According to Hedgeweek, last year in Q4, 96 new funds launched compared to 71 in Q3, giving the industry cautious optimism heading into 2023. Often, these emerging funds are tempted to launch with minor investment in operational support. Yet, no one launches a fund intending to stay small.
Changing dynamics for new launches: You need a partner to grow with you.
To that point, in April, Bloomberg reported that this year “The biggest new hedge funds are raising more money, at levels not seen since before the pandemic.” However, these new launches are facing impediments in how they establish their business and operations. According to Barsam Lakani, head of prime services sales at Jefferies Financial Group Inc., “It’s a different environment…Launches today need to embrace outsourcing and separately managed accounts, [and] be work-from-home flexible…”
Historically, firms have operated on the assumption that they can build out their platform as their business grows; however, given the new dynamics of establishing a fund, there are critical decisions to be made to set your fund up for success – establishing the legal entity and fund structure, raising capital, and choosing service providers. Of course, one of the most significant decisions is your technology partner.
What are the essential technology requirements for a hedge fund?
- Portfolio & Investor Accounting
The accounting system is the core of the investment platform. To launch successfully, you will need a system that can support not only your original hedge fund but also all the fund types and structures you may invest in down the line.
Additionally, fund managers need to allocate investment profits and losses, as well as fees and expenses, accurately among all limited partners. This requires that investor accounting be tightly integrated with portfolio accounting to increase efficiency, improve accuracy, and ensure timely delivery of reports and statements to investors.
- Trading Platform
Hedge funds are actively trading and employ sophisticated, complex strategies to maximize alpha. This requires you to leverage a platform to automate the process for directing trades to brokers and enabling tracking through the entire trade lifecycle to settlement.
- Performance Measurement & Risk Management
Fund managers require the ability to measure the performance of the overall portfolio, as well as down to the individual asset level, using industry-standard methodologies. It is also important to understand the sources of performance – why the fund performed as it did – to make informed buy-and-sell decisions and communicate your strategy to investors.
Investment managers should have tools to quantify the extent of market, credit, and liquidity risk in their portfolios, as well as to understand the sources of risk and how to remediate it where necessary.
- Data, Data, Data
- Warehouse: Investment activity generates voluminous amounts of data. Offices need a central repository to maintain, organize, and analyze the data flowing from their transactional systems.
- Reconciliation: Automating the reconciliation of position and transaction data from brokers and custodians with your internal accounting data can improve accuracy and enable daily reconciliation so managers always know where they stand.
- External data sources: The portfolio accounting system should be able to pull in market, pricing, and reference data from external providers.
- The Managed Services Option
The technology decisions you make today will have a big impact on the direction of your firm. That is why many new launches opt for the managed services model for their technology and operations. This option enables you to:
- Establish your business faster and empower your back-office
- Maintain flexibility and agility as your business grows and your needs evolve
- Leverage specialized, professional operational expertise and reduce hiring needs
- Update your platform as needed with minimal business disruption
- Maintain applications and data offsite with failover measures for business continuity planning
The lure of launching a hedge fund is the opportunity to apply your skills and knowledge to generate exceptional returns. It is certainly not the opportunity to manage a complex technology and operational infrastructure. You need a platform that can meet your needs from day one and help you grow throughout the life of your business.
 Hedge fund launches on the up heading into 2023. March 31, 2023.Hedgeweek. Retrieved from: https://www.hedgeweek.com/2023/03/31/320065/hedge-fund-launches-heading-2023 (2023, May 12)
 Parmar, H., et al. April 21, 2023. “Billion-Dollar Hedge Fund Startups Rise to Pre-Pandemic Levels.” Bloomberg. May 12, 2023. Retrieved from: https://www.bloomberg.com/news/articles/2023-04-21/billion-dollar-hedge-fund-startups-rise-to-pre-pandemic-levels#xj4y7vzkg?leadSource=uverify%20wall. (2023, May 12)