Launching a Hedge Fund: The Role of the Hedge Fund Administrator
January 30, 2013
Author: Patrick Murray
Title: President and CEO
A hedge fund is a private investment fund that is managed actively and often a participant in multiple global markets investing in numerous investment instruments and following various strategies. The management strategies of these funds are often aggressive and highly advanced, with the aim of experiencing high returns. Hedge funds are rated either in relation to a pre-determined benchmark in the market, or in a more outright and absolute sense. An effective hedge fund administrator is therefore vital to the success of any hedge fund. This is because they are responsible for the bulk of the accounting and back office work, which is carried out every day, month, or quarter depending on the structure of the fund.
Factors to consider when launching a hedge fund
Competitive advantage is an important consideration as far as hedge funds are concerned. This refers to any edge which the fund has, and it helps in the successful attraction and retention of investors. The advantage may be in the form of marketing, resources, information or products. For instance, the fund could be offering offshore services, with the hedge fund administrator performing reviews to prevent money laundering. Another important consideration while launching a hedge fund is strategy definition. Ideally, the strategy ought to be clear and incorporate a risk management plan. It also needs to be outlined as concisely as possible, in order to be able to explain it plainly to the team and potential investors; which consequently inspires confidence.
Qualities of a good investment strategy include:
For a hedge fund to be successful, it has to be effectively capitalized. Important considerations therefore include the size of the team, the cost structure, as well as the fund’s investment partner. The hedge fund administrator performs the calculation of management and performance fees, which assists the manager in planning for key capital levels. Additionally, a sound sales and marketing plan is integral to the launch of any hedge fund. This plan is developed with the aim of elevating assets prior to the launch. Since the financial input required from every investor is quite substantial, the plan ought to be targeted towards corporations, individuals who have a high net worth, and financial advisors.
Challenges of Launching a Hedge Fund
In launching a hedge fund, the main challenges are in the building of a team which is both effective and skilled. In addition to the investment management team, advisors, distributors & marketing, the hedge fund administrator is an essential partner. Due to the sensitive nature of the role, administrators should be chosen carefully, with consideration being put into the needs of the fund, in addition to the administrator’s level of competence, service, control, and availability. Given the dynamic nature of hedge funds, being able to quickly get in touch with a competent team regarding time sensitive investor inquiries or fund accounting questions is essential.
Another challenge that is commonly experienced is in establishing a niche both in the trading and marketing areas in order to operate effectively. Many funds also experience difficulty as they strive to refine their strategy. Besides this, another challenge that the fund may face is the establishment of a transparent partnership with a reliable prime brokerage firm. This relationship is important since it is these firms that provide essential services such as securities lending and leveraged trade executions.
As with all decisions that deal with money, it is important to select a third party hedge fund administrator who can be trusted to perform his/her tasks professionally and independently, with the best interests of the fund in mind. More than a professional association, the relationship between the hedge fund manager and administrator is a partnership whose dynamic can make or break the fund.