Start up hedge funds need more than an insightful investment strategy to succeed. Especially in their early days, having the right team in place can make the difference between convincing allocators that their faith in you will pay off or that they’d be better served putting their money somewhere else.
Perceptions aside, the right team is a foundation of any successful business, one that’s structured in the most advantageous way, markets effectively, is administered correctly and, in general, has its house in order. And though many investment managers don’t think of it this way, their fund is a business first and foremost. Just like any other, it must manage payroll, pay taxes, rent offices, maintain IT platforms, provide client service and attend to the myriad other details that go along with running a company.
All of this means the right team accomplishes two things: It makes your business work, and it demonstrates to prospective investors that you know what you’re doing. Allocators may love your investment strategy, but if they see even a hint of trouble in your approach to compliance or sloppiness in operations, they’re likely to pass you by.
So how do you put together the right team? This was one of the questions explored at Bloomberg’s recent Hedge Fund Forum in London which brought together industry experts to explore operational challenges and strategies for emerging managers.
While there’s no one-size-fits-all approach, panelists agreed that the answer lies in evaluating each prospective role, whether it can be filled by an individual or requires an organization, and deciding whether it’s appropriate for them to work internally or externally.
Determining whether a role should be internal or outsourced can be difficult. Certainly, cost is one of the things you’ll weigh when deciding whether to hire an employee or an external consultant. But here again, savings can come at the expense of perception.
For example, until your fund reaches the $200 million to $250 million range, you may be tempted to hire a consulting CFO. However, panelists warned that many prime brokers regard external CFOs as a lack of commitment by the fund’s manager. That, in turn, may make them skittish about doing business with you.
This is where strategy comes in. The process of putting together a team involves more than sketching out an organizational chart and filling in each box. It’s important to understand all of the work that needs to be done, how each area impacts every other, and how the org chart will evolve over time.
So you could argue that during your initial six months it’s wiser to spend money on an internal operations manager than a CFO, since investors will want to see proper compliance materials and complete legal documentation in place. You’ll move the financial role in-house once you’ve achieved certain goals.
Such arguments must be made in the context of a strategy, one that looks beyond your fund’s first year of operation. One of the earliest things on your to-do list should be developing a staffing plan that assumes success and is ready to evolve as necessary, documenting which roles will be brought in-house, which will remain external, and when those changes will happen.
As you develop this plan, experts at the event emphasized the need to remember the importance of operations. Almost reflexively, financial professionals tend to worry about investment-related matters before anything else, but in truth, the Chief Operating Officer’s role may be the one to fill first.
After all, the COO is the person charged with making sure all of the tasks that make up your business plan get done in the right way, at the right time. They’ll be sure your compliance manual is complete before potential investors review it as part of their due diligence. They’ll check that your IT platform is implemented and tested when you’re ready to use it. They’ll ensure that you’re only interviewing marketing agencies with the right experience. And, in general, they’ll make certain that you can devote as much time as possible to your investment strategy and fundraising.
Finally, never forget that you outsource function—not responsibility. Your firm will always need qualified people on staff who can review the work of your law firm, accountants, fund administrators and anyone else involved in making both your business and investment strategies succeed. Lay out your staffing plan as early as you can, and in as much detail as possible. Be ready to show how it will evolve as you grow. Balance cost with appearance and understand which roles are critical enough to be inside.
As the panelists explained, there’s no one-size-fits-all approach to putting together a team for a start up hedge fund. But if you surround yourself with people who understand not only the financial industry’s dynamics but also the processes involved in taking a fund from vision to reality, you’ll have a team that you can count on.