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The Struggles of a Hedge Fund Start-Up

Date: Wednesday, January 30, 2013
Author: Kavi Unadkat, ProHedge.co.uk

The old startup cliche that it only takes two traders and a Bloomberg terminal to set up a hedge fund, appears to be dead. The post-2008 reality for hedge fund startups could not be more different.

The increasing demands of investors and regulators have changed the environment for fledgling hedge funds significantly over the last several years. Investors now require more reporting and squeeze fees in the hope of better returns, while new regulation has piled on significant compliance and monitoring costs.

Sandy Kaul, head of business advisory services at Citi Prime Finance, says “the compliance programme you need to build within your organisation issignificant: policy, procedure, monitoring, compliance and back-up systems.”

Furthermore, institutional investors are demanding hedge funds forge new relationships with service providers, such as insisting funds have multiple prime brokers to spread their counterparty risk. Such infrastructure needs are costly but unavoidable if funds are to pass investors’ thorough due diligence tests.

The result is that startups need a much greater level of assets under management to sustain themselves: a minimum of $250m, according to Citi Prime Finance. Unfortunately, along with pressure on fees, it has become much harder to raise money.

“In 2008, someone with a good background and pedigree could probably raise $200m to $500m on day one,” says Chris Goekjian, chief investment officer of Cheyne Capital. “Today, even people with great pedigrees are struggling to do launches of $100m.” Consequently, hedge fund managers are increasingly looking to seed investors. This has resulted in a buyer’s market for seeders, and lower fee revenues for the hedge fund, exacerbating the problem.