Want to start a hedge fund? It’s easy right? You open an office in Mayfair, employ some of best talent in the industry and get trading. So how difficult can it be? It’s a topic I have debated over with friends and colleagues alike. The Dodd-Frank legislation
is causing the winding down of proprietary trading desks across the board and is presenting new opportunities to the traders this has left behind.
According to Hedgeweek.com, there were 935 new hedge fund launches in 2010. With the prop desk spin-outs, these numbers will surely increase in 2011.
The challenge for the prop spin-outs is that they are now gambling with investor’s money instead of the bank’s and may not have proven track records they can share with prospective investors. In order to attract investors to their hedge funds, IT infrastructure
and technical competence will need to be high on their agendas. Three key areas which will help attract investors are:
- Data accuracy & reconciliation – In fast moving markets it is critical to ensure that all trades are booked, confirmed and reconciled immediately. It only takes one mis-booked future or option trade to cause huge losses.
- Risk management – Managers need to be able to manage and report on their risk in an accurate and timely manner, particularly since investors demand this information with ever growing immediacy.
- Integration & STP – Rather than considering disparate solutions, managers need to be looking at fully integrated solutions from front to back office, providing all users with increased operational efficiency and audit and control.
The challenges for established funds are considerable. For the ex prop traders, it will be even harder. The Credit Suisse Investor Survey revealed only 52% of investors would be prepared to invest in a prop-desk spin-out but only if it had a 3-year track
record. This emphasises the opportunities are there but for new hedge funds it creates a tough and competitive marketplace, the least of whose entry requirements is high level of operational efficiency.
Next time I have the debate about how easy it is to start a hedge fund; I may well have a different angle to my argument. It’s tough, but get it right and the rewards are there for all to see.