cloud solutions is the right way to go.
One of the things that this cloud platform will allow us
to do is offer functionality, or extended functionality,
to customers much more easily. This is because there is
no physical software to deliver, it is all being managed
from a central point. So customers have easier access to
functionality, and we are able to meet their requirements
more easily.
And we’ll continue to focus on delivering the best service in the industry. You can have superb products, but if
you have poor service in this industry you will struggle to
succeed. At Eze Software Group we combine great products with even better service. Clients want to feel like
they have reliable partners, particularly at the start-up
stage. We have a heavy client focus and this differentiates
us in the market alongside our experience and the quality
of our technology. n
016_017_HFMHow2EU15_Eze.indd 17
16/09/2015 10:28
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Our investor base includes pension funds, institutions, family offices,
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Untitled-1 1
16/09/2015 14:32
LEGAL
BRINGING YOUR FUND
TO MARKET
SIMON THOMAS AND SAM BROOKS OF MACFARLANES LLP DISCUSS THE FACTORS EUROPEAN HEDGE FUND
MANAGERS NEED TO CONSIDER WHEN BRINGING NEW PRODUCTS INTO THE MARKET
O
Simon Thomas is a
partner in the investment
management group,
specialising in alternative
investment funds. He
advises start-up and
institutional investment
managers on all aspects
of the structuring,
establishment and
operation of investment
management companies
and investment funds with
a particular emphasis on
the hedge fund industry.
ne of the most interesting aspects of the
implementation of the AIFMD is the renewed focus it has brought to the issue of
how hedge funds are marketed.
In some ways, this is curious, because if
you operate a typical fund and management
structure (a Cayman Islands fund with a UK-regulated
manager), the AIFMD has probably made little difference
to your marketing activities. Around 60% of institutional
hedge fund capital comes from North America. Of the
approximately 20% originating in the EU, the substantial
majority is raised in the UK and the Netherlands, both of
which have retained helpful private
placement regimes.
For some managers, however, raising capital in Europe
using the traditional hedge fund
model may now be a challenge.
For example, if France, Germany
or Sweden are marketing targets,
the private placement regimes are
likely to slow or even stall your
efforts. “Relying on reverse solicitation” should be approached with
extreme caution.
Investment Ordinance. To date, there does not appear to
have been a significant relaxation of these rules as they
apply to EU AIFs managed by EU AIFMs but it is easy to
imagine more generous allocation limits being applied in
future. An obvious parallel to this is Ucits funds, which fall
outside the “alternatives” bracket.
WHAT REGULATORY FORMALITIES ARE REQUIRED?
United States
Pre-AIFMD, most managers’ primary consideration was:
“How do I access US capital?” Reaching the US market
is undoubtedly still important, but US securities laws are
a known quantity. Most offering
and subscription documents will
already contemplate US investors, and filings such as Form D
(to register an offering as a private
placement) and CFTC forms can
be processed without difficulty by
local counsel. There are subtleties depending on the exact target
investor base but, on the whole,
marketing to US investors is a
well-trodden path.
Managers also need to be aware
of the Advisers Act. A non-US
manager whose private funds
have fewer than 15 investors in the
United States and less than $25m
in US AuM may rely on the “foreign private adviser” exemption,
which puts the manager outside
the scrutiny of the SEC entirely.
Clearly, these are low thresholds.
However, once breached, an exemption from full registration is still available to non-US managers whose advisory
activities in the US are limited solely to managing private
fund assets. Although, if a US place of business is established then the manager may only manage a maximum of
$150m in private fund assets from there.
IF THE OBJECTIVE IS SIMPLY
TO SELL YOUR FUND AS
WIDELY AS POSSIBLE, OR
PRIMARILY IN THE US
AND UK, THEN A CAYMAN
ISLANDS FUND IS PROBABLY
STILL THE OPTIMAL CHOICE
WHERE ARE YOUR INVESTORS?
If the objective is simply to sell
your fund as widely as possible, or
primarily in the US and UK, then
a Cayman Islands fund is probably still the optimal choice. US
and UK institutional investors are
very familiar with Cayman Islands
structures and, as discussed below, there are no major
regulatory hurdles to marketing a Cayman Islands fund
under the private placement rules in the US and UK.
If continental European institutional investors are a
major target then the choice of fund domicile may be less
straightforward. For example, many EU-based financial
institutions have internal policies prohibiting them from
investing in offshore funds, and even those permitted to
invest may face private and public pressure to avoid products perceived as high-risk or even ethically questionable.
Additionally, the allocations policies of many European
financial institutions designate only a small portion of
their overall assets for investment in hedge funds. In some
jurisdictions local legislation has imposed allocation limits
across whole industry sectors, most notably the German
”
Sam Brooks is a
senior solicitor in the
investment management
group, specialising in
alternative investment
funds.
Switzerland
Recently introduced rules in Switzerland require a local
representative and paying agent to be appointed where
a fund is distributed in Switzerland, unless the fund is
marketed only to regulated qualified investors. These
have undoubtedly increased the cost of marketing into
Switzerland, but compliance is fairly straightforward.
There is now a good selection of Swiss representatives
019_020_HFMHow2EU15_MacFarlanes.indd 19
16/09/2015 15:12
LEGAL
and their appointment documents will have already been
negotiated and refined, meaning that the engagement process need not be painful. A few additions are also required
to funds’ offering documents, but these are in standard
form and will be familiar to any Swiss investors.
European Union
For many managers, the potential pitfalls of marketing
in the EU now top the list of their concerns. A Cayman
Islands fund, even one managed by a regulated European
AIFM, cannot take advantage of the AIFMD marketing
passport, leaving the national private placement regimes
or so-called reverse solicitation as the only means of
accepting investment.
The problem with the national private placement
regimes is that they vary significantly from country to
country. In fact, not only are differing formalities involved,
but there is not even any consistent definition of what
constitutes “marketing”, as opposed to “pre-marketing”,
which falls outside the scope of the AIFMD. While this is
not generally an insurmountable obstacle, investor expectations need to be managed accordingly.
A possible solution is to set up a fund domiciled in the
EU. The obvious advantage of an EU fund is the AIFMD
marketing passport, meaning that only a single application need be made to market the fund across the EU.
There may also be benefits when marketing to European
institutional investors, as discussed above. On the other
hand, the fund will probably need to be a regulated entity,
such as an Icaf or a Sicav-Sif, meaning increased formation
cost and time.
One point to note is that the EU marketing passport
may in future be extended to Cayman Islands funds. No
timetable for any extension has yet been provided by
ESMA, so waiting for the passport to be extended is probably not a good strategy at present.
PRIVATE PL ACEMENT RULES IN KEY EU JURISDICTIONS
JURISDICTION
IS PRIVATE PLACEMENT
AVAILABLE? IF SO, WHAT
IS THE PROCESS?
APPROXIMATE TIME
TO MARKET
PRE-MARKETING?
France
Not available, although distribution to
funds of funds and managed accounts
is considered to be outside the scope of
“marketing”.
N/A.
None permitted.
Germany
Yes, but subject to approval by the BaFIN.
A lengthy application pack must be
submitted. A depositary services provider
must be appointed.
Two to three months.
Limited pre-marketing
permitted.
Netherlands
Yes, a simple notification must be
submitted to the AFM.
The notification must
be provided at least 20
business days prior to
commencing marketing.
permitted.
Sweden
Yes, but subject to approval by the SFSA.
An application pack must be submitted.
A depositary services provider must be
appointed.
Two to three months.
permitted.
UK
Yes, a simple notification must be
submitted to the FCA.
Marketing may commence
as soon as the notification
is submitted.
Extensive premarketing permitted.
WHAT ABOUT REVERSE SOLICITATION?
Some managers have sought to avoid the EU marketing
rules by taking advantage of reverse solicitation. Reverse
solicitation refers to a situation where “marketing”, as
defined in the AIFMD, has not taken place because an
investment in a fund is made solely at the initiative of the
investor. This is helpful for an EU manager of a Cayman
hedge fund because it means they need not comply with
the local private placement regime. It is even more helpful for a non-EU manager because it puts the investment
entirely outside the scope of the AIFMD.
While reverse solicitation strategies may have their merits, they are not without risk. It is not possible to “target”
a country or region by reverse solicitation. By its nature, a
reverse solicitation must not have been targeted otherwise
it risks having been at the initiative manager and not the
investor. Further, a representation by an investor that its
investment was initiated by reverse solicitation is worthless if it is factually untrue. A standing request for information cannot refer to future funds by name so cannot be a
request for information about those funds.
The real risk of relying on reverse solicitation is that,
unless it is scrupulously employed only when an investment really was made at the initiative of an investor, the
manager will always be at risk of a demand for rescission.
This is not to say that reverse solicitation cannot happen,
only that is should not be seen as a quick-fix solution or a
marketing strategy in itself.
CONCLUSION
For managers aiming to sell a new product primarily in
the US, the UK and Switzerland, the traditional Cayman
Islands fund remains a compelling option. However, if
continental Europe is likely to be a source of significant
capital then more thought is required. An EU-based fund
may be more attractive to institutional investors and will
be able to take advantage of the marketing passport, but
will take longer and cost more to launch. Marketing a
Cayman Islands fund under the EU national private placement regimes is by no means impossible, but needs careful
planning. n
019_020_HFMHow2EU15_MacFarlanes.indd 20
16/09/2015 10:12
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©2015 Bloomberg L.P. All rights reserved. S620236880 0915
Untitled-1 1
16/09/2015 14:25
MAKING AN IT INVESTMENT
IN YOUR FUND’S FUTURE
PHIL ASHLEY, CHIEF INFORMATION OFFICER AT NETCONSULT, TALKS TO HFMWEEK
ABOUT THE KEY IT DECISIONS START-UP FUNDS WILL MAKE
Phil Ashley is the
chief information officer
at netConsult. A trained
analytical and applied
scientist he has more
than 15 years’ senior IT
experience across a range
of industries running both
internal IT teams and as an
external service provider.
HFMWeek (HFM): What trends are you seeing for IT
budgets for hedge fund launches in the EU?
Phil Ashley (PA): Increasing costs across the board for
hedge funds have resulted in IT budgets being challenged.
Compliance costs alone have been growing rapidly as
more and more demands are put on hedge funds. This
has certainly contributed to the effective squeezing of IT
budgets.
It is not just expenditure being diverted elsewhere that
is causing the decrease in IT budgets. IT is starting to
be seen more and more as a commodity, rather than an
embedded business function. While commoditisation
of IT is becoming more and more a reality, it tends to
remove the expectation of getting a return on investment
from IT systems. Ultimately, the perceived value of IT
services is being eroded and thus
justification of IT spend is much
more difficult, especially when
funds are faced with so many
other growing costs.
ons, can help get access to much deeper real added value.
For example, enhanced security solutions that can utilise
underlying network hardware without the need for further equipment can be much more cost effective.
HFM: What are the key areas for IT investment new
hedge funds should focus on?
PA: Focus must go into security as a priority. It is simply
unacceptable not to have reasonable security measures in
place. Firewalls, antivirus, intrusion detection, security
event monitoring, multi-factor authentication, for example. These can be delivered relatively cost effectively on
a small scale to get to a good security standpoint without
excessive expense.
Getting the key pieces you need in place at the earliest
opportunity may be more expensive initially and might feel inappropriate for the early stages, but
can pay for themselves time and
again. Critical services such as
email, data storage and communications are key cornerstones of
any IT infrastructure and should
be given full attention. Without
good initial foundations, retrospective data migrations and
system integrations can be often
costly, risky and disruptive tasks;
wasteful necessities that could
have been avoided.
Finally, support and management of your IT must not be
overlooked. Operating minimalist IT solutions can result in a
substantial support overhead.
Day-to-day support tasks can be
manual and inefficient, and may
require more care and attention to keep them running well.
Without large enterprise, autonomous systems in place to manage IT, skilled local IT support, while it may be a sizable cost, can prove invaluable
in the long run.
WITH EXPECTATIONS
ON TECHNOLOGY
SERVICES GROWING WITH
DECREASING BUDGETS,
THERE IS A REAL DANGER
OF INVESTING IN SECONDRATE TECHNOLOGIES WHEN
BEING DRIVEN BY THE
BOTTOM LINE
HFM: How can new hedge
funds make the most out of
their IT budgets?
PA: Trying to get the most out of
technology is a big challenge for
new hedge funds. With expectations on technology services
growing with decreasing budgets,
there is a real danger of investing
in second-rate technologies when
being driven by the bottom line.
Knowing exactly which services are critical and which are
not is paramount to getting the
most out of an IT budget. You are
likely to be using email every day
to exchange confidential information, however do you need the
ability to work remotely, considering the cost of office space in Central London?
Look for solutions that scale down economically.
Solutions with pricing models that are user based can
often deliver substantial value to new funds by avoiding
expensive up-front costs.
Inescapably, there are going to be some capex costs.
However, integrated solutions that can leverage other
investments, rather than basic solutions with many add-
”
HFM: How critical is it to make technology decisions
based on longevity?
PA: Considering what your realistic intentions and growth
plans are can help to determine the criticality of making
022_023_HFMHow2EU15_Netconsult.indd 22
16/09/2015 10:35
TECHNOLOGY
long-term technology decisions. Technology invariably
has the ability to grow and scale substantially, however
what to focus on is how efficiently and cost effectively
growth can be achieved and additional services added.
It is more important to understand the expected lifecycle and use of a solution or system rather than focusing on technical scalability. Look more for services that
can mature over time, improving with use and growing
understanding between the business requirements and
IT capabilities. Being able to delivering extra functionality easily and when you need it can be beneficial as well.
Bear in mind, however, that the costs of replacing
and migrating from small systems to newer, larger ones
can be very expensive and often not proportional to the
number of people using it. There are minimal economies
of scale when it comes to short-term IT solutions. Being
able to find a balance is more relevant than necessarily
focusing on longevity alone. Effectively communicating business needs and gaining sufficient understanding
of IT systems will make finding this balance far easier
and ultimately ensure much more appropriate and roadmapped solutions.
HFM: How exposed are new hedge funds to cybersecurity threats?
PA: New hedge funds are particularly vulnerable to
cyber-security attacks. Cyber criminals are likely to be
acutely aware of start-up financial companies, along with
the fact that their security practices might not yet be fully
matured in smaller financial institutions. We regularly
see newly commissioned systems being programmatically scanned, typically by autonomous systems looking
for security weaknesses.
Attackers are also aware that new start-ups are not
always well positioned to respond to a successful attack
or data breach. This can often result in future repeat
attack as a technique to avoid detection and attempt
further security breaches. However, this behaviour is not
exclusive to new start-ups. We regularly see several realworld attacks each month across our client base. Cybersecurity threats can materialise very quickly for new
hedge funds as well as persisting into the future.
HFM: Are you seeing an alignment between investor
expectations and technology implementations?
PA: The traditional technology solutions that exist in
the hedge fund provider space are largely tried and tested
and meet investor expectations, on paper at least. It is in
the implementation of these services, however, than an
element of misalignment can often be created. This can
typically come from lack of understanding of a solution’s
abilities between client and provider. Openly discussing
a solution’s governance and controls along with delivered services can help explore and minimise gaps between
expectations and reality.
Adding to this, we have seen a developing trend
towards utilisation of newer, cheaper, domestic IT services purely to minimise cost, but at the expense of
control, security and supportability. Running appropriate information systems is expected of a hedge fund and
indeed all financial institutions. Domestic solutions, no
matter how innovative they might be, are unlikely to be
viewed acceptable in the eyes of investors and regulators. Would implementing a simple file-sharing solution
hosted by a community cloud service, to which the original developers may have full access, be taking reasonable
steps to protect, store and manage your client data?
HFM: Do you think the requirements for governance
and regulation will change in the future?
PA: The requirements for governance and regulation are
growing today and this is likely to continue into the future
with more stringent requirements and controls. We have
seen a lot of recent investor due diligence questions aligning with requirements from the SEC. This, along with
recent developments from AITEC, the UK government
and the current MIFID II proposal, all bring more security
and operational requirements and expectations.
We believe that one of the most prudent ways to operate within the increasingly regulated and governed IT
space is to know your technology systems. Better understanding of how your IT functions are controlled and its
limitations can enable you to make informed decisions
going forward to ensure you keep up to date, use IT efficiently and stay compliant. n
022_023_HFMHow2EU15_Netconsult.indd 23
16/09/2015 10:35
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Untitled-1 1
globalprimepartners.com
16/09/2015 14:29
FINANCIAL SERVICES
CHOOSING A DOMICILE
IVAN GRECH, HEAD OF BUSINESS DEVELOPMENT AT FINANCEMALTA, TALKS TO HFMWEEK ABOUT MALTA’S
POSITION AS AN EU DOMICILE AND WHAT IT HAS TO OFFER START-UP FUNDS
Ivan Grech is the
recently appointed head
of business development
at FinanceMalta, the
promotional arm of the
financial services industry
in Malta. Working in
marketing management
roles for more than 20
years, he has gained
experience in various
industry sectors ranging
from private healthcare to
the automotive business.
HFMWeek (HFM): Can you outline the formation process for forming a hedge fund in Malta?
Ivan Grech (IG): The majority of funds in Malta are
Professional Investor Funds (PIFs), which are typically in
the form of open-ended public or private limited liability
investment companies with variable share capital (Sicavs).
The formation process is of a twofold nature wherein the
licensing process is handled by the single regulator of all
financial services in Malta, the Malta Financial Services
Authority (MFSA), while the Registry of Companies handles the constitutive part.
The licensing timeframe for a hedge fund is three
months and requires the filing of a formal application for a
licence with MFSA. Generally, the documentation required
includes an application form, a draft Memorandum &
Articles of Association, a draft offering documentation,
board resolutions and due diligence documentation on all
functionaries and appointees as well as relevant fees.
After due consideration, the MFSA issues an ‘Initial
Comments’ letter, and any issues
raised by the regulator are addressed
by the turnkey contractor – who
may be the appointed legal firm or
the fund administration company
– and revised documentation then
submitted. Once all pre-licensing
conditions are fully addressed, then
the MFSA will issue an ‘In Principle
Approval’ letter upon which the
Sicav may be incorporated and a
licence issued.
Hedge fund requirements in Malta for de minimis funds
may vary according to the category chosen. The large
majority of funds in Malta are PIFs, of which there are three
types, and may be promoted to experienced, qualifying,
or extraordinary investors. Additionally, by providing the
framework for self-managed funds, local requirements allow
for structures that are leaner in nature, which are advantageous for promoters of small AIFMs. This puts Malta in
the enviable position whereby it can target investors having
a diverse risk profile, while also catering for flexible and
diverse investment strategies.
Malta continues to be a popular choice for both EU and
non-EU alternative fund managers. Testament to the robust
structure of the Malta Funds Industry is the ‘Most favoured
Fund Domicle’ recognition awarded to Malta in 2013 and
2014.
HFM: What is Malta’s regulatory infrastructure like for
emerging or newly formed funds?
IG: Flexible regulation, transparency and good governance, as
well as its status as a cost-effective
domicile for funds, have long been
some of Malta’s key advantages not
only for established, but also for
emerging and newly formed funds.
Malta has established a comprehensive regulatory framework for
the registration and marketing of
all types of funds and investment
vehicles. This framework is constantly updated and this, together
with easy access to the regulatory
body and streamlined prudential
supervision, are the foundations of
the Maltese regulatory landscape.
Malta’s financial services framework and tax laws are up to date
with EU directives and in line with
EU requirements, while MFSA
performs its regulatory function in
a constructive manner. Operators
based in Malta cite the licensing
process with MFSA as being carried out within an acceptable timeframe: quick, thorough and efficient. The MFSA
also practises an ‘open door’ policy that allows fund promoters to constructively engage in the licensing process.
Malta’s fund industry is made up of different fund typologies catering to a variety of investment strategies including
retail, quasi-retail, HNWIs and institutional investors. It
also caters to strategies ranging from long-only to long-short
strategies, to extensive use of derivative instruments, high
frequency trading funds, algorithmic funds, private equity,
THE TWO MAIN FACTORS TO
BE CONSIDERED INITIALLY
WHEN LOOKING TO FORM A
FUND INSIDE THE EU ARE:
WHO ARE THE INVESTORS?
AND WHAT ARE THE CORE
INVESTMENT MANAGEMENT
COMPETENCIES?”
HFM: Are your requirements
similar to other EU domiciles?
If not why and how are they different?
IG: Malta is an EU domicile
and therefore the general regulatory requirements that Malta has
adopted are based on best practices
mirroring other jurisdictions of
stature. Malta has also introduced
The Alternative Investment Funds
Management Directive (AIFMD), a 2011 EU directive
regulating the marketing or the management of hedge
funds within the union.
The AIFMD framework also provides for a lighter or
de minimis regime for fund managers or self-managed de
minimis hedge funds that may choose to opt out of the regulation and be structured as per regulatory provisions of the
country where the fund is to be set up. This is also the case
in many other domiciles, but not necessarily in all. Malta has
opted to regulate this segment.
”
025_026_HFMHow2EU15_FinMalta.indd 25
16/09/2015 10:09
FINANCIAL SERVICES
investments in real assets including real estate, distressed
debt funds, loan funds and others.
up. Therefore, the barriers to entry are in effect mitigated
through the development of new business models.
HFM: What challenges do those looking to form a fund
inside the EU face in the current market?
IG: The two main factors to be considered initially when
looking to form a fund inside the EU are: Who
are the investors? And what are the core investment management competencies? Once these
have been established, the choice of products
such as Ucits or the alternative type, and in the
latter case, whether de minimis or full scope must
be decided upon, as each of these categories has
its own regulatory requirements, challenges and
opportunities.
One must also then consider the distribution
model of the fund, active marketing through passporting or private placement. However, common
features that are fast developing in the market are
the increased focus on risk management capabilities as well as the requirement to appoint external
valuers for hard to value assets.
HFM: How does Malta differentiate itself in the EU
market? How will it continue to do so in the future?
IG: Malta continues to be an attractive domicile for investors
and financial entities seeking a dynamic European
base that is professional, practical, safe and cost-effective by positioning itself on various fronts.
Malta was one of the first countries to transpose
the Ucits IV directive to law. In addition, the Ucits
Management Company Passport allows asset managers in one state to manage Ucits on a cross-border
basis as well as merge Ucits to set up master-feeder
structures.
The setting up of AIFMs in Malta is developing
handsomely with the core business model being the
use of Malta as the base for the risk management
function while the investment management activity
is outsourced to other licensed entities in domiciles
that do not have the AIFM rubber stamp.
In effect, a number of such EU-based entities,
particularly UK-based ones, have set up subsidiary
operations in Malta, as AIFMs, precisely for this
purpose, thus benefiting from a lower cost base, an
open-door regulatory scenario, and an EU-approved
advantageous fiscal background.
De minimis funds and fund managers have also
found fertile ground in Malta, a situation that is
expected to be sustainable in the long term. Other
areas of potential growth that are looking positive
are the structuring of the so-called ‘funds-for-one’ and funds
investing in ‘other assets’ that require depositary-lite services in the AIFMD realm.
Another positive development on the local market which
is likely to continue providing growth opportunities to the
sector is the ‘rent-a-cell’ concept. Platforms hosting other
parties’ sub-funds, the ‘plug-and-play’ model, is a very positive development that is steadily gaining ground. n
MALTA CONTINUES TO BE AN
ATTRACTIVE DOMICILE FOR
INVESTORS AND FINANCIAL
ENTITIES SEEKING A
DYNAMIC EUROPEAN BASE
THAT IS PROFESSIONAL,
PRACTICAL, SAFE AND COST
EFFECTIVE BY POSITIONING
ITSELF ON VARIOUS FRONTS”
HFM: Have the barriers to entry for new funds
changed significantly in the past few years?
IG: As the market matures and becomes increasingly sophisticated, so do the requirements of the
local regulator. For example, substance requirements become more demanding and provide
increasing challenges for entities such as self-managed structures.
This has resulted in portfolio managers assessing alternatives, such as engaging an external licensed fund management company. Advisory agreements with the promoters
or ad hoc investment committees are also developing at
the level of the said fund management company where the
promoters are represented, thereby allowing same promoters to have a say in the day-to-day investment management decisions of the fund structures they intended to set
”
025_026_HFMHow2EU15_FinMalta.indd 26
16/09/2015 10:09
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1
Based on Institutional Investor’s Alpha 2015 Hedge Fund 100 List
Untitled-1 1
16/09/2015 14:28
STRATEGIC PARTNERSHIPS:
THE OUTSOURCING
MEGA-TREND
JERRY LEES AND GARY NEWMAN, CHAIRMAN AND SENIOR RELATIONSHIP MANAGER RESPECTIVELY OF LINEAR INVESTMENTS,
DISCUSS SIX KEY ISSUES FACING EMERGING FUNDS, AND THE EMERGING TREND OF STRATEGIC PARTNERSHIPS
W
Jerry Lees is the
executive chairman of
Linear Investments Ltd.
Jerry has been an active
entrepreneur in the success
of multiple technology
and financial businesses.
Linear is FCA regulated to
provide prime brokerage,
execution and hedge fund
platform services, including
FCA umbrella and capital
introduction.
Gary Newman
is senior relationship
manager at Linear
Investments Ltd. Gary has
10 years of experience
operating across asset
management and execution
services. Gary holds a
Master’s Degree from
Warwick Business School.
hy has starting a new fund become
so difficult? Many comments are
made about a time, now long past,
when you could step out of a major
investment bank with a personal
track record and attract substantial
sums for your budding strategic investment strategy. It
is doubtful that it was ever really that easy but it does
appear to have become significantly more difficult in
recent years. The financial crisis, the post-crisis regulatory clampdown, Madoff and Basle III all contributed
to the world in which funds now operate. It has become
critical to prepare a business strategy to overcome six key
issues, if you are to succeed in launching and growing an
emerging fund in current market conditions:
1.It is now significantly harder to attract investor funds
2.Fee expectations across the board are significantly
lower
3.Regulatory pressures are immense
4.Operational costs have escalated
5.Prime brokers have abandoned smaller funds
6.Critical audited track record
EXPLORING THE SIX ISSUES FACING EMERGING FUNDS
Market conditions for generating investor interests and
commitment of capital are becoming increasingly challenging for a new fund manager. Without deep market
knowledge of how to raise capital while supporting an
effective marketing team and strategy, smaller funds find
themselves being swiftly overlooked for a larger competitor by ever more cautious investors. With assets
under $250m, you cannot get the
attention of capital-introduction
teams at larger prime brokers. It
is just not worth their while. At
the same time, finding investors is
like finding a needle in a haystack,
without a considerable budget to
employ cap-intro skills and attend
events, it is very hard to find the
right investor ready and willing
to look at your strategy. All of this
leads to reduced Assets under
Management (AuM).
At the same time, management
and performance fees are under
severe pressure, not only to attract additional capital but
also to retain existing funds. Investors have become far
more demanding of their fund managers, expecting the
same returns for less cost. Historically with a healthy
AuM value, management fees of around 2% would have
provided for hedge funds to cover a significant proportion of their operating expenditure on a day-to-day basis,
with performance fees on top of 20%. Only exceptionally
established funds can command such fees in the current
climate. However, with management fees now languishing at less than 1.5% (often down to 0.75%) and with
performance fees at around 15% (after a threshold), the
operating costs will far exceed the income generated
from management and performance fees until the fund
has established a considerable asset base.
On top of the issues of raising funds and lower fees,
we need to add the massively increasing burden of
regulatory pressure. European directives are leading to
more supervisory demands, reporting requirements and
investment restrictions under AIFMD and MiFID II.
You need the resources of a highly skilled and competent compliance team to navigate through and maintain
proper reporting under these directives. Backing them
up requires investment in technology, operations and IT
structures capable of ensuring you are recording, storing,
analysing and justifying all of your actions, marketing,
emails and trading to prove you are operating within the
rules. There is little doubt the EU is planning to increase
the extent and depth of regulation.
This leads to a further barrier to entry: operational
setup. Office space has to comply with regulations and is
at a premium in London and other
European financial centres, where
most hedge funds operate. Middle
and back office staff are required
to process the business and have
to be backed by sophisticated
middle and back office systems
and fund administration services.
Depositories have to be nominated, and auditors, external directors
and legal advisors set up before you
even start on the cost of the offering documentation and set-up.
Assuming there are sufficient
resources to deal with the hurdles
INVESTORS HAVE BECOME
FAR MORE DEMANDING OF
THEIR FUND MANAGERS,
EXPECTING THE SAME
RETURNS FOR LESS COST
”
RISK MANAGEMENT
already covered, there is the problem of convincing mainstream service providers to provide prime brokerage and
execution services. The pressure on mainstream prime brokerage houses to continually assess return on capital and the
administrative/regulatory costs has further intensified, with
the result being service providers are refusing to provide
services to small-to-medium hedge funds.
A new fund is faced with a conundrum: it has to be set
up to create an audited track record, but cannot raise funds
without a track record, so cannot get the funds in the first
instance. No one trusts back testing any more. So how do
funds overcome this? Essentially by outsourcing
many of the processes we outline here and short
circuiting setting up structures, operations, IT,
regulatory structures and sharing staff and overhead costs you can reduce outgoings to a minimum whilst building the essential track record
which you can then leverage to go to stage two,
acceleration funds.
nally. Linear will let out desk space and IT equipment,
network connectivity, trading and support systems with
full data and phone recording to meet regulatory standards
in premises designed to be cost effective through shared
infrastructure. This allows fund managers to begin operating swiftly at a significantly lower cost, without long term
lease commitments and heavy investment.
Regulation is a big hurdle to the start-up, the initial
establishment of a fund can be a minefield of challenges,
and will take more than a year to complete taking all
aspects of preparation, allocation of a case manager by
the regulator followed by the process itself. By
choosing to operate under a firm’s regulatory
umbrella, a fund manager can begin operations
straightaway while approval is being granted.
Importantly, during this time a track record and
possibly revenue is already being created.
As a fund manager, you need to find an adequate service provider to clear and settle your
trades and provide prime brokerage services,
both of which need to be cost efficient for the
fund. For the smaller fund, finding an appropriate provider, specifically at the right price,
can be challenging. However, there are firms
such as Linear specialising in servicing smallto-medium sized funds, with services offering
outsourced middle and back office services,
whereby the whole process of clearing and settlement is carried out on behalf of the fund.
A fund manager requires premium execution
services. Achieving best execution, and proving
it has been achieved, has always been a crucial
requirement of any fund manager but this requirement is
being further emphasised by forthcoming regulation (MiFID
II). A strong execution provider will deliver global, multi-asset
execution solutions, facilitating high touch trading (manual
orders’ receipts) and electronic (DMA and Algorithmic) trading services. For small- to medium-sized hedge funds, identifying such a provider who can offer these services at a costeffective rate, covering the asset classes required is no easy
task, but there are execution firms that specialise in providing
such services to small- to medium-sized hedge funds. n
AS A FUND MANAGER,
YOU WILL NEED TO FIND
AN APPROPRIATE SERVICE
PROVIDER TO CLEAR AND
SETTLE YOUR TRADES AND,
POSSIBLY, TO PROVIDE PRIME
BROKERAGE SERVICES, BOTH
OF WHICH NEED TO BE COST
EFFICIENT FOR THE FUND
EVOLVING
One of the most interesting things about evolution
is how the pace of evolutionary change speeds up
in the face of adversity. As can be expected from
a finance sector enduring a time of ever-growing
complexity and financial straitjacketing, new processes and approaches are evolving to meet these
challenges. Fund managers no longer have to own
every operational process. Instead, they can focus
on what they do best, the conceptualisation of
investment strategies and research, while forming strategic service relationships with specialist
third-party providers to manage areas such as order execution, financing, operations and regulation. The benefits
include efficient setup time frames, significant cost reductions and enhanced operational performance.
Based on our experience with emerging funds, we
understand it is now essential for even large hedge fund
operations to embrace outsourcing of expertise and process to experts in their fields. The cost constraints and
operational barriers including hugely expensive IT systems
and operations prohibit fulfilling these functions inter-
”
Untitled-1 1
16/09/2015 14:33
FUND SERVICES
COMMON MISTAKES WHEN
CHOOSING A CRM
ROBERT GOLDBAUM, VICE PRESIDENT AT BACKSTOP SOLUTIONS GROUP, TALKS TO HFMWEEK ABOUT THE FIRM’S OFFERING AND
WHAT FUNDS SHOULD CONSIDER WHEN CHOOSING TECHNOLOGY PROVIDERS
Robert Goldbaum
brings more than 22
years of experience with
alternative investments
and technology innovation
to Backstop’s product
development and client/
partner management
efforts. Prior to joining
Backstop, Mr. Goldbaum
was a director and head of
fund of funds services at
Citadel Solutions, now part
of Northern Truste.
HFMWeek (HFM): What should funds look for in a
technology vendor?
Robert Goldbaum (RG): As funds are launched, they
usually look for the best service providers for administration, prime brokerage, accounting and audit. This is not
only to ensure they get proper service, but also to ensure
their investors they are running a quality business operation. The same goals should apply to their selections of
systems. Funds must find the best vendor that can fill their
needs today and into the future, while also demonstrating
to prospective and current investors they run an efficient
and compliant business. As they do with the service providers, they should also be looking
to partner with system providers
that impart knowledge of best
practices within the industry.
This means understanding how
similar clients are utilising a system. In addition, it involves the
institutional strength and industry knowledge of a support team.
Clients at Backstop with questions about their software are able
to pick up the phone and speak
to someone who has experience
working with hundreds of similar
firms in their industry that typically have the same operational
challenges.
Funds should also be looking
for a vendor providing a quality Professional Services Team
(PST). The PST should be dedicated to implementation and
ensuring the process of getting
you to market is as efficient as possible. Other services that should
be provided include a Knowledge
Management Staff (KMS), which
should be working with clients to help them get the most
out of their product on an ongoing basis. A COO of a
fund will want to ensure everyone in their organisation is
comfortable with the software being used. A good KMS
will help with this and ensure the team stays up to speed
on new features and best practices adopted by the broader
industry. At Backstop, if we notice that usage is down, we
will even offer customised training.
More generic things you should be looking for in a
technology vendor involve longevity and reliability. Has
the vendor been in the business for a significant amount
of time? Are they offering a SAAS-based product, or is it a
client server? Is it a cloud based product or an insufficient
ASP system?
HFM: How important is it for
funds to have an effective and
suitable CRM system in place?
RG: It is crucial for funds to have a
good IRM system in place, meaning
Investor Relationship Management.
A generic CRM system cannot support the specific needs of a private
investment firm. This is because
if you want to grow, you cannot
just be thinking about the current
needs of your fund. You need to be
thinking about what the fund will
require over the next three years.
This may begin with calls, meetings and notes tracking, which can
be provided by a very basic, offthe-shelf CRM. But eventually, the
process becomes about efficiency,
scalability and speed to market
when you begin to collaborate with
other areas of your operations. For
example, the CRM works with
sales, business development and
marketing. Ultimately, you will tie
in the investor relations team or
the CCO for compliance. So when
your organisation is growing, if you do not have an efficient and appropriate IRM system in place, you will hit
major obstacles that would have been unnecessary if an
FUNDS MUST FIND THE
BEST VENDOR THAT
CAN FILL THEIR NEEDS
TODAY AND INTO THE
FUTURE, WHILE ALSO
DEMONSTRATING TO
PROSPECTIVE AND CURRENT
INVESTORS THAT THEY
RUN AN EFFICIENT AND
COMPLIANT BUSINESS
”
031_032_HFMHow2EU15_Backstop.indd 31
18/09/2015 14:18
FUND SERVICES
effective IRM system was established on day one. It will
likely end up costing your fund two or three times more to
implement the right IRM system later on, if you fail to invest
more on an appropriate system at the start-up stage.
HFM: Are there features outside of standard CRM functionality that a fund should think about?
RG: Some features funds should be considering, may not
be available via standard CRM functionality.
This includes account balances for the investor,
investor liquidity tracking, custom field to track
compliance issues, document management and
integration with leading investor portals such as
Preqin.
In addition, watermarking is something that is
not normally seen in standard CRM functionality.
In terms of sending out statements to investors,
there is no other CRM offering watermarking on
documents that are security protected out of the
system. Backstop are unique in this respect.
vice. We have three distinct units in our business, which all
have deep financial industry expertise. This allows firms to
gain a deeper product adoption, increase their workflow and
decrease their number of reporting errors.
Third, having our developers in the same time zone as
support enables us to resolve issues for our clients in hours
rather than days. If a month end number does not tie out,
clients can call into support and expect a clear timeline for
resolution, which would be very challenging if
developers were overseas.
Lastly, and very importantly, the cloud is a
key differentiator. We were the very first cloud
based IRM system to come to market. There
are a number of our competitors that are client server-based. Our true multi-tenant cloud
offering, in the form of SAAS, is more secure,
less risky, more scalable, less complex and less
costly than client server systems. We are truly
multi-tenant. All of our 160 staff cover the same
software, which handles all of our clients. We
also have rapid release cycles that allow us to
release products very quickly.
In one of our surveys, our clients indicated
they have raised 52% more AuM and had a 10%
increase in productivity since implementing
Backstop. It is designed for their business and
the industry as a whole.
The vast majority of our customers that we
have surveyed agree that since implementing
Backstop, they have seen an increase in workflow efficiency,
a decrease in report generation time and in data reporting
errors, and ultimately an increase in investor satisfaction. n
OUR TRUE MULTI-TENANT
CLOUD OFFERING, IN THE
FORM OF SAAS, IS MORE
SECURE, LESS RISKY, MORE
SCALABLE, LESS COMPLEX
AND LESS COSTLY THAN
CLIENT SERVER SYSTEMS
HFM: What does Backstop’s CRM system offer
clients that differentiates it from other systems?
RG: There are four characteristics that really differentiate Backstop in the marketplace. One or
two competitors may be able to claim to beat us at
one of these, but none of them have all of them in
the way Backstop does.
First, industry specific functionality. As previously discussed, this completely differentiates our system
from a generic CRM.
Second, our institutional level of support and client ser-
”
031_032_HFMHow2EU15_Backstop.indd 32
18/09/2015 14:18
SUBSCRIBE TO
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15/09/20
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subs ad_203X273.indd 1
16/09/2015 14:39
INVESTORS
ARE KEY
PETER NORTHCOTT, EXECUTIVE DIRECTOR AT KB ASSOCIATES, TALKS TO HFMWEEK ABOUT THE MOST IMPORTANT FACTORS FOR
EMERGING MANAGERS TO CONSIDER AND WHAT ASSISTANCE HIS FIRM CAN OFFER
Peter Northcott
heads up KB Associates’
London Office. Peter is an
operational consultant and
supports hedge fund startups through the launch
phase as a ‘virtual COO’.
He also helps established
managers prepare for
investor operational due
diligence.
HFMWeek (HFM): What are the key challenges when
starting a hedge fund in today’s market?
Peter Northcott (PN): There are three key challenges I
see my clients and others face when attempting to launch
a hedge fund.
Firstly, the investment strategy needs to be able to deliver risk-adjusted alpha. And this needs to be convincingly
demonstrated either with a track record or, where this is
not available or cannot be published, other very strong evidence of the fund manager’s ability. The manager needs to
put him or herself in the investor’s shoes. There are many
thousands of places to invest money, why should the investor choose that manager?
Secondly, the manager needs to
have money. This is required to
build the business and convince
investors and other stakeholders
that the business has the resources to last at least two years. The
manager will also be expected to
invest some of their available personal resources in the fund. The
money does not necessarily need
to be the manager’s own, a friendly
backer will suffice. However, these
are often thin on the ground and it
adds another layer of complexity
around ownership, control and the
alignment of incentives.
Thirdly, the manager needs to
have access to investors, ideally
through their own relationships.
But this challenge can be worked around by partnering with skilled and well-networked business developers either as a partner or in a third-party relationship.
However, again, this creates the potential for misalignment
of incentives.
community becomes more institutional, they are becoming more discerning. Is the hedge fund a primary source
of investment returns for the investor or a small fraction
of their portfolio looking for an uncorrelated return?
Certainly, there is greater emphasis now on risk adjusted
returns as opposed to pure alpha.
The second requirement, financial resources, has also
always been there. However, backers are now harder to
find. There is also the increasing expectation from investors that fledgling managers can evidence their previous successes through financial rewards and hence have
spare capital to invest in the business.
The third requirement, access
to investors, is now far harder
to meet. When I started in the
industry a decade-or-so ago, a
high proportion of investors were
high-net-worth individuals, family
offices or fund of funds. These
were far more willing to take considered bets on new managers.
Nowadays, a much higher proportion of investment comes from an
institutional origin. These investors will tend to be more cautious,
less willing to invest in new managers, possibly constrained regarding ticket size, more concerned
about risk-adjusted returns and
are answerable to conservative
investment committees or trustees. The increasing influence of
investment consultants continues this trend. In contrast,
the fund of funds sector is now a shadow of its former self
with little new money to invest.
NOT ONLY DOES THE
INVESTOR WANT ALPHA,
THEY ALSO WANT TO KNOW
THAT THEIR MONEY IS
SAFE AND THEY ARE ONLY
RUNNING THE INVESTMENT
RISK SPELT OUT TO THEM
”
HFM: How does this environment differ from recent
years?
PN: The first requirement, to have a provable investment
strategy, has always been there. Although as the investor
HFM: What are the operational requirements currently expected by investors?
PN: As investors become more institutional, so are their
requirements of managers. Having said that, investors do
understand it is not always possible to have a grade-one
infrastructure from day one.
034_035_HFMHow2EU15_KBAssociates.indd 34
16/09/2015 09:43
FUND SERVICES
The basis of the infrastructure is the network of service
providers to the manager and the fund. The development
of this network is a key part of what I do with my clients.
The first step is to have an honest discussion around the
types of investor the manager intends to target and how
this is likely to evolve as the fund grows and develops. We
will then review the investment strategy, the budget and
likely launch size of the fund, the geographies of
the manager, the invested markets and the core
investors.
From this, we can figure out shortlists of service providers, whether tier one, two or three,
and the specialisms needed to meet the manager’s
and fund’s requirements. There are no one-sizefits-all solutions. I will then work with my clients
to assist them with the selection, configuration
and onboarding of the service providers.
Managers also need to ensure their operational
and business processes are robust and this is evidenced with properly drafted relevant documentation. For example, operations and compliance
manuals, risk and valuation procedures and business continuity plans.
Our focus, as with any business, is always on
“what would the client want?”
Not only does the investor want alpha, they
also want to know that their money is safe and
they are only running the investment risk spelt
out to them. They do not want to be running any hidden
operational risks and will work hard during due diligence
to make sure this is not the case.
HFM: What jurisdictions and structures are most popular
for fund domiciles, currently?
PN: Industry statistics suggest that Cayman remains the
default option with a majority market share. Even in Europe,
this has not changed greatly following the advent of AIFMD.
However, the recent recommendations from ESMA regarding extending the marketing passport under AIFMD where
a passport extension to Cayman (and many other offshore domiciles) has been deferred, might
make managers looking to conveniently market
into Europe search for other options. These
include EU-onshore domiciled funds such as
Ireland, Luxembourg, Malta or Gibraltar, or, if
the manager is located outside Europe, a thirdparty European AIFM Manco. Also, the increasing flexibility of Ucits offers another option.
IT IS FRUSTRATING, BUT I
WOULD URGE MANAGERS
TO HOLD-OFF LAUNCHING
AS LONG AS POSSIBLE
WHILE THEY TRY TO BUILD
UP A VIABLE LEVEL OF
ASSETS
”
HFM: What final piece of advice would you
offer to a start-up manager?
PN: It is frustrating, but I would urge managers to hold-off launching as long as possible while they try to build up a viable level
of assets. Once trading has started, investors
have a perfect excuse to watch, wait and see.
The manager will then have to deliver positive returns and market hard at the same time.
Better to get in everything possible and then
launch at a time when managing the portfolio
can be the exclusive focus. It is exceptionally, almost
overwhelmingly hard to recover from a poor start. Wait
and then get it right. n
034_035_HFMHow2EU15_KBAssociates.indd 35
18/09/2015 14:36
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16/09/2015 15:02
S E R V I C E D I R E C TO R Y
Backstop Solutions // US: Patrick Rodgers, VP, Regional Sales Manager & Sales Development // T: +1 312-277-7701 // 233 S. Wacker Dr., Suite
3960, Chicago, IL 60606, USA // EU: Simon Johnson, Managing Director, EMEA // T: +44 (0) 203 764 7090 // 25 Berkeley Square, Berkeley
Square, London, W1J 6HN, United Kingdom
Backstop Solutions Group, LLC is an award-winning provider of innovative software solutions to hedge funds, funds of hedge funds, endowments, foundations, pensions, fund administrators, private equity firms and family offices throughout the United States, Europe and Asia. BSG was founded in 2003 with
the goal of creating the industry’s first Software-as-a-Service platform designed to help firms in the alternative investment management industry operate efficiently, invest intelligently and communicate effectively. For more information about Backstop’s product offerings, contact us at: [email protected]
Bloomberg, Richard Pascoe // Tel: 020 3525 2318, email: [email protected] // John Ash // Tel: 020 3525 2001 // email: jash24@
bloomberg.net
Bloomberg Asset and Investment Manager (AIM) is an integrated suite of solutions specifically designed for buy-side institutions, hedge funds and proprietary
trading desks. These global, multi-asset-class offerings deliver everything firms need for portfolio management, trading and operations. AIM also provides the
tools firms need to manage portfolio and risk, optimize workflow, enhance compliance and lower operational risk.
Eze Software Group, Stuart Field, Director, Head of New Business Sales, EMEA // Tel: +44 2076348532 // email: [email protected]
Eze Software Group is a premier provider of global investment technology to support the front, middle and back office. The Eze Software Investment Suite
addresses the core business needs of the asset management community, including Order Management, Trade Execution & Analytics, Portfolio Analytics &
Modeling, Compliance & Regulatory Reporting, Commission Management, Data Management and Portfolio Accounting. Eze Software partners with more
than 2,000 buy- and sell-side institutions in 30 countries across North and South America, EMEA, and Asia Pacific. Clients include hedge funds, institutional
asset managers, mutual funds, pension funds, endowments, family offices, wealth managers, and broker-dealers across a range of strategies, investment
products, and asset classes. Based in Boston, Eze Software employs more than 1,000 associates in 12 offices worldwide. For more information, visit www.
ezesoft.com
Eze Castle Integration, UK: Dean Hill, Executive Director // Tel: +44 (0)207 071 6802 // Interpark House, 7 Down Street, London, W1J 7AJ US: Vinod
Paul, Managing Director // Tel: +1 212.954.0600 // 529 Fifth Avenue, 7th Floor, New York, NY 10017 Asia: Michael Leung, Director // Tel: +852 3189 0101
// Room 301, 3/F, Chinachem Hollywood Centre, 1-13 Hollywood Road, Central, Hong Kong
Eze Castle Integration is the leading provider of IT solutions and private cloud services to more than 650 alternative investment firms worldwide, including more
than 100 firms with $1 billion or more in assets under management. Since 1995, Eze Castle Integration has developed financial vertical-specific IT solutions including infrastructure design and management (both in our Eze Private Cloud and on premise), telecommunications, business continuity planning and disaster recovery, archiving, storage, and internet services. These solutions are complemented by a broad service organisation that delivers outsourced IT support, including a
24x7x365 help desk, project and technology management services, consulting services and more. Eze Castle has presence in major financial centres including 8
US offices, a Singapore office, and a Hong Kong office in addition to its London office.
Finance Malta, Ivan Grech, Head of Business Development // Bernice Buttigieg, Head of Adminstration // FinanceMalta, Garrison Chapel,
Castille Place, Valletta, VLT1063, Malta // email: [email protected] // Tel +356 21224525 // Fax +356 2144 9212 // web: financemalta.org
FinanceMalta, a non-profit public-private initiative, was set up to promote Malta’s international Business & Financial Centre, both within, as well as outside
Malta. It brings together, and harnesses, the resources of the industry and government, to ensure Malta maintains a modern and effective legal, regulatory
and fiscal framework in which the financial services sector can continue to grow and prosper. The Board of Governors, together with the founding associations: The Malta Funds Industry Association, the College of Stockbrokers, the Malta Bankers Association, the Malta Insurance Association, the Association of
Insurance Brokers, the Institute of Financial Services Practitioners, and the Malta Insurance Managers Association which is also affiliated; its members and
staff are committed to promote Malta as a centre of excellence in financial services and international business.
Global Prime Partners Ltd, Colin Bridges, Sales – Hedge Funds, T: +44 (0)20 7399 9488 // Julian Parker, CEO, T: +44 (0)20 7399 9450
Global Prime Partners Ltd is a boutique Prime Broker providing a highly-personalised specialist service to start up and emerging hedge funds, family
offices, asset managers and professional traders, often overlooked and underserviced by large firms. Our integrated, proprietary technology platform,
allows us to provide the right level of integration and reporting to meet each of our client’s needs. We provide start up consulting, trade execution, clearing,
custody, margin financing, stock lending and potentially introduction to capital.
037_038_HFMHow2EU_directory.indd 37
16/09/2015 12:11
S E R V I C E D I R EC TO R Y
KB Associates, Peter Northcott, Executive Director // [email protected] // T: +44 (0) 20 3170 8813
KB Associates is a boutique operational consulting firm with offices in Dublin, London, Luxembourg, Cayman and New York. KB Associates advises managers on operational issues relevant to the establishment and ongoing management of offshore investment funds. Services include tailored hedge fund
and investment manager start-up services, preparation for investor due diligence (full review to identify potential issues combined with advice on meeting
growing investor due diligence standards) and re-domiciliation advisory services.
Linear Investments, Jerry Lees, Chairman, Linear Investments // T:+44 (0) 203 603 9801 // jleeslinearinvestment.com // Sales Tel: +44
(0)20 3603 9834 // [email protected] // US office: T: +1 (212) 293 1836 // 800 Third Avenue, 39th Floor, New York, NY 10022 //
www.linearinvestment.com
Linear Investments provides Mini-Prime brokerage, regulatory incubation and capital introduction services geared towards smaller/mid-size funds. With
Linears’ aggregated PB relationships, we can provide attractive pricing for our clients. For Capital introduction, Linear provides investment via its B&L Seeder
fund for seed/acceleration capital. In addition, Linear provides outsourced trading through its experienced trading team, encompassing a comprehensive
Electronic Execution platform.
Macfarlanes LLP, Simon Thomas, Partner // email: [email protected] // Tel: +44 (0)20 7849 2444 // Will Sykes, Partner //
emial: [email protected] // +44 (0)20 7849 2294
Macfarlanes LLP is a leading legal adviser to financial services firms, asset managers and investment funds and is an active adviser in the hedge fund
space. We have a straightforward, independently-minded approach. We represent clients ranging from small start-ups and boutique operations to some of
the largest institutions. Our advice is not limited to designing and building the funds. Our Macfarlanes hedge funds team, working together with the other
practice areas in the firm, has extensive experience advising hedge fund managers on all aspects, and at all stages, of the business cycle.
Maples Fund Services, Stephen Lewis, Regional Head of Sales and Relationship Management – Europe // Tel: +44 20 7466 1633 //
[email protected]
Maples Fund Services is a leading independent global fund services provider operating in key onshore and offshore financial centres including Boston,
the Cayman Islands, Dubai, Dublin, Hong Kong, Luxembourg, Montreal, New York, San Francisco and Singapore. Working within these key jurisdictions, we
provide customised fund services to the diverse and sophisticated needs of our clients and their investors. Our expert teams and leading technologies
provide clients with high-quality service and consistent and timely reporting. As a firm recognised internationally by managers and investors for its quality
and professionalism, our clients are confident in the integrity and independence of our policies and procedures, and in the ability of our adaptable solutions to address their ever-changing needs.
netConsult Ltd, Holden House, 57 Rathbone Place, London, W1T 1JU // T. +44 (0)20 7100 3310 // F. +44 (0)870 318 3126 // www.netconsult.
co.uk // David Mansfield, COO // T:+44 (0)20 7100 3310 // [email protected] // Laura Zverko, CMO // T:+44 (0)20 7100 3310 //
[email protected] //
Established in 2002, netConsult is an award winning provider of managed IT Services to the global alternative investment industry. We aim to provide a
high level of technical expertise to our clients combined with a dedication to customer service. Our ethos is based upon designing secure IT platforms
which are manageable over the long term. We are a trusted technology provider to a large portfolio of clients ranging from small start ups to large global
funds. netConsult provides a bespoke service to its clients and provides a full suite of IT services including cloud services, outsourced IT, BCP, virtual CTO
and IT security.
3 8 H F M W E E K . CO M
037_038_HFMHow2EU_directory.indd 38
16/09/2015 12:11
LEGAL ADVICE. PRECISELY CRAFTED.
We have hedge fund specialists in funds and tax who can advise start-ups in a
cost-efficient way. We know the industry, understand investment strategies and
can help start-ups think about the long-term to grow and develop your fund.
We assist hedge funds at all stages of their life cycle.
DAMIEN CROSSLEY
DD: +44 (0)20 7849 2728
[email protected]
DANIEL HARRIS
DD: +44 (0)20 7849 2408
[email protected]
SIMON THOMAS
DD: +44 (0)20 7849 2444
[email protected]
Macfarlanes LLP 20 Cursitor Street London EC4A 1LT
T +44 (0)20 7831 9222 F +44 (0)20 7831 9607 DX 138 Chancery Lane
www.macfarlanes.com
HFM week -1Sept 15_CMYK.indd 1
Untitled-1
03/09/2015
10:34:17
16/09/2015
14:30
Managed
Suite
Managed
Protection
Managed
Communication
One cloud.
Countless
possibilities.
Managed
Security
Managed
Infrastructure
Secure. Scalable. Simplified. Cost-Effective.
The award-winning Eze Private Cloud provides hedge funds with seamless access to
technology and business applications they require to effectively and efficiently run their
businesses. The Eze Private Cloud is the most widely used hedge fund cloud spanning three
continents and supporting thousands of users.
Contact us at 0207 071 6802 (UK) or 800 752 1382 (US)
visit us at www.eci.com
BOSTON | CHICAGO | DALLAS | HONG KONG | LONDON | LOS ANGELES | MINNEAPOLIS
NEW YORK | SAN FRANCISCO | SINGAPORE | STAMFORD
Untitled-1 1
16/09/2015 14:26

how to start a hedge fund in the eu 2015

Transcription

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