A COO in search of a serious operational challenge
It was in 1992 that George Hartigan joined a hedge fund start-up in New Jersey. The role was managing director and head of operations at LibertyView Capital management. The multi-strategy hedge fund was founded in Hoboken in 1992 by Rick Meckler, who Hartigan had met when they both worked at the New Jersey-based fund manager Palladin Group. Meckler remains president of the LibertyView today, having led it through successive acquisitions by Neuberger Berman (in 2001) and Lehman Brothers (2002), before restoring its independence after the collapse of Lehman in September 2008. George Hartigan, on the other hand, has had a good number of operational adventures since those first days on the unfashionable side of the Hudson.
He has not forgotten the first of them. When LibertyView began in 1992, portfolio management – and the firm from the outset ran equity long/short, convertible arbitrage, mortgage-backed securities, volatility and high yield credit strategies – was only one of the responsibilities of the founders of a hedge fund. They also had to build everything else, including marketing, trading, compliance, and operations and infrastructure, themselves. “There was no infrastructure or software systems to aggregate all the transactions and positions,” recalls Hartigan. “There is a model now, and we all know how to do it, and investors demand a solid operational infrastructure, with a heavy third party influence. There was no such model then.” In fact, the only reason the founders of LibertyView did not do their own fund accounting and investor relations in-house as well was the then regulatory stipulation that offshore-domiciled funds must do meaningful work offshore.
In 1992, the repeal by the Clinton Administration of the so-called Ten Commandments - which required any offshore-domiciled but onshore-managed fund to perform at least ten functions offshore, including subscriptions and redemptions, investor relations, AGMs and audit, or be taxed at the prevailing onshore rates - was still five years away. So one of the first decisions taken by George Hartigan as head of operations at LibertyView was to appoint Hemisphere (later acquired by Bisys, which was in turn acquired by Citi) as their offshore fund administrator in the Cayman Islands. “You had to have books and records in the Cayman Islands for real, not just the way we do it today, through shadow accounting and electronics,” recalls Hartigan. “So we understood, early on, the value of a third party administrator.”
At the time, this was unusual in the US hedge fund industry. It is not now, as Hartigan acknowledges. “Now, of course, it is the biggest growth area in outsourcing by hedge fund managers,” he says. “You can now have a fully outsourced infrastructure. I know of one $20 billion firm that has outsourced its entire post-trade operations. The administrator has actually placed people inside the firm to run its middle and back office. It starts with the trades. Outsourcing has gone way beyond hiring an administrator to run your offshore books and records.” While recognising its potential to control costs, Hartigan cautions firms to continue to do shadow fund accounting – as he has at both LibertyView and his current employers, the $23 billion credit fund manager GoldenTree Asset Management. “It is a choice for firms, not a necessity,” he says. “You can outsource it all if you want to.”
The LibertyView-Hemisphere deal was not the first time Hartigan had outsourced an accounting task. In fact, it was not the first time he had built a back and middle office from scratch either. When he joined Palladin Group in 1992, the principals were handling the operational aspects of $200 million in assets under management off spreadsheets. “My duties there were practically everything,” recalls Hartigan. “I did the compliance, operations, and P&L, but we outsourced our accounting to a local firm. Palladin was an onshore fund, so we had no need of a third party administrator offshore.” His first decision at Palladin was to buy a system and upload the positions from the spreadsheet into it. That system was Advent, whose Geneva platform is now the industry standard.
As it happens, the fact that George Hartigan worked with Rick Meckler was not the only link between Palladin and LibertyView Capital Management. A large client of Palladin Group was the treasury arm of the American subsidiary of Banque CPR, a French bank which has long since disappeared – it was acquired by the doomed Credit Lyonnais before eventually being absorbed into Credit Agricole – but which was then a major investment banking force. It was an invitation to Rick Meckler from Phil Spray, who ran the proprietary trading desk at Banque CPR in New York, which led to the eventual formation of LibertyView Capital Management. “The money was slowly moved out of proprietary trading and into the fund business,” recalls Hartigan. “Rick joined Banque CPR about nine months before I did, promising he would call once the fund was set up. He did.”
Palladin also afforded Hartigan his first experience of dealing with prime brokers. The early 1990s were of course an entrepreneurial era for prime brokers as well as hedge fund managers, and the competition between them to finance trades and lend stock for even $100 million start-ups was intense. “As a well-established, $20 billion-plus fund manager, GoldenTree Asset Management has options, and strong relationships with the leading primes, but for anyone starting up now, God bless them, because $100 million is only the starting point,” says Hartigan. “They want to know what your short balances are going to be like, what your debit balances are going to be like. In effect, the prime brokers have said, `We are not going to take it any more. Either you are going to do more business with us, or you are not going to be here.’ The primes have also cut their ties with the mini-primes, or introducing brokers. So there is less of a focus on relationships with managers than there was before.”
Asked how start-ups can find suitable service providers, Hartigan has an interesting answer. He advises them to work with fund administrators, which can combine the business of many funds in convenient ways that make the relationship interesting to a prime broker. Hartigan reckons the fund administrator that pieces together its services from trade capture to fund accounting in ways that make groups of smaller managers attractive business propositions to prime brokers will secure a great deal of business from start-up and emerging managers. And he knows how brokers think, and not just because he lived and worked through the 2007-08 period, when hedge fund managers learned the harsh truth about how prime brokers fund themselves and view their clients. “In 2008, a very big guy at a very big prime brokerage firm said to me, `Not one dollar will I lend that portfolio,’” recalls Hartigan.
Even then, he understood the mentality behind that perspective, because his career began not on the buy-side, but on the sell-side. He worked in operations for three brokerage firms – National Financial Services, Invest ISFA Corp and Jeffrey Casdin & Co – between 1980 and 1988. “I took to being on the buy-side immediately,” says Hartigan. “It was good to have the brokers chasing you, rather than the other way round.” The switch to the buy-side had a cost. One of them was the 11 National Association of Securities Dealers (NASD) licences Hartigan had earned. Luckily, his regulatory status lasted long enough to prove useful at LibertyView, where he was empowered to open a broker-dealing arm, and oversee marketing people, which the regulations then insisted be supervised by a registered broker-dealer.
There were rules of that kind even in 1992, but the regulatory environment of the early 1990s was in general a lot more conducive to the entrepreneurial approach. This did not mean the market was an unlicensed free-for-all. In fact, Hartigan argues that the much heavier-handed regulation of today has damaged the self-regulating mechanisms that then inhibited unethical behaviour. “We were cutting edge,” he says. “We were pushing the envelope on things. But the decisions you were making about your business definitely involved a high level of integrity. We were certainly testing the boundaries, but we were equally certain we did not want to do it in a way that was wrong, or which could even be viewed as potentially wrong. Back in the day, we also knew exactly which people and firms suffered from a lack of ethics.”
The switch from the sell-side to the buy-side entailed a more far-reaching cultural change when it came to business ethics. “That period ingrained in me very deeply that I have a fiduciary responsibility,” explains Hartigan. “That is the biggest difference between an investment adviser and a broker. An adviser has a fiduciary responsibility, while a broker actually does not. So I tended to look at everything on the basis of whether it was an advantage for the client or not. If it was not, it was probably wrong to do it. That is basically the way Rick Meckler and I comported ourselves throughout the building of the business. If it was not right for the client, it probably was not right at all, and was going to be challenged by somebody.”
But, as Hartigan says, operations are a cluster of processes, not a school of morals. What counts is the ability to understand the investment products the operational people and platforms are required to support, turn that support into repeatable processes, and persuade the senior management of the firm to invest in the people and the technology to deliver them. In the six years he spent at Neuberger Berman and its parent from 2002 - Lehman Brothers - Hartigan had to cope with a senior management which was initially disinclined to invest, and eventually unable to. Abstracted from LibertyView, he was charged with building a new middle office to support the alternative investment management arms of the combined businesses.
At the time, the firm was running $7 billion of money for clients, including the $2 billion contributed by LibertyView at the height of its success, but the management also wanted a platform which could support a new range of in-house funds. With the hedge fund markets booming after the Dot Com correction, it was not hard to see why Neuberger Berman wanted its own funds. The two-and-twenty fee structure promised lavish rewards for the portfolio managers and the wealth management side of the firm that was charged with distributing them. Lehman, however, was doubtful about the value of investing in the integrated operational infrastructure required to support the combined asset and wealth management businesses. Instead, Hartigan had to embark on a make-do and-mend strategy that aimed to link three separate platforms to a data warehouse. Lehman collapsed before the project was completed.
Hartigan did not stay long. In November 2008 he accepted an invitation from Bob Matza, president of GoldenTree Asset Management, and his COO Bill Christian, to run operations at the firm. At the time, GoldenTree was battling with the string of redemptions that affected every manager at the height of the financial crisis, using both gates and side-pockets to steer the firm successfully through the turmoil. “Bill Christian, who as COO at GoldenTree ran IT and operations, gave me free rein,” says Hartigan. “He said, `Do what you have to do.’ I made a list of the ten highest operational risks, and I started going from one to ten, knocking them down, and improving process along the way.” Investors who agreed to the liquidating vehicles were more than happy with the results. That counted when conditions improved. Over the six years from 2008 to 2014, the assets under management by the firm grew by 136 per cent, from $9.75 billion to $23 billion.
Growth of that magnitude creates operational challenges of its own. For a start, GoldenTree attracted institutional investors partly by its willingness to support separately managed accounts. “We went from two to 40,” says Hartigan “So we went from managing five funds to 45.” Yet Hartigan somehow supported that increase in complexity by adding just two people to an operational payroll of 22 when he arrived at the firm in 2008. The increase in productivity was not painless. Under-performing staff members were shed. Manual and spreadsheet-based income collection and payment processes – volumes are always high at a credit manager - were automated. So were the collateral management and foreign exchange hedging processes of the firm. “Building systems whose output required senior or portfolio management approval, rather than lots of people getting hands-on, saved massive amounts of bodies,” says Hartigan.
Yet Hartigan denies that his approach is other than commonsensical. “What looks like magic was not magic,” he says. “What I do better than anything else, and have done better than anything else throughout my career, is just being able to look at what is in front of me, the enormity of it, how it inter-operates, not only within itself, but also with other areas of the firm, and just being able to effect improvement. Sometimes a major overhaul is needed. At other times, small adjustments or enhancements are required, such as changing a process to take advantage of new or better technology. How can you do it most effectively, both from a process standpoint and a cost standpoint? Answering those sorts of questions are my strengths.”
They were demonstrably effective at GoldenTree. In fact, Hartigan did such a good job as director of operations at GoldenTree that he worked himself out of a job. He even trained his successor. In January this year, Hartigan relinquished the role of director of operations, and accepted a newly created position within the firm as head of project management. Predictably, it is not enough. “30-odd years of being in charge, and then not being in charge,” says Hartigan. “It is kind of hard.”
Hartigan is itching now to get back into operational management. In nearly 30 years on the buy-side, he has built up a stock of experience that spans technology systems, fund accounting, legal and technology. Large firms – even those with strong-minded COOs and CTOs – would be wise to talk to him. But fund administrators, most of which never lose an opportunity to gripe about the low margins in their core business, could do a lot worse than tap into the ideas as well as the experience of George Hartigan.