Money isn’t everything.
Most new fund managers enter the hedge fund landscape knowing that raising capital is one of the biggest challenges to face them and is a crucial factor in fund survival past the initial start-up period. However, there is another challenge facing new hedge funds that can be an enormous contributing factor to fund survival and success in creating a sustainable structure. This is the challenge of creating a back office team that is appealing to prospective investors. With many hedge fund scandals being very public news items over the past few years, investors have increased their vetting processes and want to know that any hedge fund they put their money in has the infrastructure in place to protect their investments. This usually starts with the selection of a prime broker, auditor, administrator, and compliance personnel. For prime broker selection there are a number of very reputable brokerage houses that offer prime broker services. Choosing any of these should be acceptable to your investors. That is usually an easier selection process as the amount of major prime brokers is not an enormous pool to choose from. This is not the case with auditor and administrator selection.
Auditor selection can be somewhat intimidating for a new hedge fund manager.
There are hundreds of audit firms across the country that offer audit services for hedge funds. One avenue is the large national and Big 4 accounting firms that offer name recognition to those trying to appeal to institutional investors. However, choosing these firms comes at a price that is often not palatable to a new start-up hedge fund and the costs can be a significant drain on fund performance and any fund manager’s wallet. For managers that have not raised enough capital to pay for Big 4 prices, or want more personalized service, finding a smaller scale audit firm can seem daunting. Those managers should not be too concerned, they just need to spend a little more time making sure they find the right audit firm. There are a number of quality audit firms that have significant experience in the industry, and can usually offer more personalized service than a larger firm can. Any new manager should make sure to choose a firm that has significant experience in the industry, has an established reputation, and can offer experienced personal service that the start-up fund manager is comfortable with. Usually if a quality audit firm is chosen, even as the hedge fund grows, the manager will develop a level of trust and comfort with their auditors that will develop into a long-term working relationship for many years to come.
Selecting an administrator usually falls along the same lines.
For those who have raised significant amounts of capital, choosing a large national administrator firm may seem like the easy choice. However, this is not for everyone. Some may demand more individualized services than the larger administrators can offer. Others just find that the cost of a large administrator is too heavy a burden on performance or the fund manager’s overhead. For those manager’s there are other options to choose from. A number of CPA firms have significant experience in doing quality fund administration, and there are a several smaller fund administration companies that do this work as well. An experienced fund administrator can be a new hedge fund manager’s most trusted and valuable resource as they are dealing with each other on a regular basis. It is very important to find an administrator that has a good reputation in the industry, and can offer attentive experienced service to the new hedge fund manager. Again, if the right choice is made, a hedge fund manager will find their administrator to be a huge asset not only as they enter the start-up process, but as they grow into a mature stable hedge fund.
Lastly, but just as important as any of the other steps, any hedge fund should make sure they have the appropriate compliance personnel in place.
Unlike the fund auditor or administrator, the compliance personnel can be in-house or outsourced. But as with any of the other professionals selected, you want to make sure the compliance personnel can handle the tasks at hand. In today’s climate, there are many steps a hedge fund must take to comply with SEC and other state agency regulatory agency requirements. Whether it be ADV filings, meeting the firm custody rules, or numerous other regulations, it is crucial to have someone in place that has experience in complying with these regulations. Falling afoul of SEC or other regulatory requirements can lead to headaches for even the most experienced hedge funds, so any new hedge fund would want to ensure they have someone in place that can guide them along the way. Paying for this experience may seem to be a burden at first, especially for a start-up hedge fund, but will be light in comparison to the drain on resources that would ensue if a fund manager needs to deal with extensive SEC audits. Therefore, as with all your other professionals, it is important to choose wisely.
Having a quality team in place will project to your investors that you are prepared for the challenges that come in running a hedge fund.
It also shows that you know that running a fund is not just generating performance, but also adapting to today’s demands in a complex world. Any new manager that does not have a team of quality professionals in place will be at a huge disadvantage in raising capital and convincing prospective investors their money can be safe with you.
Brian Uhlman has a Bachelor of Business Administration from Pace University and a Master of Business Administration from the Stern School of Business at New York University. He is a member of the New York State Society of Certified Public Accountants and the American Institute of Certified Public Accountants. He became a partner in the firm in 2008.
Brian Uhlman, CPA
Partner, Raines & Fischer, LLP