Alternative Investment Fund in the USA

May 2016 globalfund www.globalfundmedia.commediaspecial report

2016 Guide to setting up an Alternative Investment Fund in the USA

CoverlineStructuring 1 a GradingCoverline your 2 cloud HowCoverline to assess 3 tax‑efficient provider: critical a prime broker’s hedge fund criteria operational support Forward thinking is the ﬁ rst step

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For more information about our comprehensive suite of services for alternative funds, exchange-traded funds and mutual funds, call 800.300.3863 or visit usbfs.com. CONTENTS In this issue… 04 Introduction By Sunil Gopalan, Chairman & Publisher, GFM Ltd

05 Chapter 1: Legal & tax structuring

08 Structuring a tax-efficient hedge fund Interview with Ron Geffner, Sadis & Goldberg LLP

11 Grading your cloud provider: four critical criteria By Bob Guilbert, Eze Castle Integration

13 Chapter 2: Regulations & compliance

16 Compliance mindset to be set by senior management Interview with Brian Roberts, ACA Compliance Group

19 ODD considerations for start-up managers Interview with Frank Napolitani, EisnerAmper LLP

21 Chapter 3: Selecting service providers

24 Key criteria for selecting a fund administrator Interview with Dennis Westley, Apex Fund Services

27 Chapter 4: Technology considerations

29 Financial budgeting: One chance to succeed Interview with Jeffrey Rosenthal, Anchin Block & Anchin LLP

32 Chapter 5: Marketing & distribution

34 Assess the scale of a prime broker’s operational support Interview with Jack Seibald, Cowen Prime Services

Publisher

Managing Editor: James Williams, [email protected] Managing Editor (Wealth Adviser, etfexpress & AlphaQ): Beverly Chandler, beverly.chandler@ globalfundmedia.com; Online News Editor: Mark Kitchen, [email protected] Deputy Online News Editor: Leah Cunningham, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected] Marketing Administrator: Marion Fullerton, [email protected] Head of Events: Katie Gopal, [email protected] Head of Awards Research: Mary Gopalan, [email protected] Chief Operating Officer: Oliver Bradley, [email protected] Chairman & Publisher: Sunil Gopalan, [email protected] Photographs: ©European Union Published by: GFM Ltd, Floor One, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com ©Copyright 2016 GFM Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up.

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 3 INTRODUCTION Introduction

The hitherto opaque alternative investment funds (AIFs) industry has been making significant strides towards transparency, driven largely by the demands of institutional investors and global regulators, who want to see AIFs deliver clarity and accuracy in their trading and investor reporting methods. This is good news for an industry that is growing in size and scale globally and going retail with liquid alternatives. But how are AIFS set up in the first place? How do traders and prop desk alumni take the first the steps to setting up their own AIFs in the transparent and correct format required by investors and regulators? And, given regulatory differences on either side of the Atlantic, where should these funds be domiciled? To help answer these and other key questions GFM’s Team, led by Hedgeweek Managing Editor James Williams, has prepared a two-part “Guide to Setting up an Alternative Investment Fund”. In this first part we focus on the factors to consider when establishing an AIF in the USA, from domicile issues (Delaware, Cayman etc) to finance and compliance issues, selecting service providers and even marketing & distribution – in short, a complete beginners’ Guide to Setting up an AIF in the USA. The second part, which will be issued next month (June 2016), will tackle these issues from the perspective of setting up an AIF in Europe, and will be accompanied by a one-day seminar in London, details of which can be found on the Events section of hedgeweek.com. This edition of the Guide to Setting up an Alternative Investment Fund in the USA was prepared with the support and expert contributions from the following firms: • ACA Compliance Group; • Anchin Block and Anchin LLP; • Apex Fund Services; • Circle Partners; • Cowen Prime Services; • EisnerAmper LLP; • Eze Castle Integration; • Sadis & Goldberg LLP; • U.S. Bancorp Fund Services. If you would like to participate in future editions of this Guide, or wish to work with GFM on producing other industry Guides, do not hesitate to contact us.

Sunil Gopalan Chairman & Publisher GFM (Global Fund Media) Limited www.globalfundmedia.com Email: [email protected]

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 4 CHAPTER 1 Chapter 1: Legal & tax structuring

The two key questions that will drive fund Remnant doctrine’,” explains James Munsell, structuring decisions are: Where is the a partner at leading US law firm Sidley money coming from and what do you want Austin LLP. “This doctrine stands for the to do with it? proposition that an offshore fund can make This will determine whether the start-up an offering of its securities outside of the manager launches a domestic Delaware US whilst simultaneously making a private LP structure, which might be the case placement of its securities within the US, and if his investors will only be US taxable the two will not be integrated for purposes of investors, or whether he chooses a more the Investment Company Act.” traditional offshore master feeder structure to A Delaware fund must comply with US accommodate US tax-exempt investors and private placement rules and the requirements non-US investors as well as US taxpayers. of the available exceptions from registration “An offshore fund is typically organised and regulation as an investment company in as a corporation and functions as a blocker respect of all its investors, both US and non- of taxable income to the foreign investor. US. An offshore Cayman fund, by contrast, Domestic investors, on the other hand, has to comply with those requirements only prefer the flow through of a partnership in respect of its US investors. as it avoids the double taxation if it was And that, says Munsell, is one factor “that organised as a corporation and they may pushes funds offshore”. get beneficial long-term gains treatment. You always need to analyse where the money Master-feeder structure is coming from, and what the investors’ tax The master fund is where the assets are considerations are. aggregated and traded as a single pool. “Where the offshore investor is domiciled The feeder funds are typically hardwired, will have an influence on where you organise meaning they have no purpose other than to the offshore vehicle. You ultimately want to aggregate subscriptions from investors and minimise the tax consequences to specific funnel capital into the master fund. classes of your investors, which might require “The master fund and Delaware feeder having multiple offshore vehicles to minimise fund for US taxable investors are classified the foreign tax withholding requirements,” as partnerships for US federal income tax explains Jeffrey I. Rosenthal CPA, Partner-in- purposes, while the offshore feeder fund Charge of the Financial Services Group at for US tax-exempt investors and non-US Anchin Block & Anchin LLP. investors is classified as a corporation for US federal income tax purposes,” says Munsell. Delaware master or Cayman master? The two feeder funds provide a dual entry Most new start-ups will look to establish point into the master fund. the classic Cayman master feeder structure, There is, however, a second model for simply because it is so well recognised managers to consider. This does away with and understood by investors and managers the double-layer of transparency where alike. One reason the master fund typically a Delaware fund is feeding into a tax- is located in a tax haven jurisdiction and transparent Cayman master fund and instead not Delaware is because US regulations uses a single-legged master feeder structure, encourage it to organise offshore. also referred to as the ‘Dechert Model’. In “A fund that is organised in Delaware this arrangement, US taxable investors go doesn’t get the benefit of the ‘Touche straight into the master fund.

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 5 CHAPTER 1

But Munsell makes two points as to why be so strict as to tie the manager’s hands,” this might not be optimal for a start-up. remarks Munsell. First, start-ups have a limited amount of time to talk to a potential investor. If they Fund manager structure have to spend time explaining why their Generally speaking, most US investment fund structure is different from other fund advisers organise themselves as limited structures the investor is seeing, they lose partnerships or limited liability companies. precious time that would be better spent If the manager is to be based in New York explaining their investment strategy. City, it is recommended that the investment “Second, the master feeder fund structure adviser that collects the management fee be has proven to be resilient in litigation. The a separate entity from the entity that collects investors are a layer removed from the the carried interest (performance fee). master fund, where the assets are. Leaving This is because New York City imposes aside its derivative nature, if an investor an ‘unincorporated business tax’. A limited seeks to cause the master fund to bring a partnership, or limited liability company that is suit against its investment adviser, he will classified as a partnership for tax purposes, is have difficulty establishing standing, because considered an unincorporated business and he isn’t a shareholder of the master fund. It’s is subject to this tax. a robust structure,” comments Munsell. Fund managers generally will want to avoid paying NYC unincorporated business Offering memorandum tax on the carried interest by directing it to What will often drive timing with respect an entity that does not conduct business to drafting the fund’s legal documentation in NYC. is securing that first investor. Once they There are other reasons to use multiple are in place, the appointed legal counsel entities. Many investment funds are will work with the manager to finalise organised as limited partnerships. Limited the documentation, which usually takes partnerships can have as many or as few from six to eight weeks, from start to limited partners as they choose, but they finish. The most important document is must have at least one general partner, the Offering Memorandum, which has the which controls the limited partnership dual functions of marketing the fund and and manages its business. In a limited protecting the fund and the investment partnership, limited partners have limited adviser from liability. liability. They can only lose the amount Investors are increasingly institutional and they invested. General partners in a want to be able to classify managers by limited partnership have unlimited liability. investment strategy and investment style. It is sensible to isolate this liability in a As such it has become necessary, from a separate entity. capital raising perspective, to be precise in In the US, fees for services (in this case describing the fund’s investment strategy. the management fee) are taxed at ordinary Within a fund’s strategy and style, income rates. Hedge fund managers investors will typically want to see additional generally prefer not to charge performance limitations such as concentration limits (by fees, but rather are entitled to performance position, by sector or some other metric), allocations, which are made at the fund from leverage limits, etc. the capital account of each investor to the “If you are a proven manager with capital account of the fund’s general partner, a strong track record you will be able which is an affiliate of the investment adviser. to command more flexible terms. It’s a Because the fund is a partnership, the negotiation; the manager will want to have tax characteristics of the income of the as much flexibility as possible, while the partnership flow through to its partners. The investor will want the manager to stick to a general partner typically is itself a partnership clearly articulated and limited strategy and for tax purposes, and the tax characteristics style. The limitations have to be reasonable, of the performance allocation flow through though. Markets are constantly changing, the general partner to its owners, the and the terms and limitations should not managing principals. 9

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 6 WE PRACTICE LAW

BUT WE LIVE BUSINESS

Sadis & Goldberg represents over 800 hedge and private equity funds. Above all else, we value our client relationships. Our attorneys strive to provide excellent, consistent, practical and efficient legal services. We distinguish ourselves from other law firms by assisting our clients in the development of their businesses. This comprehensive approach has often earned us recognition as one of the top five law firms in the U.S. for our hedge fund practice. Invest a few minutes to learn what our attorneys can do for your business.

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551 Fifth Avenue, 21st Floor ,New York, NY 10176 212.947.3793 | www.sglawyers.com SADIS & GOLDBERG Structuring a tax-efficient hedge fund Interview with Ron Geffner

When embarking on any new business, Deciding on whether to go offshore will often it’s important that one not only engages be dictated by the perceived level of assets professionals with deep industry knowledge available to the manager.” but also commercial knowledge to support Whilst the manager will be taxed the various stages of business growth. For accordingly based on the profits derived anyone establishing a hedge fund, their from the management fee, there are different needs are going to change as their business considerations in respect to the performance evolves from launch to maturity. allocation fee. Receiving a percentage of the “If a manager launches with USD10m, their profits as an allocation or a fee is also driven tax situation maybe far different compared to by tax considerations, which are primarily some point in the future if the fund’s assets Ron Geffner, partner at Sadis driven by the portfolio construction and & Goldberg LLP have risen to USD200m. If a manager derives harvesting of profits. profit from their management fee, proper When selecting legal counsel to structure structuring of the management entity may the fund entity, managers should consider reduce self-employment tax,” explains Ron making it as viable a commercial proposition Geffner, partner at Sadis & Goldberg LLP, to prospective investors as possible. one of New York’s leading financial services- Last year, for example, Sadis & Goldberg focused law firms. launched approximately 80 new funds. Geffner heads up the Financial Services “The work we do ranges from structuring Group, comprised of 13 attorneys that have the fund product to make it viable to each spent a significant amount of their prospective investors and guiding Sadis & career practicing in the private fund space, Goldberg clients in respect of regulatory, tax providing a compelling roster of seasoned and corporate related issues. The offering legal advisers. documents should reflect a structure that They routinely handle a diverse range matches the intended investment strategy of enquiries providing legal counsel to and management, as well as terms regarding over 800 funds including domestic and liquidity fees, valuation and expenses, to international financial institutions, family name a few, that conform to commercial offices, hedge funds, private equity funds, standards. Based upon the number of hedge venture capital funds, real estate funds and funds which we represent, we have the commodity pools. commercial experience to guide managers Geffner says that the majority of hedge on these issues,” explains Geffner. fund launches in the United States launch He adds that the appointed legal counsel a domestic fund and that the majority should establish a “close rapport” so that the of domestic funds are organised as a client can appreciate the practical guidance Delaware limited partnership. “Nonetheless, they are providing. “A lot of professionals a significant number of our clients establish in this industry have lost touch with their an offshore Cayman master feeder structure clients. What makes Sadis & Goldberg at launch. In this instance, the Cayman unique is that we’ve had considerable master fund is established as an exempted experience working with start-up managers, corporation for US non-taxable investors (i.e. middle market managers and large, public pension funds) and non-US investors. established managers,” concludes Geffner. n

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 8 CHAPTER 1

6 Say a fund has had a profitable year and “If the single member LLC is successful it half the fund’s profits are long-term capital can be converted into a standalone fund with gains and half are ordinary income. In this a track record. Then you will be in a better case, the general partner will be entitled position to spend the money on legal fees to a performance allocation. Fifty per cent and everything else associated with running of that allocated amount will be taxed at a hedge fund business,” suggests Rosenthal. ordinary income rates and 50 per cent will be taxed at long-term capital gains rates. To Tax considerations the extent the fund is generating long-term It is a sensible idea to think about tax capital gains, the lower income tax rate is planning at the pre-launch phase. preserved. For most managers, this will be their most significant appreciating asset. Budget your expenses They may decide to slice and dice the Start-ups can break down their expenses as General Partnership to allocate to a family follows: partnership. If so, it is prudent to do this Fund expenses: Legal organisational as early as possible when the value of costs, audit/tax and fund administration the entity is negligible, and before the and other disclosed fund expenses. It is management entity attracts assets and builds important to have proper disclosures in a track record in the fund. place. For prime brokerage this will include In the United States, where the fund trading commissions, market data fees, manager chooses to domicile will also financing costs etc. These have to be be an important tax consideration. New disclosed in the fund expense section of the York City imposes its own income tax in Offering Memorandum. addition to New York State income tax. Other Generally, the fund expenses should aim states such as Texas and Florida have no to be below 50bps for a new launch. state income tax; moreover Florida has no Firm expenses: Technology, payroll/ estate tax so this makes it quite appealing payroll taxes, healthcare, business insurance, to managers who wish to operate as tax rent and marketing expenses (websites, efficiently as possible. Indeed, David Tepper, marketing collaterals). These expenses founder of Appaloosa Management, and one typically are paid by the manager out of the of New Jersey’s biggest income tax payers, management fee. recently relocated from New Jersey to tax- “Investors have really squeezed on the 2% friendly Florida. management fee. Typically we see a 1.5% Anchin Block Anchin sits with new management fee, not inclusive of founder managers to discuss their short-term and shares. However, we also see approximately long-term tax structuring objectives and 60% of start-ups using a founder share uses a custom tax layering programme class to entice investors, which will range with respect to a fund’s tax allocations. If anywhere from 1/10 to 1.25/12.5% and a manager invests into a long-term trading 1.5/15%,” says Frank Napolitani, Director, fund, which has a significant amount of Financial Services at EisnerAmper LLP. unrealised gains, how does the partnership If at the pre-launch phase the numbers allocate those gains once they are realised? don’t stack up, an alternative is to set up a “We analyse each security such that single member LLC and defer thoughts of a the tax allocations mirror the economic standalone fund. Set up a brokerage account allocations made to each investor. Therefore, and trade your capital as if it were a fund. that new investor won’t be allocated a The benefit to doing this is that it avoids all of portion of those unrealised gains for the fund and manager costs detailed above. securities that appreciated prior to them All too often, managers rush into things. entering in to the fund when the gains or They want to do well and they may get losses become realised. It provides a much things wrong. The market timing might be better allocation between tax and book wrong. Then they panic; they may lose their for the manager and a more equitable tax conviction or start to double down. And arrangement for the investor,” concludes ultimately fail. Rosenthal. n

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 9 Launch with Us Grow with Us We are YOUR Technology Partner

You have enough to think about when launching a new fund. Don’t add Cloud Services technology to the mix. Cybersecurity Proteccons Let Eze handle IT. Global Private Network Eze Castle Integraaon has helped launched Disaster Recovery more than 1,000 ﬁrms worldwide and and so much more can help your startup achieve insstuuonal-grade technology from Day One.

You’re a new fund manager, and somewhere And how exactly do emerging fund on your task list the letters “IT” are probably managers embark on that decision-making followed by a question mark. Odds are, you process? don’t have a technology background, so There are clear indicators to look for as your firm’s Chief Operating/Financial/ and expect from a cloud services provider Compliance Officer (or in some cases, with whom you wish to entrust your firm’s Portfolio Manager), the sudden responsibility technology lifeblood. Among them, these you’ve undertaken as your firm’s de facto IT four: Manager is intimidating at best. The good news is, as a startup, your Experience & reputation IT options are pretty clear. In 2016, there’s Bob Guilbert, Managing When entering into a new partnership, you no better technology decision a new firm Director, Eze Castle want to feel confident that the other side can make than selecting a cloud platform Integration understands you and appreciates your – an infrastructure that has proven benefits unique qualities. Whether that relationship is including scalability, flexibility and robust romantic or professional, the same sentiment security, among others. And while the applies. Your fund’s IT service provider thought of hosting IT offsite was once should have a deep understanding of your a worry for allocators, today’s investors business – that means knowing the ins and find comfort in knowing hedge fund and outs of the financial services industry as well alternative investment firms are focusing on as the technology that powers it. Beyond their investment priorities and leaving the industry experience, take note of a service technology decisions to the experts. provider’s reputation in the industry. If their From our perspective, the cloud is now a resume touts long-standing relationships with tried and tested infrastructure environment clients just like your firm, that’s a telling sign. that is acceptable to the institutional investor community. They have become very Breadth of solutions thorough in their operational due diligence One of the great benefits to leveraging an process, understanding exactly what cloud outsourced cloud provider is that it checks providers provide from an operational, off an important box on your task list. But management and security perspective. what about the bullets under that list? If the This has allowed managers to become provider you select has a limited portfolio much more comfortable at appointing a of services, that means you’ll need to forge cloud provider to deliver an infrastructure additional outsourced relationships and that will perform well in any type of trading end up worrying about how the providers/ environment. services interoperate. Wouldn’t it be easier Where managers need to spend their to engage with a provider that features time is deciding on the best cloud provider solutions and services to complement your to work with, as opposed to thinking about firm’s entire IT foundation? Think: disaster whether or not they should use a cloud recovery, email archiving, information security provider in the first place. planning, telephony services. One provider

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 11 EZE CASTLE INTEGRATION

versus four or five providers? Sounds like a factors in preventing a workplace security simple answer. incident, but let’s not overlook the technology must-haves. To protect your firm and investor Scalability/geographic reach assets, you need robust security measures The here-and-now is important, but it’s not employed across all aspects of your firm’s everything. With everything you’re juggling infrastructure – everything from the desktop at the outset of your launch, it’s easy to put to the data center. And managing all of that plans for the future aside. But it’s a critical won’t be easy. Fortunately, experienced IT mistake if you do. In selecting a cloud providers have the ability to invest heavily services provider, you want a partner who in security protections that can detect and can grow with your firm, even if today that prevent outside cyber threats and can even firm is only made of a handful of employees. help train your staff to ward off internal If all goes well, that number will grow over incidents. time, and you’ll need an IT solution to grow If you can identify a provider who meets along with you. Think about where you’d the criteria above, you’re well on your way to like to see your firm in three to five years. achieving the institutional level of IT today’s How many employees will you have? What investors demand of financial firms. n kind of resources/real estate will you need? About the Author Will you expand to other office locations? With more than 25 years of IT experience, Bob Guilbert Do you want an international presence? is responsible for leading all of Eze Castle Integration’s marketing, partnership and product development functions. Understand from the start whether a cloud The scope of his efforts ranges from maximising the value provider/platform can support these future of the company’s brand to establishing core strategic partnerships and developing new revenue streams for growth plans. the company. Prior to joining Eze Castle, Bob was vice president of business development at Virtual Iron Software -- a venture-backed start-up offering enterprise-class data Security posture center virtualisation software. At Virtual Iron, Bob developed We’re all concerned about the potential for a and oversaw all facets of business development and security breach to wreak havoc in a business channel management. Bob has also held senior marketing and business development positions at Double-Take setting, and preventing such an occurrence Software (formerly NSI), EMC Corporation, and Digital is not an easy feat. Employee awareness Equipment Corporation. Bob is fluent in German and graduated from Northeastern University in Boston with a and training are arguably the most important Bachelor of Science degree in computer science.

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 12 CHAPTER 2 Chapter 2: Regulations & compliance

US hedge fund managers face significant report on the fund’s regulatory assets under regulatory requirements, which this chapter management (‘RAUM’). cannot possibly cover in detail. But there This is defined as being the gross assets are a few key areas of particular import, under management (including leverage), which shall be summarised below. In unlike net assets under management, which addition, this chapter will highlight some of is calculated by subtracting outstanding the key considerations for implementing a liabilities from fund assets. compliance manual; a must-do task for any ambitious start-up manager who intends to FORM ADV incorporate best practices from the get-go Any investment adviser is required to file form and place themselves in the best possible ADV if they have USD150m or more in assets light with prospective investors. under management, or more than USD100m in private fund assets; for example, they might Dodd-Frank Act have USD100m in private fund assets and Already six years in, US hedge fund USD10m in a segregated managed account managers are subject to the Dodd-Frank Wall from a seed investor. Street Reform and Consumer Protection Act If the state where the manager’s principal of 2010. If the fund manager has less than place of business is located does not USD150m in assets under management they subject the firm to examination by state can avoid registering with the Securities and regulators they must also register with the Exchange Commission. Generally speaking, relevant state regulatory authority if they hedge fund managers with up to USD25m in have between USD25m and USD100m. assets must register with the relevant state According to Brian Roberts, Senior regulatory authority. Once the manager has Compliance Analyst for ACA Compliance reached USD150m in private fund assets they Group, a leading regulatory compliance and are required to file two important documents: consulting firm, start-up managers should file Form PF, and Form ADV. Form ADV and get it approved by the SEC before they cross the USD150m threshold in Form PF regulatory assets under management. Form PF includes specific data fields “Going forward, investment advisers are regarding trading and clearing mechanisms; required to submit an annual update and percentage of the reporting fund’s net asset they are also required to update their filings value; turnover by asset class; aggregated on an intra-annual basis if there are certain hedge fund exposures; turnover value items that become materially inaccurate; e.g., of advised hedge funds; exposure to if they move office or experience financial counterparties; concentration of investor base; difficulties. and geographical breakdown of investments. “Form ADV does not have the same According to a white paper entitled level of detail as Form PF, which involves a Practical Compliance and Risk Management number of complex calculations, but it will for the Securities Industry, the SEC and ask for details on things such as: location of CFTC estimate that for smaller advisers, the hedge fund manager, level of regulatory the initial Form PF would take 40 hours to AUM, percentage of private fund assets complete and that subsequent filing would owned by the management company versus take 15 hours to complete. It’s important to external investors,” explains Roberts. note that within Form PF, managers must The form is divided into two sections.

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 13 CHAPTER 2

Part one provides information about past AIFMs running non-EU AIFs. As such, any disciplinary actions, if any, against the manager wishing to market their fund into adviser. Part two summarises the adviser’s Europe would be required to comply with background, investment strategies, services, the National Private Placement Regimes of and fees. the respective EU Member State i.e. the UK. Form ADV is crucial for those who are They would need to file an annual report, going to register or who are classified as namely Annex IV, under Article 42. In the exempt reporting advisors (ERAs); An ERA UK, the AIFM does not need to worry about will not be required to register with the providing look-through information on the SEC but will be subject to certain reporting, Master Fund, which is the case in certain EU recordkeeping, and other obligations. Member States such as Belgium. Finally, whereas Form PF is based upon FATCA fiscal year-end, Annex IV is based on The Foreign Account Tax Compliance Act calendar year-end. (FATCA) makes no distinction between managers. Whether they are a USD50m start- Culture of compliance up or a USD5bn veteran, everybody falls In order to cope with the myriad regulatory under its gaze. reports, start-up managers should try to Investor transparency lies at the heart of adopt best practices and establish a culture FATCA and there are a couple of terms that of compliance, even if at the time of launch managers need to be aware of. The first is they are not going to be SEC-registered. ‘US Indicia’. This means you find something Speak to most compliance specialists in the that doesn’t tally up e.g. an investor has a US industry and the general consensus is ‘if you address and they are but are claiming tax- want to be taken seriously, operate as if you exempt status. This doesn’t necessarily mean are SEC-registered’. there’s anything wrong but it requires the As such, incorporating a sound manager collecting additional documentation. compliance framework is advisable. Most The second is the ‘recalcitrant’ investor. new managers will do this by working with This is where the manager is trying to get an outsourced compliance firm who can documentation on an investor to prove who guide them through all the necessary twists they are but the investor is not providing and turns. The benefit to this is once the that documentation. US fund managers manager does become registered it isn’t a are required to have a Global Intermediary shock to the system and doesn’t require any Identification Number or ‘GIIN’ for every drastic overhaul of compliance workflows legal entity they manage. In turn, they must and processes. “Incorporating best practices ensure that each one of the fund’s trading will allow the firm to be proactive in their counterparties also has a valid GIIN. If the compliance programme versus reactive,” manager does not have a GIIN they will not says Frank Napolitani, Director, Financial be able to do business with their appointed Services at EisnerAmper LLP. counterparties so this is something that must “If you realise that you are going to need be factored in at the pre-launch phase. to become registered with the SEC at some point in the future adopt best practices from AIFMD Day One; even though you’re not obligated The Alternative Investment Fund Managers to do so set up compliance processes and Directive is comparable to the Dodd-Frank Act policies. Establish a culture of compliance so in the US and will only apply to those start-up that when the time comes to become SEC- managers who have visions of raising assets registered you already have the practices in from European investors. In brief, the AIFMD place and it becomes an easy transition,” is an EU regulatory framework that controls emphasises Anchin Block Anchin’s the way that hedge funds are marketed and Rosenthal. He continues: distributed into Europe. “From a marketing perspective, when In the context of this report, US managers investors perform their due diligence you with a Cayman fund would be viewed by can demonstrate that even though you ESMA, the European regulator, as non-EU aren’t yet SEC-registered you have a proper 17

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 14 ACA Compliance Group provides a broad range of global regulatory compliance, cybersecurity and risk, GIPS® verification and performance, and technology solutions to hedge fund managers.

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For more information, contact Nick Batinich at [email protected] or Kent Wegrzyn at [email protected]. acacompliancegroup.com

16186_ACA_Hedgeweek_Ad.indd 1 5/3/16 10:58 AM ACA COMPLIANCE GROUP Compliance mindset to be set by senior management Interview with Brian Roberts

Although it might not necessarily be top- Security Program, including an incident of-mind for a start-up manager, if they are response plan and a business continuity serious about building a proper business plan, but as Roberts explains, these “tend to then establishing a culture of compliance be separate documents due to the technical from the get-go is important. details they contain”. A new hedge fund manager that is not With respect to portfolio management, required to register with the SEC “doesn’t this section of the compliance manual might necessarily need to have as detailed a detail how the manager generates trading compliance manual as an SEC-registered ideas, makes investment decisions, the types investment adviser,” says Brian Roberts, of research employees utilise, as well as Senior Compliance Analyst and Hedge Fund Brian Roberts, Senior how that research is retained. Practice Associate for ACA Compliance Compliance Analyst and Hedge According to Roberts, an adviser’s Group, a leading regulatory compliance and Fund Practice Associate for filings policy should “detail what sorts of ACA Compliance Group consulting firm. filing obligations are applicable to the firm, However, unregistered fund managers still what type of monitoring will be in place to owe their clients a fiduciary duty and are determine when new filing obligations arise, subject to a number of legal and regulatory and who will be responsible for making requirements, including prohibitions on those filings.” insider trading, restrictions on principal On average, hedge fund managers transactions, anti-money laundering and anti- that plan to register with the SEC should corruption laws. expect a well-drafted compliance manual “One of the things we often hear when to take four to eight weeks to produce. talking to start-ups is whether they can get Written policies and procedures have to be a template off-the-shelf compliance manual,” tailored to the individual manager because says Roberts. “That is something the SEC their contents will be contingent upon the frowns upon. They don’t want managers manager’s investment strategy and the way to have cookie-cutter compliance manuals; the manager intends to operate its business. they want them to be customised to address Adopting policies that have not been compliance risks of the specific manager customised in this way is ill advised. implementing the policies and procedures.” “Take the valuation policy,” Roberts says. Firms like ACA Compliance Group can help “This is going to look very different for a managers map out all of the regulatory issues specialist private lending strategy compared they will need to comply with, as well as to a long/short equity strategy that trades describe in the compliance manual how they publicly listed securities. Trading policies are going to carry out those responsibilities. and procedures will also vary from manager For hedge fund advisers that plan to to manager.” register with the SEC, the compliance Finally, senior management should manual should include, among other things: take care to set the compliance tone from policies and procedures covering portfolio the top down. “Having buy-in from senior management; filings and disclosures; custody management is a key part of running and safeguarding of assets; maintenance a hedge fund business. Having them of required books and records; trading, attend trainings and remind employees valuation, and a code of ethics. of the importance of strong compliance Registered hedge fund advisers should is advisable, regardless of the size of the also plan to adopt a Written Information manager,” concludes Roberts. n

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 16 CHAPTER 2

14 compliance programme in place. Don’t just “People trip up in this area quite often,” think about where you are today. Think about says Roberts. “The information you are where you want to be.” required to keep is very specific and managers sometimes overlook certain Implementing the compliance manual items. For example, you have to specify Once the compliance manual has been in the memoranda whether each trade is finalised and adopted, a training element is discretionary or non-discretionary, who it normally required. This is where working with was that recommended the trade and who an outsourced compliance partner becomes executed the trade. These things tend to fall beneficial. According to ACA Compliance through the cracks.” Group’s Roberts, this training element is two- The SEC will request all such record fold. Firstly, training those who are going to keeping documents if they visit a manager be responsible for implementing the policies to conduct an examination. If the manager is and procedures; determining exactly what unable to produce the documents in a timely their individual responsibilities will be in fashion – within 24 to 48 hours – then the SEC implementing the compliance manual. may get upset and issue a deficiency letter. Secondly, training employees about their It is advisable that as part of a business obligations under the compliance manual. continuity plan, the manager has an off-site “Mostly, this second type of training server to store the investment books and will focus on employees’ responsibilities records so that if something were to happen under the code of ethics with respect to to the principal office (i.e. flooding or fire) personal trade reporting, reporting gifts and they wouldn’t lose anything. entertainment, political contributions, code of conduct, and whistleblowing. Chief Compliance Officer “The above would relate more to start- One question that tends to come up at ups who plan on getting SEC-registered start-up manager conferences is when immediately. But new managers that plan on the manager concerned should appoint a becoming SEC-registered should be aware that Chief Compliance Officer (CCO). Firstly, all they’ll eventually need to adopt similar policies SEC-registered investment advisors have to and procedures,” says Roberts. “Hedge fund have a CCO in place. And whilst it is not advisers that are not SEC-registered still owe mandatory, start-up managers with aspirations their clients a fiduciary duty, and are subject of becoming a serious registered fund to restrictions on insider trading, principal management entity should probably think transactions and cross trades, and a number about having a CCO in place early on. This of other activities. These advisers should could be someone who performs both the consider adopting, at a minimum, policies that CFO and CCO role or the COO and CCO role. address these risk areas.” Ongoing compliance review Books and records Registered advisers are required under Rule Again, this only applies to managers who 2064-7 to conduct an annual compliance become SEC-registered but it is useful for all programme review. This will include an start-ups to be aware of. It is a detailed rule overview of the compliance programme, and is referred to as Rule 204-2 under the seeing what controls work and testing to Investment Advisers Act. see if there are any violations. Again, this The kinds of records that the investment is something that outsourced compliance adviser will be required to retain include: experts will typically help managers with. corporate documents (formation documents, “Most of our consultants have former financial and accounting documents); trading regulatory experience and we tend to do a lot and account management records; proxy of mock SEC audits for our clients. For those voting records. There is also a rule called who are not registered, it is good practice the Order Memorandum Rule that requires to review the compliance manual each year investment advisers to keep records on all of and update it; basically a lighter touch version a fund’s order and trades that they execute of what an SEC-registered manager will be on behalf of their funds. required to do,” concludes Roberts. n

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www.eisneramper.com EISNERAMPER ODD considerations for start-up managers Interview with Frank Napolitani

Operational due diligence or “ODD” are systems that demonstrate the manager is arguably three of the most important institutionalising their business,” explains words for any start-up manager hopeful of Napolitani, who heads up EisnerAmper’s attracting new investors. Such is the level new launch advisory business. of expectation among institutional investors Launch AUM is a big driver towards today that even if the manager only has how the organisation is set up on Day One. USD20-30m in AUM and outsources the CFO Napolitani says that for larger launches of function, operationally they still must look USD100m plus, they will generally have a and act like a serious outfit. CIO (founder), two to four analysts, a CFO/ As Frank Napolitani, Director, Financial CCO, Head of Operations, Controller and

Services at EisnerAmper LLP, comments: Frank Napolitani, Director, Executive Assistant. The will generally “You have to be buttoned up from a front- Financial Services at outsource their OMS, PMS/Middle Office and middle-back-office, legal, compliance and EisnerAmper LLP General Ledger and IT (hard/soft plus cloud, infrastructure standpoint and have answers telephony). to things; for example, on the outsourced For smaller launches of under USD100m, CFO point, they might want to say, ‘I can’t it is acceptable to for the CIO to have up afford a CFO currently, however I have to two analysts and to outsource the CFO, outsourced the function to XYZ who have a as well as have a compliance consultant great reputation and this is how they support to help the manager operate their business my operation.” with a “culture of compliance” as if they were For many new managers, they often find already SEC registered. They would typically themselves wearing multiple hats. They rely on the technology capabilities of their might be the CEO, portfolio manager and fund administrator and prime broker: EMS/ CFO rolled into one. For those that can OMS, real-time/T+1 reporting etc. afford to hire a CFO from day one, however, When outsourcing any function, however, the pressure is far less. In Napolitani’s from an ODD perspective it is vital that view, taking on the CFO role internally is a someone in the firm takes responsibility for massive learning curve and one of the main the oversight and delivery of that function challenges for new managers. internally. “These are smart people and it’s important Since the Madoff scandal, the ODD not to let ego get in the way. The smartest industry has grown dramatically. Prior to this, guys are the ones who sit back, listen investors would focus their attention on the and talk to a number of different service fund manager’s pedigree, investment process providers and consultants in the space to and performance. Today, those remain key formulate a plan. The heads of ODD that characteristics, however, the quality of the I speak to, who oversee approximately front-middle-back-office operations, in addition USD100bn in hedge fund investments, say to legal, compliance and infrastructure, play that it’s okay for a manager not to have the an equally important role. CFO in place, on Day One. Start-ups are minded to appreciate that “However, if they say they plan to hire a ODD is not just a one-time exercise with CFO after they reach USD100m, the heads prospective investors. It is a repeatable of ODD are going to hold them to it. They process with investors following up on ODD will expect to see the addition of staff and with managers on a quarterly, bi-annual

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 19 EISNERAMPER

or annual basis. As Napolitani is keen to • Cybersecurity: Outsource this function emphasise: “ODD is the back-end of the to your IT service provider; it is what investment process for an allocator and it is they specialise in. Don’t try to do it on NOT meant to ‘throw away good investment your own. You’re built to raise capital and talent’. The research teams of allocators are manage capital. looking for good talent and will have a good A key element of any ODD questionnaire feel for the internal ODD process to identify will be determining who the fund’s gaps early in the process. service providers are. Investors need “Three key traits of high quality ODD are: total reassurance that there is sufficient Honesty, Transparency and Knowledge.” independent oversight but also that the A Deutsche Bank survey of 2012 found firms carrying out this independence – for that 70% of ODD teams have explicit veto example the PB or fund administrator – have power in the investment decision-making robust operational processes in place, strong process. Some of the reasons to veto an balance sheets etc. This really addresses the investment included the following: counterparty risk issue that any ODD team • Lack of independent oversight will want to get a handle on. • Unwillingness to provide transparency Name brand recognition is one of several • Valuation issues key considerations when choosing service • Unsatisfactory service provider providers, says Napolitani. engagement “I talk to bulge bracket, middle market and • Insufficient personal wealth invested in boutique firms because managers come in the fund all different shapes and sizes and strategies. “The survey also highlighted that 63% of A small manager might not be suitable for a investors won’t reconsider investing in a fund bulge bracket prime broker but more suitable previously vetoed by the ODD team. You get for a boutique prime and vice-versa. The one shot to do this. It is therefore important institutional investor community knows who that all the processes, pre- and post-trade, are these providers are,” comments Napolitani. in place so that the manager looks institutional Technology capabilities will also need to from Day One,” remarks Napolitani. be considered. Also, what is the knowledge To help with this, he advises managers and experience that the service provider to complete the AIMA DDQ for their fund can bring to the table? Everyone on the management company. This will give new planet can support long/short equity but do managers an insight into what they can they have the expertise in supporting bank expect and makes for a useful preparation debt strategies for example; can they book exercise. The questions contained within the trades, value the assets and provide AIMA’s DDQ relate not just to the fund administration, audit and tax services to such strategy, but the business as a whole. complex strategies? Napolitani says that some of the more “Another factor is Partner Interaction/ common areas that prospective investors ask Employee turnover. Make sure the partner about in their ODD process include: you are speaking to will be covering you • Straight through processing: of trades going forward and try to find out what the flowing from the OMS through middle firm’s employee turnover looks like? You office to settlement at the PB; don’t want to have a new team supporting • Cash movements: must have two you for auditing and tax purposes each year, signatures and backup for cash requiring you to bring them up to speed movements (management fees, fund on your investment strategy, organisational expenses, redemptions, etc.); structure, etc. • Compliance: the dual CFO/CCO role. Most “I would also recommend determining time is spent on financial functions by what the service provider’s client base is the CFO in smaller organisations versus – how many funds do they support, what compliance functions and as a result types of funds (strategies) are they, and how compliance suffers. Create a committee long have those fund clients been on their within the firm for checks and balances books – and finally, their breadth of services,” within those different compliance functions. concludes Napolitani. n

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 20 CHAPTER 3 Chapter 3: Selecting service providers

Choosing appropriate service providers Prime brokerage considerations is one of the cornerstones to creating a There are many criteria to think about when successful hedge fund business. drawing up a short list of potential Prime All too often, start-up managers try to Brokers but some of the more salient issues appoint the big, bulge-bracket names but to consider would tend to include: alignment this is folly. Unless the manager in question of interests; experience of the PB team; has existing relationships with the likes soundness of operational infrastructure; of Goldman Sachs, and is launching with robustness of technology offering; platform US250m or more in AUM, they will have stability; custodian and capital introduction precious little chance of becoming clients of capabilities, and finally the financial strength the industry’s leading asset servicers. of the PB. So the first thing to consider at the pre- launch phase is: who would be the best Have a proper business plan service providers to support you relative to Before a new manager embarks on meeting the size of your fund? with Prime Brokers, they should ensure that “If you’re launching a USD20m fund you they have a solid business plan in place. may not need the largest law firm but select They need to evidence that they have a a law firm that has the experience drafting long-term vision, and a roadmap to grow fund documents and understands fund the business over successive years. The related issues. Mid-market and smaller law business plan should also clearly articulate firms are fine for small start-ups. But don’t the investment strategy. hire a family attorney or a law firm that has “The more information we have the better experience with only a limited number of prepared we are when it comes to making a hedge funds; they may not be current with decision on whether to make a proposal to the recent developments affecting the industry,” manager, and what the pricing of that proposal asserts Anchin, Block & Anchin’s Rosenthal. should be. Just blindly meeting a manager and With respect to the auditor, managers then agreeing to take them on as a client is should select one that can offer a cost- not something that we would ever entertain,” effective service and has a good industry explains Jack Seibald, Global Co-Head of reputation and experience. If the manager Prime Brokerage, Cowen Prime Services. intends to become a registered investment By having a proper business plan, it will adviser with the SEC, the auditor needs to give the sales team at a prime brokerage be registered and inspected by the PCAOB the ability to gain a deep understanding (Public Company Accounting Oversight of exactly what the manager plans to do. Board). They will need to know precisely what asset “The same applies to the prime broker class(es) will be used in the strategy, the and fund administrator. Partner with those types of securities to be traded, degree that are the most cost-effective for your of leverage, and the extent to which the business needs and have deep knowledge strategy will employ short positions. with respect to the securities that you will be BTIG has built a prime brokerage division trading in the fund. There should also be a on the foundation of helping emerging cultural fit,” adds Rosenthal. managers launch their funds. It has Given that the Prime Broker and Hedge assembled a group of experienced prime Fund Administrator are integral partners, they brokerage professionals, many of whom will be the focus of this chapter. have spent the majority of their careers at

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bulge bracket Prime Brokers where they’ve strategy is one that is not conducive to a garnered experience working on complicated revenue stream required to cover the cost fund strategies and structures. of servicing that account, obviously it’s not “We educate ourselves in every facet of the going to be worthwhile pursuing.” manager’s business including understanding When asked what some of the typical the fund’s strategy, the manager’s longer term mistakes made by new managers when business plan as the fund grows and even selecting a prime broker, Press comments: the names of other service providers the fund “A mistake we have seen is assuming is engaging (Legal, Auditor, Administrator, the brand name of a provider alone will etc.),” explains Justin Press, Co-Head of Prime attract investor capital. It is important Brokerage at BTIG. Justin Press, Co-Head of Prime to work with service providers that have “We also want the manager to explain Brokerage at BTIG experience in Prime Brokerage, but hedge how they manage and monitor risk, as well fund managers should make sure their as gauge how they will handle Compliance. interests are also aligned with the Prime Lastly, we ask a pertinent yet simple Broker with which they partner. A fund can question, ‘What is important to the fund in be overlooked if they are managing a selecting a Prime Broker?’ By understanding USD50m fund on a Prime Brokerage what the fund is looking for in their Prime platform where the average client size is Broker, we can make a determination if USD500m‑plus. BTIG’s platform is aligned with the needs “The manager needs to assess if the and requirements of the manager.” Prime Broker is truly interested in a long- term partnership and not just short term Prime brokerage agreement profitability.” All of this information then goes into the producing the Prime Brokerage Agreement. Capital introduction “We make a proposal based on the The one thing on every manager’s mind parameters provided to us by the manager,” when selecting a Prime Broker is capital says Seibald. introduction. Some Prime Brokers have The pricing structure offered by the prime made a bigger commitment to this service in broker, as detailed in the Prime Brokerage terms of the size of their capital introduction Agreement, has become a more sensitive teams but the number of people allocated issue in recent times because of the impact to do this work doesn’t necessarily equate of Basel 3 regulation. This is causing banks to to a successful capital introduction service; more closely scrutinise how they are utilising sometimes it is more of a marketing tool to their balance sheets. As such, every Prime try and win new mandates. Broker needs to have a clear understanding “Our approach is that an investment with of the revenue stream they can expect to get a manager has to stand on its own merit. It from any new client they onboard. After all, ought to be based on the manager’s strategy there are only a limited number of ways that and verifiable performance track record. It’s a PB can generate revenue. important to understand that in our capital “One is through trading activity and the introduction effort we represent the asset other is through the financing revenue that allocator, not the Prime Brokerage client,” might accrue through the use of leverage says Seibald. and the use of shorting. If a sales person This is an important point. Managers brings in a prospect we encourage them to tend to assume that capital introduction is fully understand the investment strategy and a value-added service that is there to serve whether, from Cowen Prime’s perspective, them and deliver investors on a silver platter. it’s worth allocating resources to an The reality is quite different. account,” says Seibald. “Don’t rely on Prime Brokerage capital “It’s important for us to be intellectually introduction teams to be the primary source honest with ourselves and our prospects. of asset raising. Rather, rely on them for We have to be mindful of the resources consultative services; pick their brains on we will be allocating to any new manager the trends they are seeing, what are they and properly service an account and if the hearing from allocators, to set your business 25

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 22 LEAP ABOVE THE REST Apex gives you time to focus on producing Alpha

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For more information contact [email protected] www.apexfundservices.com APEX FUND SERVICES Key criteria for selecting a fund administrator Interview with Dennis Westley

If one were to sum up the key role of a hedge support regulatory, financial and tax reporting? fund administrator, it is to independently value “Technology is especially important when a fund’s assets, allocate those assets correctly the strategy trades derivatives and other to individual investors, and accurately report complex instruments, has a high turnover the allocations to those investors. of trades, and uses multiple counterparties,” Investors want an administrator, not explains Westley. the manager, to independently calculate the fund’s assets and monitor the books Product expertise and records, and to report the fund’s NAV. This is more a function of the administrator’s For any new start-up manager, it is worth quality of staff than system capabilities, but remembering that when selecting the most Dennis Westley, Managing in essence the two go hand in hand. appropriate administrator they understand Director (North America), “Here in the United States, for example, that whilst the administrator will ordinarily Apex Fund Services Apex has a lot of experience with impact perform a range of middle- and back-office lending and peer-to-peer lending. If a functions, at a high level they: manager planning to launch such a • Independently value the Fund’s assets strategy were to go to an administrator that • Act as the Fund’s official books and records predominantly supports equity strategies, • Independently report to the Fund’s investors. they may not be the best fit.” “Managers are well advised to view a fund “Therefore, managers need to be sure administrator as a partner and an extension that the administrator has a track record of their business,” states Dennis Westley, of experience in supporting their particular Managing Director (North America), Apex product and has staff that are able to Fund Services. “A fund administrator should be recognise potential issues and deal with them selected that has the capacity to scale as the correctly. Ultimately, the fund administrator fund and manager grow and the manager’s should be well versed in the manager’s strategy evolves. They should present a value product, structure and strategy,” says Westley. proposition to potential capital, in particular institutional investor capital.” Cross-border service capabilities Such is the nature of hedge fund For managers starting out, a standard investors today that most will expect the onshore-offshore master-feeder structure manager to perform thorough due diligence might only apply for the first couple of years. before appointing the fund administrator. In Managers today have to raise assets globally Westley’s view, key areas that managers and may eventually find an investor that likes should focus on include: their strategy but doesn’t want to invest in • Technology their Cayman feeder; perhaps they would • Product Experience prefer a UCITS product, or an AIF product. • Internal Control Environment “Managers might start off with a simple • Cross-border Service Capabilities offshore product, but they often expand • Financial Stability and Ownership Structure. their product mix based on global investor With respect to technology, there will demand. To that end, the manager will want be various issues for managers to seek to know that his fund administrator can assurances on. For example: Can the fund support him. At Apex, we have 26 offices administrator meet the fund’s objectives? Can globally that can deliver proper cross-border it provide flexible investor transparency and capabilities,” concludes Westley. n

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22 up as best as possible,” emphasises and sign off the financial statements. EisnerAmper’s Frank Napolitani. Legal counsel will be involved in drafting To clarify, a capital introduction team will the legal documentation that outlines the need to understand the investment strategy investment guidelines the manager needs and verify the relationship between the to follow. And it’s within those documents performance track record and the investment that the administrator sets out the fund’s strategy. This will allow them to articulate it criteria; what the fund expenses will be, how to an audience that has an interest in that they will be allocated, what the investment type of strategy. parameters are. Subscription documentation “Our capital introduction team truly digs prepared by legal counsel is another key in to a manager’s strategy and results document that the Hedge Fund Administrator and effectively becomes an extension of needs for transfer agency as investors the manager so that when they go out to allocate into the fund and redeem out of it. the marketplace they are fully prepared to Managers should therefore do their answer any questions and concerns that homework to determine the types of hedge investors might have,” says Seibald. fund strategies that the HFA works with, how long they have worked with those funds, the Fund administrator considerations size of the funds, the suite of middle-office There are in excess of 100 different Hedge reporting services that are available, and Fund Administrators so uppermost in any also look at the assets under administration: manager’s mind has to be ensuring that the have they grown in recent years, have they one they finally opt for will be the one that plateaued or have they contracted? can best support their strategy without issue. As such, technology capabilities are a key People factor in the selection process. Where this This relates to the size of the team and is most valuable, and where managers will the amount of employee turnover. Before typically find variations among administrators, a manager appoints a Hedge Fund is technology that facilitates the delivery of Administrator they should talk to people data to the manager and to the investor. The within the firm, find out how long they have manager needs the ability to draw down data worked there, what the attrition rate is, and ad hoc in real time for portfolio management what the overall work environment is like. purposes. Does the administrator have “One question to consider is, ‘How many a portal for supporting this? Equally, for resources does the administrator have for investor reporting, does the administrator supporting a fund’s tax requirements?’ Tax provide an online portal for investors to and regulatory services are an important access fund documents, K1 documents etc.? consideration for the manager because the Every administrator will, of course, say administrator is really in the best position to that they have great technology. But that keep on top of regulatory changes such as means nothing. The key is validating it. So AIFMD, FATCA, Common Reporting Standards, talk to clients of those administrators on the Form PF, etc,” suggests Bob Kern, Executive short before arriving at a final decision. Find Vice President at U.S. Bancorp Fund Services. out how they receive their data and what the quality of reporting is like. Financial strength The stability of a small administrator is not Expertise going to be as strong as an administrator Ascertaining a Hedge Fund Administrator’s with scale: i.e. one with USD100bn or more expertise should not be underestimated. in AuA. A firm at that level has made a After all, they are the one who ties all the commitment to technology, to its people, and service providers together (legal, prime will have the ability to support the manager brokerage, auditor, custodian). When the through thick and then. As such, any new manager’s auditor conducts its annual manager should evaluate the strength of audit it will work with the Hedge Fund the administrator’s balance sheet and its Administrator to get the information they financial stability; especially if they are a non- need in order for them to prepare the audit bank owned organisation.

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“Financial stability of the Administrator is managers that run a shadow book tend critical. One of the things you want to avoid to be the largest players where they will after selecting a Hedge Fund Administrator hire two administrators, one to perform the and launching your fund is to discover that primary duties and the second to perform the HFA has collapsed for one reason or shadow record keeping. another. It impacts the manager’s ability to At the middle end of the spectrum, raise capital, is transparent and concerning says Westley, managers would hire a to the investors and places operational team internally to provide oversight on the strain on the Investment Manager to replace administrator and at the lower end of the the Administrator,” says Dennis Westley, spectrum (start-ups) managers would rely Managing Director (North America), Apex exclusively on their appointed administrator Fund Services. to produce the books and records, with little The HFA’s ownership structure should or no oversight. also be considered. There are plenty of “The recommendation, from my excellent bank-owned fund administrators perspective, is to be somewhere in the but there might be some restrictions on the middle but there is a cost implication to this counterparties they work with. “Independent, and it also depends on the size and strategy private administrators have the ability to do of the fund. A USD50m equity long/short unrestricted work with counterparties, which fund with five investors and limited trading is important to know,” adds Westley. would not necessarily require an internal team to perform shadow accounting. Consultative approach “But for a more sophisticated portfolio A good HFA is one that engages with the that trades more frequently and maintains a manager in a consultative manner. Do they higher number of investors, it may be in the have the right technology and the right talent manager’s best interests to have a second in place that understands the strategy, asset pair of eyes in place; not necessarily to do class, and speaks the same language as full shadow accounting but to employ some the asset manager? After all, a manager oversight of the books and records on a might initially launch with a global macro regular basis to ensure they are accurate and strategy and then diversify his product the Administrator is performing as expected.” offering over time to include variants of the strategy, different fund structures, managed Key performance indicators accounts and so on. Knowing that the HFA Rarely do managers ask for references will support them on this journey, not stymie before appointing an administrator. In Kern’s them, has to be confirmed at the outset. experience, this is something that managers Often, new managers get carried away should pursue. But asking to speak to a with their AUM targets and will try to couple of existing clients, running similar gravitate towards tier one HFAs. But Kern sized strategies, on the quality of service, the believes they should take a more considered accuracy of calculating the NAV and reliability approach to selecting the ideal administrator: of fund reports etc., can be beneficial and “If they are going to launch with less offer the manager invaluable insights. than USD100m they are unlikely to court the “Managers should be asking the fund interests of tier one administrators. What administrator about their service metrics we have seen is certain asset managers and service quality management and their that do go down that road are not receiving reporting programme. Certain items like the expected level of service. Tier one when do they get K1 documents out? When administrators sometimes do not have the are they delivering their monthly reporting appetite for start-ups and these managers package? What are the value-adds that are tend to find that out fairly quickly when they provided in that package: timeliness, NAV enter into initial discussions.” accuracy, etc. “We often share service metrics with our Shadow accounting clients to demonstrate the level of service we Whether start-ups should do their own are providing to help them optimise their fund’s shadow accounting is open to debate. Those performance,” says Kern in conclusion. n

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Cloud technology disaster that might occur at anyone of the The scale of a manager’s IT infrastructure data centres we operate out of.” will largely depend on the type of trading The Eze Managed Infrastructure is strategy. A quantitative market neutral essentially Infrastructure-as-a-Service. If the statistical arbitrage fund is likely going to start-up manager has a specific application spend more capital on front-office portfolio that they want to use it can be hosted within management, risk management systems and the cloud without issue. The manager may server storage capabilities than a specialist want to run a CRM package for example, credit strategy that trades infrequently. or a risk package alongside Eze Managed Either way, investors will expect the Suite, and benefit from having one cloud manager to have a well-oiled machine in provider offering the entire computing place: well-established workflow processes, infrastructure. operational controls, and, as far as possible, “We have interwoven Eze Disaster front- to back-office system integration. Recovery into both our cloud offerings. One of the most popular routes We believe it’s important, especially for to establishing a sound technology Eze Managed Suite. With Eze Managed infrastructure is to appoint an outsourced Infrastructure, however, we give clients the cloud provider. It is cost-effective, and option of having disaster recovery because it allows the manager to benefit from the manager may not choose to make an economies of scale; after all, a cloud application highly resilient,” says Guilbert. provider that supports hundreds of different Third party risk is a key component of hedge fund strategies will be able to share an investor’s due diligence so the manager insights that a manager running their IT should seek assurances before selecting operations internally could never hope to a cloud provider that they will allow the achieve. manager to execute their strategy without Eze Castle Integration has become a issue. In other words, the technology pioneer in this space with its Eze Private provider must check the box in the eyes Cloud. It consists of three core components: of potential investors and demonstrate that Eze Managed Suite, Eze Managed they will be able to mitigate as much of the Infrastructure and Eze Disaster Recovery. manager’s operational risk as possible. The Eze Managed Suite includes the “Investors are asking questions to give fundamental email, file services and back- them the confidence that the manager has up capabilities that any organisation would chosen an institutional-grade cloud provider. expect to derive from a cloud provider. Have they gone through the necessary steps Managers can readily access emails from to create the right IT environment, the right mobile devices and utlilise file services when technology, and put the right protections in on the road. It is, as Bob Guilbert, Managing place? Clearly from an institutional investor Director at Eze Castle Integration explains, perspective, if the manager selects a cloud “a multi-tenanted cloud that allows you to provider like Eze it gives them reassurance operate anywhere seamlessly. that the fund’s technology infrastructure is “We’ve also incorporated disaster recovery enterprise-quality and robust,” says Guilbert. into Eze Managed Suite. The way we’ve Some of the points to consider before constructed the cloud means it will continue selecting an outsourced technology provider to operate as normal, independent of any include:

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 27 CHAPTER 4

• Reputation There are three main areas of insurance • Technology capabilities – managers should that a start-up manager should consider validate this with their own due diligence before going live: 1) Financial Insurance, 2) • Security Prowess – are they using the Employee Benefits and 3) General Insurance. highest levels of security and encryption There are two main forms of financial to store and protect clients’ data on insurances to be aware of: the cloud? Do they have the latest • Professional indemnity insurance certifications? • Directors and Officers insurance. With respect to security, Guilbert says that Professional Indemnity insurance covers Eze Castle Integration uses encrypted professionals for their legal liability to tunnels to ensure that no one can see what compensate other parties (generally their data is flowing through. clients) for any losses they suffer as a “We are not security specialists per se so result of the professionals’ breach of their we leverage numerous third parties. One in professional duty (known as professional particular is eSentire, which monitors traffic liability). coming in to and out of our cloud. They Directors & Officers insurance cover provide a managed service to continuously directors and officers for their legal liability monitor activity. If they see an attack (i.e. to compensate other parties for the loss a rogue IP address) on one of their hedge which they suffer as a result of any wrongful fund client’s networks they will lock down act, error or omission committed by the that IP address for all of their other hedge directors and officers. ‘Other parties’ in this fund clients. context could be shareholders, the Company, “We have well over 400 clients using the competitors, employees and liquidators. Eze Managed Suite which is protected by eSentire. These security layers allow us to Premiums & level of liability fully protect them, should one manager be The above are well-established insurance the focus of a targeted attack. In addition, we policies that have been used by fund use the highest security measures in our data managers for decades and as such are fairly centres: biometrics, locked cages, segregation straightforward to price. Cyber insurance, of client data and so on,” confirms Guilbert. on the other hand, is a recent development. Hackers are stealing data not assets, and Cyber insurance data doesn’t have a ‘value’ per se. Cyber insurance is becoming increasingly “The potential liability that relates to the popular among managers of all sizes as theft of data and breaches of confidentiality the threats of cybersecurity rise in number is a key area of concern for our hedge and sophistication. Managers have to guard fund clients. against this and although it might not be a “With respect to the premium, we top priority on Day One, start-ups should at approach the broad marketplace with our least make plans to have cyber insurance in clients’ permission and solicit quotes from place once the fund’s assets and investor different insurers. There’s no clear direction base start to grow. right now as to how insurers are pricing “It is definitely a key area of focus for premiums for cyber insurance as the the majority of our hedge fund clients. I underwriters continue to work to understand would say that at least 75 percent of our and evaluate cyber risk exposures with clients have approached us to discuss respect to hedge funds,” notes Borys. cyber insurance, and all of them are doing One factor that can help determine the the necessary due diligence to assess their premium is ascertaining the amount of firm’s cyber exposures, evaluate their current personally identifiable information (PII) a cyber security protection and controls, and manager has stored on their server. Another formulate a comprehensive incident response important factor will be the fees or revenues plan in the event of a cyber breach,” explains generated by the manager. Ron Borys, Managing Director, Crystal & “Those are probably the two main factors Company, a leading New York-headquartered considered by insurers underwriting hedge strategic risk and insurance advisor. fund cyber liability risk. Keep in mind that 30

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 28 ANCHIN BLOCK & ANCHIN Financial budgeting: One chance to succeed Interview with Jeffrey Rosenthal

Planning a hedge fund launch is a serious “It is therefore important to forecast what business. People need to decide whether you anticipate the management fee income they are truly ready, both financially and is going to be based on the assets raised, mentally, and be confident in their investment and calculate what the overhead expenses strategy. This may sound trite but all too often will be. Most start-ups are not likely to raise start-ups rush to get a hedge fund in place significant capital in the first year that the without clearly thinking everything through. management company will be running a “It is a significant undertaking and should profit. So it’s important the manager knows not be treated lightly. From a financial what the overheads will be, deduct them perspective the first thing to do is to create from the expected management fee and a budget broken down into three categories: Jeffrey Rosenthal, Partner- have a clear idea of what the deficit is likely in-Charge of the Financial budgeting for fund expenses, budgeting for Services Group at Anchin to be,” asserts Rosenthal. manager expenses and finally budgeting Block & Anchin LLP for personal expenses,” says Jeffrey I. Personal expenses Rosenthal, CPA, Partner- in-Charge of the Given that a start-up manager will be putting Financial Services Group at Anchin Block & a significant amount of his personal wealth Anchin LLP, a full-service accounting, tax and into the fund, he needs to also make sure advisory firm. there is enough personal income to cover living expenses. Fund expenses The majority of people who start up hedge With respect to budgeting for the fund, funds know how to trade but don’t focus on one needs to factor in the anticipated all the associated costs of running a hedge management fee and professional fees; fund business. The reality is they are going audit, tax, legal and administration expenses. to be paid last, after their employees, so “The expenses are not radically different for they need to know what will be left in the a USD10m fund versus a USD100m fund but honey pot. they will significantly impact the rate of return Start-ups would like to launch with of a smaller fund,” says Rosenthal. USD100m or more and be confident that the amounts remaining after expenses will Manager expenses leave them with plenty of ‘burn capital’ “One of our roles is to educate the manager, to grow the business. But raising capital not only from the fund perspective but also remains a challenge. Rosenthal relates how, from the manager perspective. The Fund when he meets start-up managers they will Manager also has to absorb a fair amount of often reveal that they are going to raise expenses. The 1% or 2% management fee USD50m or more. “At that point I always ask: needs to cover business overheads: office ‘What happens if you only end up raising rent, employee salaries, IT costs, insurance USD20m?’ and so on,” adds Rosenthal. “Start-ups have to anticipate what the The management fee is what the manager threshold needs to be before launching will survive on so factoring in all these costs the fund. Adopt the mindset that you’re at the pre-launch phase is vital as it will help only going to raise half the target capital. determine how much Day One capital they You have one shot to do this so plan it out will need to launch with. properly,” concludes Rosenthal. n

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28 there is generally a minimum premium that an underwriter will look to charge for the issuance of a cyber policy. “Our hedge fund clients are typically considering limits in the range of USD5m to USD10m. We are currently seeing premiums in the range of USD6,000 to USD8,000 per million, so managers considering USD5m in coverage will be looking at an annual premium in the range of USD30k to USD40k,” confirms Borys. There are two key components that will go into a cyber insurance policy.

First party costs These will typically include: • Privacy notification costs. If there is a breach and personally identifiable information is stolen, the manager has an obligation to provide notification that such a breach has occurred to the US regulatory authorities. • Business interruption costs. If the providers are doing the same; they need to manager’s systems are taken offline ask the right questions to get assurances as a result of a cyber breach (maybe a that their service providers are protecting DDoS attack) it could prevent them from their information that the manager could be trading and potentially impact the fund’s liable for in the event of a cyber breach. performance These questions might include: How • Cyber extortion. This is where someone are your servers protected? Who are you penetrates the manager’s network and consulting with to stay up-to-date with the threatens to do something unless they best solutions and tools? What is your pay a ransom (often with Bitcoins). disaster recovery plan? What would you do “Some of the other first party costs would if a breach occurred and you had a system include: forensics, accounting, extra expense outage, which would directly or indirectly coverage to bring systems back on line, affect the fund? public relations costs that might arise to “Three key insurance coverages that every protect a manager’s reputation following a fund manager should ask of their service breach. The coverage is written to respond provider are: to the potential expenses incurred by • Errors and Omissions – broad coverage the manager who could be liable to pay for any actual or alleged wrongful act damages as a result of a security breach,” committed by the service provider in says Borys. rendering or failure to render services to The second component of the coverage the manager or fund; is written to respond to the broader liability • Fidelity bond coverage – coverage for the associated with claims made against a fund’s assets from theft by an employee manager for damages associated with of the service provider (i.e. the PB or a breach of their network, including custodian); unauthorised access to confidential or • Cyber insurance – coverage if the fund personally identifiable information. or its investors’ confidential data is exposed or stolen, or if the service Check your service providers provider experiences a network outage In addition to focusing on the manager’s that adversely impacts the fund or own protections and systems, they should manager as a result of a cyber breach,” also ensure that their third party service concludes Borys. n

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 30 Your true partner to progress

Circle Partners is a global, independent fund administrator providing a comprehensive range of fund administration, corporate, legal and reporting services to investment funds.

www.circlepartners.com

CIRCLE6007 adv US EastCoast Report_210x297.indd 1 11-05-16 15:24 CHAPTER 5 Chapter 5: Marketing & distribution

A recent survey by Preqin revealed that 60 “Fund managers do a bad per cent of hedge funds have less than USD100m in AUM and that only 5 per cent job of communicating their of hedge fund flows go to funds operating point of differentiation to below that AUM level. investors and the investor’s There are now approximately 15,000 hedge funds in the industry, meaning perception of their fund falls investors are being bombarded by different below reality. This results in funds every single day and thousands over a manager doing countless the course of a year. They probably meet with 200 or so, engage in follow-up meetings meetings with investors yet with around 40 and allocate to two or three. failing to secure capital.” As such, there is one certainty that US start-ups can be sure of when launching Don Steinbrugge, Agecroft Partners their new fund: the ability to raise capital is exceptionally difficult and competitive. So what can start-ups do to put select a hedge fund. The message must be themselves in the best possible position to concise, linear and consistently delivered. succeed? Reaching out to their appointed One of the biggest problems is that fund Prime Broker(s) will help to a certain extent, managers do a bad job of communicating provided they have a capital introductions their point of differentiation to investors and team in place, but this should only be done the investor’s perception of their fund falls as part of a wider, strategic marketing and below reality. This results in a manager distribution strategy. doing countless meetings with investors yet Don Steinbrugge is the founder of failing to secure capital,” says Steinbrugge. Agecroft Partners, a prominent, award- The third component of raising assets winning third party marketing firm located in is the marketing strategy. This requires Richmond, Virginia. He says that managers reaching out to a wide selection of investors need to excel in three areas: and setting up qualified meetings. It also • Quality of product requires making sure that the manager • Quality of message has the right follow-up strategy in place for • Distribution strategy each prospect. Building momentum in asset A manager’s fund will make the first screen growth is more important than asset size, as a high quality product by investors if says Steinbrugge. performance is strong, however their due “I’d much rather represent a hedge fund diligence process goes much further than that is going from USD50 million to USD175 that. Investors will also consider factors million than one that has been at USD800 such as: organisational structure, the quality million for the last few years.” and make-up of the investment team, the He says that new managers shouldn’t hit investment process, risk controls, appointed the market until they are certain they have service providers and fund terms. a product that is competitive and that their “Secondly, they have to have a refined marketing message is well refined as first marketing message that clearly articulates impressions are vital. their differential advantages across each “Part of the challenge is identifying in of the evaluation factors investors use to the first place who to call on. There’s no

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 32 CHAPTER 5 definitive list of investors that a manager “Investors are not inclined can refer to. It takes a lot of hard work building out that list. The more prospects to invest with someone who that a manager can identify the more does not have significant meetings they are going to get with investors skin in the game – it that are interested in their strategy,” adds Steinbrugge. raises questions about the Thomas S. Kreitler is a managing manager’s conviction in the director and leads the hedge fund/public market strategies fundraising team at Eaton investment strategy and Partners, which works with some of the their level of commitment.” largest pension funds, endowments and Thomas Kreitler, Eaton Partners insurance companies. Kreitler has a deep understanding of what institutional investors look for when investing in hedge funds, and whilst the majority of its hedge fund relevant but should not be an immediate clients are well established managers with consideration for new managers; rather, it solid track records he is able to share some should be part of the long-term business important insights for any start-up manager plan. Nobody can build a brand overnight. to consider. In the first two years of operating, investors The first criteria an investor will consider are going to place more stock on the criteria is that the fund manager can provide clear cited above. A manager who might have evidence of alpha generation; this can also a fantastic website, lots of good thought- include a performance track record if the leadership papers and a strong social media start-up manager previously worked at a presence yet can’t articulate their strategy hedge fund manager and ran a percentage concisely is going to face an uphill task. of the firm’s AUM. “Branding, in my view, shouldn’t Secondly, whatever the strategy is, it be a priority for a start-up manager. should be focused on a clear, robust market I wouldn’t recommend that opportunity – for example, the prolonged they allocate limited resources price dispersion and inefficiency within a to branding at an early capital raising stage,” market sector. Typically, institutional investors says Kreitler. will already be well versed in the opportunity and potentially interested in making an Investment edge allocation. Without question, a manager’s marketing “Thirdly, the group’s strategy needs materials have to clearly articulate their to be highly differentiated. It can’t just be investment edge. They should be high a standard trading strategy that looks like caliber, well written materials that reflect the countless others in the marketplace. At core attributes of the hedge fund. After all, Eaton, we tend to work with managers in the presentation deck will act as a roadmap more niche strategies who demonstrate a for those meeting the prospective investor so clear expertise in their chosen area. These the more complete and rehearsed it is the could be sector-focused strategies that better the presentation will be. provide a unique set of market exposures to “Oftentimes, managers like to talk about the investor. their latest great trade; that may be okay “Fourthly, the principals of the firm need for the second meeting but not the initial to have significant personal investments in meeting. When making that first presentation the fund. Investors are not inclined to invest and introduction to an investor, the manager with someone who does not have significant needs to give a broad overview of the skin in the game – it raises questions about business, including the background of the the manager’s conviction in the investment principals and their investment edge. If it strategy and their level of commitment,” gets to the point that there’s interest in a explains Kreitler. more granular discussion that’s fine but a The concept of establishing a brand is proper relationship and rapport needs to be 35

U.S. GUIDE TO SETTING UP AIFs GFM Special Report May 2016 www.globalfundmedia.com | 33 COWEN PRIME SERVICES Assess the scale of a prime broker’s operational support Interview with Jack Seibald

Choosing the best prime broker to support they build out the business, yet still benefit the strategy is vital, but will depend on the from an institutional-grade infrastructure. manager. A portfolio manager spinning out Managers get the benefit of an of a hedge fund with an established track experienced buy-side trading desk that record and experience in running a pot of has relationships across a large number of capital, will likely want to appoint a tier one brokerage firms, and is able to offer broader prime broker: the likes of Goldman Sachs, insights into stocks, sectors, and different Morgan Stanley; especially if they are markets. This solution is proving attractive as launching with significant AUM. They may, well to larger sized start-ups and in general however, look to others as an alternate, or to managers looking to reduce their fixed second, prime to mitigate risk and to provide Jack Seibald, Global Co-Head overhead. certain outsourced services. of Prime Brokerage, Cowen A prime broker’s technology capabilities A true start-up, however, will likely be Prime Services should always be taken into account. Even launching with limited capital and is going to if Cowen acts as the second or third prime be more cost sensitive. For them, a boutique broker it can provide consolidated portfolio prime or Introducing Broker that can provide reporting regardless of where else the fund’s a comprehensive suite of services is more assets are held in custody. appropriate. “That’s a service that is not readily made “One of the things we have long prided available by prime brokers,” says Seibald. “In ourselves on is that regardless of the that respect, we can support a wide variety of manager’s size and strategy, based on the start-ups from the very small to the very large.” menu of services we offer, we can satisfy He adds that when appointing an any number of needs they might have and introducing broker, a principal question for tailor those as the requirements evolve,” any manager should be which bank(s) the IB explains Jack Seibald, Global Co-Head of uses to custody the fund’s assets. Prime Brokerage, Cowen Prime Services. “It’s very different if the bank is Pershing, “If it’s a start-up, we offer all of the Merrill Lynch or Goldman Sachs versus a services the manager would need, including smaller, lesser known bank. Also relevant is the ability to place client accounts with a the range of services made available to the number of the most highly regarded global manager. A prime broker can differentiate banks that offer the asset protections and itself based on the level of operational institutional recognition managers and their support it provides. That could include the investors desire. The breadth of our prime caliber of the client service representatives brokerage solution is meant to help position that deal with all the issues involved in a manager as institutionally sound from trading the portfolio (trade breaks, getting Day One,” hard to borrow stocks for shorting etc.). Cowen also provides an outsourced “It also includes the type of portfolio trading solution that is fast becoming a key reporting made available to the manager; factor in winning new business. This solution whether that’s end of day reporting or live allows new managers to limit the number of To see a paper that Cowen intraday reporting for portfolio management have produced on Launching a n front-office personnel in the early years as Fund click here… purposes,” concludes Seibald.

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33 established before the manager starts getting too detailed. “Managers should aim to discuss how they built the business, and their plans for growth that are consistent with optimal performance. If they do a poor job of highlighting what their value-add is as a fund manager, they’re not going to make it through the starting gate,” asserts Kreitler.

Patience is a virtue The cycle of going from an initial investor meeting to securing investment dollars can be a long one, especially if the manager is targeting institutional investors. As such, it is advisable to prioritise prospects. Identify those most interested in the fund and think about what will help them in their decision making process. managers we work with initially said Investors might provide positive feedback ‘No’. This demonstrates that perseverance after a meeting, but they’ll likely be seeing pays off.” another manager or two later that day, another couple the next day and so on. As Experience counts the days turn into months, managers should Make sure it’s a product specialist going out ensure that investors are regularly contacted. to do the first meetings with investors rather This requires putting proper processes in than the portfolio manager. It’s imperative place to do follow-up emails, answering that they speak exactly like the portfolio additional questions or points of clarification. manager, however. The manager will need to be proactive Also, whoever that product specialist is, because an investor will quickly forget don’t hire them as a junior member of staff. about them. That person is going to have a major impact “It is important to follow up with investors on how an investor views the hedge fund. and understand what the next step in their They will impact the brand so they should due diligence process is. If not, the positive be well-polished, extremely knowledgeable initial impression you made will get diluted people. A junior inexperienced staffer will not by all the other meetings that investor command any credibility. will be having with other managers,” says Then, if the meeting goes well, the Steinbrugge. “Also, think about the nature of founding partner or portfolio manager (if they the investor. Some investors are interested are two different people) should attend the in all types of strategies, whilst others have second or third meeting with the investor to very specific requirements. If you’re a CTA give them a clearer picture of the firm. and you’re approaching a FoHF manager “I think it’s hard for just one individual to that has a preference for long/short equity represent the firm and penetrate the market managers, you’re going to be wasting as they build a brand. Yet at the same your time.” time, investors will be looking at the firm’s At Eaton Partners, Kreitler says that AUM month to month and if your AUM is the average sales cycle from initial not growing investors will be reluctant to meeting to allocation can take anywhere allocate. If it is growing, they tend to jump from 12 to 24 months or longer. “Our on the bandwagon. So by penetrating the research reveals that the typical fund marketplace, delivering a good product and raising process requires an average of 42 a good presentation, this will help to build a touch points; meetings, emails, phone brand. Ultimately success breeds success calls etc. Additionally, over 25 per cent in the hedge fund industry,” concludes of investors who have invested with the Steinbrugge. n

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