Capital raising is the single biggest challenge for more than 80% of emerging hedge fund managers, a new Hedgeweek survey has found. Almost half say it is tougher to attract investor inflows now than it was 12 months ago, with new funds also taking longer to launch. And this is despite performance data that shows funds from emerging managers continue to outperform those of established players.
Taking a punt on a new, untested hedge fund – even where the portfolio managers have a track record – is always a risk. Add in today’s deteriorating economic backdrop and heightened market volatility and it is little wonder investor caution is growing.
So what can start-up hedge funds do to alleviate their fundraising headaches?
Investment skill and operational excellence
A compelling investment proposition is one key to loosening the allocator purse strings. Another, especially as the industry has institutionalised, has been to meet investors’ increasingly taxing operational demands.
Operational due diligence examinations are now central to the investment allocation process. Passing muster isn’t easy though for small start-up managers with limited budgets. Operational rigour takes expert staff and an advanced technology infrastructure. Which is why more firms are turning to outsourcing.
While the Hedgeweek survey reported that 17% of all hedge fund firms plan to outsource more of their operational functions, among cost-constrained emerging managers that figure is 29%.
One of the most important outsourcing relationships hedge funds have is with their fund administrator, a relationship that for many managers is expanding over time.
Faced with complex regulatory compliance requirements, clients’ digital service expectations, and competitive pressures to mitigate risk, improve controls and reduce operational costs, funds are turning to such third-party experts for help. Administrators are extending the collection of middle office, investment administration, fund accounting and transfer agency services they offer in response.
The capabilities available are wide and varied. They can span investor registration, trade processing, reconciliations, cash management, valuations, performance analytics, performance and incentive fee calculations, profit and loss allocation, NAV processing, and a mix of regulatory compliance, tax and client reporting. For hedge fund firms it is an opportunity to get the robust, dedicated operational support they need while freeing their resources to focus on performance and growth.
Much depends though on selecting the right service provider. Administrators don’t just need to offer an appropriate service mix. They need the expertise and infrastructure to deliver those services to investment allocators’ increasingly high standards.
The technology solution
A fit-for-purpose IT platform is at the heart of that ability.
The technology needs to support all types of complex fund structures to give hedge funds the consolidated reporting and unified client experience they seek. Maintaining the shareholder registry should be automated, with straight-through processing of all transfer agency capital activity to minimise errors and maximise operational efficiency.
A powerful engine for profit and loss allocation and NAV creation is essential for accurate valuations and faster investor reporting. Systems must also be able to handle complex fee methods for open and closed-ended structures to produce accurate performance and incentive fee calculations.
Comprehensive investor and regulatory reporting capabilities are another core requirement. Firms need Automatic Exchange of Information-compliant processes for FATCA and CRS that can generate the necessary regulatory reports in filing-ready state. And with investors expecting ever more personalised and timely portfolio and performance information, customised reporting capabilities – delivered through a multi-functional web portal offering two-way communications and self-servicing options – are now an essential part of the client servicing proposition.
With fundraising conditions looking set to tighten, emerging hedge fund managers can no longer afford to rely on the spreadsheet-based, manual-heavy operational set ups that got their predecessors up and running. Collaboration with a full-service fund administrator offering end-to-end process automation and a value-adding support mix is the obvious alternative.
ABOUT DEEP POOL
Deep Pool is the #1 investor servicing and compliance solutions supplier, providing cutting-edge software and consulting services to the world’s leading fund administrators and asset managers. Our flexible solution suite, developed by an experienced team of accountants, business analysts and software engineers, supports offshore and onshore hedge funds, partnerships, private equity vehicles, retail funds and regulated financial firms. Deep Pool is a global organisation with offices in Dublin, Ireland, the United States, the Cayman Islands and Slovakia. For more information, visit: www.deep-pool.com.