Starting a new fund – five thoughts on making the big leap

January 30, 2024

Ortwin Gierhake, director, prime brokerage sales

Imagine a portfolio manager who has had an exceptional run. Let’s call her Jane. She generates great returns for her investors year after year, outperforming in both bull and bear markets. Jane is highly disciplined, surrounded by a solid team, and confident every day she comes to work.

But Jane wants more. Who doesn’t? So, she does what many people in her situation do. She makes plans to start her own asset management business. Jane has no shortage of ideas for how to make money in the markets and knows how she would go about it.

This scenario is fairly common in my line of work. As someone in the prime brokerage industry, I’m used to working with people like Jane, helping them get their new funds off to a successful start.

But I haven’t told the whole story. You need to know about Jane’s painful first year, the struggles raising capital, the tensions in her team or all the sleepless nights she has had because of glitches, paperwork, accounting and a host of issues she never used to think about. This kind of scenario, sadly, is also not uncommon.

Put simply, making the transition from being a fund management star to running an asset management business is fraught with pitfalls. I’m not saying they can’t be overcome – of course they can. But anyone thinking about making this transition needs to go in with their eyes open. If they do, the story I just told can have a very different second chapter.

I was recently part of a panel session on just this subject. We talked about all the things the Janes of this world don’t realise. Here are a few of my contributions to that discussion.

1. Take a cold, hard look at who would be the right CEO

If you’re a successful fund manager, it’s easy to imagine running your own hedge fund. The question is, are you actually able to? Many people in that situation will have only run very small teams, with a few assistants. Suddenly, you have an actual business to look after, which means you’re outside of your comfort zone.

For me, the CEO is key. The person needs to have the right blend of skills and experience. Too often, when a fund is formed, the initial team will pick someone from their own ranks to run it based on whatever is most expedient. If need be, consider a new face, someone external to the start-up team.

2. Think in terms of an elevator pitch

Often, someone who has little or no experience running a business does not understand the importance of crystalising their strategy in a tight 30-second statement. If you can begin to do that – and not ramble – that is progress. As you move into marketing, if you don’t have that, it becomes immediately apparent.

Your fund does not need to be unique. In fact, when I hear people say they have something totally unique, I begin to worry. They are either unaware of industry dynamics or they could be making promises they won’t be able to keep. You just have to have something that makes a lot of sense.

3. Understand the value of independence

The boss should make decisions purely on evidence, not based on prior relationships. I’ve seen situations where the compliance officer or the risk officer is related to the CIO. How is that supposed to work?

If a fund wants to manage its own money, or the money of friends and family, then cosy relationships like that may work. But if you want to get bigger, you need to take on a more professional approach from Day 1. An institutional investor looking at your operation will expect to see that.

4. Focus on team dynamics

Managing the team is a critical function. One of the panellists noted how often he had seen new funds begin to fray because individual managers created their own realities, with too many yes people who were unprepared to push back. It comes down to whether you have someone running the fund who understands how to create the right team dynamic, to cut through the noise and focus on what matters.

There are so many potential ways that stress can enter the scene in the first 12-24 months. A fund CEO needs to have an eye on all of that, getting people to keep talking to each other and being open. Allocators will pick up on these things.

5. Be organised right from the start

There was a question as to whether to hire an investor relations person at the outset. Whether you have someone with that title is not the question. It’s whether you have someone doing all the hard work that an IR person does.

There needs to be somebody who takes initial inquiries, answers the easy questions and ensures that investor leads are handled correctly. At the beginning, we see funds get overwhelmed. They go to conferences and collect cards and feedback, but they don’t take notes and categorise them. After a month, they have lots of leads but they don’t know which are hot, cold or worth forgetting. You need to be organised from the start. Funds have a brief window of opportunity when they are launching. They need to use the time wisely.

Obviously, I’m only scratching the surface. You can’t do justice to a subject as nuanced and complex as this in a short blog. But this gives you an idea of the value that a supportive prime brokerage partner can bring. Successful funds need more than great trading ideas. They need great business leaders. But that kind of greatness can definitely be learned, with the right helping hand.

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