Hedge Fund tune-up: can you risk sitting in front of investors if you haven’t lifted the hood?

Buy-Side FeaturesFeature
17 Nov, 2015

Facing the prospect of scrutiny from new potential investors is daunting.  Performance has been good, the pitch book has been stressed over ad nauseum and then you realise that everyone is “short” business cards.

Amidst all the fevered activity how often is the actual structure of the offering revisited?  That offering structure which includes the dusty documents that were signed up to couple of years prior and that operating structure which purports to deliver management process in line with the long forgotten provisions that might lie within?

  • Offering documents: these are formed from standard blueprints and though deemed fitting at outset the delivery expectations may not actually be mirrored in the prevailing fund management environment.
  • Service providers: administrators, custodians, prime brokers etc. are your business partners, yet the provisions that they imposed on you at start-up might be sub-optimal in hindsight.

The last thing that you now need is for a key potential investor to point out, for example, that contractual deliverables or limitations of liability of the service providers are unacceptable to them or that you are clearly not abiding by the investment management requirements as set out in your offering documents or policies.  A leading administrator recently noted “Asset managers are now competing on their operating capabilities - what they used to think of as ‘the back office’ has become a critical factor in their business success.”

Blame regulatory compliance.  The sheer weight of compliance requirements has diminished the time available to check under the hood, yet what is under there is the driving force for the investment that your potential targets are making.  From their standpoint they can easily check-off your “perfect” compliance model from their list of concerns, so the question then turns to assessing whether the all-encompassing offering is fit for purpose.

First you need to check that all the components are appropriate and coherently connected, then you need to present the working of the model. 

So, pressed for resource and really not sure how all the wires connect, what sort of mechanic is needed?

Certainly a law firm will welcome you with open arms to do a documentation review but then you face three issues:

  1. operational insight – has your lawyer ever worked in a fund management firm?
  2. practical application - it’s up to you to translate their output into an operating model presentable to investors and linked to your own policies and procedures
  3. cost – it is easy to run up substantial legal bills over even simple day to day discussions

Alternatively, many larger consultancies may dissect the issue into a number of parallel deliverables but are less equipped for the sleeves-rolled-up strategic, holistic and horizontal unification of those initiatives, unless they themselves have gained senior funds COO/CEO experience.  Similarly, a due diligence research firm may create a voluminous document that collates structural statements but still fails to give deep, joined-up insight of the business.

Preferably, seek the assistance of someone who has been there before.  Someone who understands fund documentation (from offering documents to service provider contracts) through launching numerous funds and has sat in front of those institutional investors that you want to present your joined-up model to.  Someone who is quickly up to speed with your firm’s pressures, daily demands, idiosyncrasies, concerns and delivery expectations, both internal and external.  Someone who can tie together the technical and process elements in a succinct documented format suitable for external scrutiny.

Not only will the process deliver a model that you can confidently stand by but it will also coach you, the team, in how to confirm your true understanding of the complete end-to-end operation that others will be placing their trust in.

Get a “tune-up” from someone in your funds network – these experts are out there.  Once your offering and operating structures become part of your governance model it will help differentiate your fund from the hundreds of firms competing for investors’ valuable engagement.

 Clive Snowdon is the founder of UK fund consultancy Draycliffe  (www.draycliffe.com).  He has over twenty years’ experience providing strategic, operational and transformational leadership in the alternative fund management and financial services industries.

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