Operational challenges of the new and emerging manager

• Hedge Funds

As managers know, whether a first-time manager or a seasoned vet, launching a hedge fund is a highly ambitious endeavour that comes with a unique set of challenges and potential pain points.

Here, Linear provides some insight on the challenges managers, first time or not, may face along the way:

1. Getting Regulated

Most funds start with selecting their legal partner. Hunt around, speak to your network and articulate what you’re trying to achieve and what you expect from a legal partner. The clearer the vision, the better the working relationship and the pathway to launch will be much smoother. A succinct business plan will also come in handy when comparing apples with apples; vital at this stage when funding is tight.

Invest in a compliance consultant now if you don’t have first-hand experience, to help reduce potential problems further down the line. Your lawyer will work hand in hand with your compliance consultant (if you have one) to guide you through the process of getting regulated. As your fund begins to grow, having your setup right from day one will be a real advantage.

Some start-ups are choosing to work under the umbrella of a third-party platform; this is mostly because regulators approving direct applications are proving to be one of the most significant delays in getting a fund up and running in the current market. If you are considering this route, bear in mind all platforms work differently, so choose carefully when comparing fees and functionality.

2. Your middle and back-office team

Recruiting and retaining a skilled team is essential for a hedge fund’s long-term success. However, attracting top talent early on requires financial resources that aren’t usually available to a start-up or even emerging fund. Yet, having a strong team in place to assist your fund narrative is important when thinking about capital raising and investor relations.

At our recent Emerging Mangers Knowledge Exchange (EMKx) event, all the new managers in the room were opting for outsourced support as the early and mid-stage solution. This can be an excellent arrangement as you and your team can work with the very best talent out there, from COOs to CTOs, but without the burden of a full-time salary and other financial benefits.

3. Infrastructure and Operational Setup

Establishing the operational infrastructure of a hedge fund involves multiple complex components, including trading platforms, risk management systems, and back-office functions. Efficient trading systems and robust risk management are critical for fund operations. Additionally, the back office must handle tasks such as compliance monitoring, client reporting, and trade reconciliation. Your COO will be able to introduce you to a network of third-party operators who are well placed to support you with all these functions. Selecting the right partners and software solutions that scale with the fund’s growth is key. By outsourcing to third-party service providers, such as fund administrators or technology firms, you also reduce the initial capital outlay and operational complexity.

Summary

In 2024, a boutique prime broker such as Linear presents a compelling choice for the emerging fund manager, given our tailored service approach and agility in the dynamic financial landscape. Unlike larger prime brokers, we can offer a highly tailored service, which we believe is crucial for funds still defining their market strategy and building their reputation. We can provide flexible terms and deeper support for innovative trading strategies that emerging funds might employ, and we have no minimum trade size.

Setting up a hedge fund involves navigating several pathways. Strategic use of available resources provides stability and access to expertise to support these challenges. By anticipating and preparing, fund managers can set a solid foundation for their venture and enhance their prospects for long-term success.