One of the world’s most successful hedge fund managers captivated delegates at GAIM Ops Cayman with an enlightening discussion of how he would change things and do things differently if he was launching a fund in today’s markets. By examining what had worked and what challenges had to be overcome, the assembled managers were given a glimpse into the holistic fund of the future.
While the closed sessions at GAIM Ops Cayman are strictly off the record, his observations provided a useful insight into the changes seen after decades building his business. With an industry landscape of over 10,000 funds, for start-ups today, the key question is whether you are going to try and get rich too quickly because then you run the risk of cutting corners. Launching now compared to 20 years ago, things are a lot easier if you have a brand name or come from a big shop. Other generational changes in the hedge fund business include the social media revolution which allows you to effectively create your own buzz.
Clearly the cost of getting started today is enormous and initially you are locked out of getting any institutional capital. But on the other hand, today it is easier to some extent because there are people that can help you build your infrastructure and marketing people to get you in front of the decision makers.
Another challenge for the emerging fund is the people in place from day one expect to be partners in the firm. The considered view is that when starting out, you will tend to attract different people than the big funds, which is great if the people you hire at the beginning are able to grow with you.
More advice is to learn the business to get a better appreciation of what your functional heads are doing and also so you can ask the right questions. Some years ago there was a great deal of concern about managers being required to register with the SEC. An alternate view is embracing best practice and voluntarily registering. That demonstrates the firm has nothing to hide and will impress institutional investors.
It is an accepted fact that people don’t like change and senior industry figures recognise change is needed but that requires buy in. Compliance is everything today and it’s important that your compliance department can get things done. For that reason the compliance department needs your absolute support. If the rest of the employees understand you will always back your CCO it provides the power that is needed to get things done.
Whether the changes in regulatory compliance have made the hedge fund industry safer for investors is a matter of debate. World class compliance is the goal, but in a highly regulated business, this will cost billions and clearly large funds have higher compliance thresholds.
Looking at how asset flows have developed, two key watershed events were identified for hedge funds, with the fallout from the dot com crash, providing the required volatility for huge growth in funds of funds, multi manager funds and real estate hedge funds. The other big boom for hedge funds came from the zero interest rate period. Today, asset flows are seen as more circular, with greater allocation to asset classes that are performing well, but not really a case of new money being added to the industry.