Hedge Fund and Private Equity Firms Prepare for Icebergs in Uncharted Waters

Tower Fund Services delves into how proper planning and execution can help hedge fund and private equity investment managers conduct a business that can thrive in any business environment.  

Hedge Fund and Private Equity fund managers are most comfortable with investment related topics and often glaze over the operations, fund structure and service provider aspects of their investment management company plan. Fund managers typically develop their investment strategy and head off to find investors. One can draw a parallel to this as selling tickets to the passengers before building the ship and hiring the crew. This holds true for the most incredible opportunities out there; hasn’t everyone bought their 2016 maiden voyage tickets for Clive Palmer’s Titanic II? Remember, lead times for launches may be longer than anticipated. Investors can be lost if they sit cooling off while you are putting these things in place.

Even if the fund group is going to be one or two people working in a home office, there is a great amount of logistical factors to consider: technology support, trading systems, services providers and disaster planning. The “once in a century” events such as the Northeast recently experienced with Super-storm Sandy are expected to occur far more often. How long can operations be down when power goes out and not have it affect the fund? The answer should be gauged in hours, not days. Taking the time to evaluate what is needed to support the management team now and as it grows needs to be spent early on.

Having a well-documented investment and operations program, with policies and procedures in place will show commitment to the success of the fund. These plans do not have to be elaborate but need to fit the group and what it does. Not having policies and procedures documented and in place is poor planning. Having them and not following them is poor business.

Outsourcing is one solution for managers who are trying to direct investment strategies and business operations at the same time. Which functions should be considered for outsourcing? Most acceptable areas fall into functions that are outside the core strengths of an investment manager such as technology, risk analytics, administration, accounting and reporting. Scalable operational strength is a hallmark of an institutional-quality hedge fund. Investors need to know they can trust the investment part of the process and that falls on the investment manager. Anything else can be outsourced, allowing the manager to focus on generating returns. Other benefits of outsourcing include an improved cost structure and the ability to rapidly scale up (or down) functions such as operations.

Ultimately, getting caught with the unexpected or unplanned event can become more than an inconvenience by having the investment team dealing with non-investment related matters. It can be a non-starter for prospective investors who are looking to come on board. Having contingency plans and the right outsourced service providers in the wheelhouse can make for a smooth voyage.