It is getting harder to launch a hedge fund, there's no doubt about it. Once, the industry was valued for its open-mindedness when it came to seeding new investment talent, but now the criteria being applied to those who would manage hedge funds are much tougher.
Julian and Lucien Gover are operations professionals who have proven their credentials as part of the IKOS growth story, and are now introducing a formula that will facilitate the launch of new investment strategies to an ever more demanding market. Their creation, called Hedge-House Partners, is more than just about putting a roof over a portfolio manager's head.
"Hedge-House is a team of highly experienced hedge fund business professionals looking to partner hedge fund managers to grow their businesses and build successful hedge funds" says Lucien Gover. "This is a business that is ready for growth," says Julian Gover. "It is designed so that start-ups can overcome some of the teething problems that would usually be thrown in their paths. The landscape for start-ups is very different today from what it was even five years ago. Changes within the industry…mean that the requirements to be put in place by start-ups are far greater than they used to be. In the old days it was acceptable for two guys from a bank with a great trading idea to move out and start a hedge fund and gain lots of interest from large investors. But today it's different – to succeed you need to tick a lot more of the institutional boxes."
Due diligence requirements are far, far higher today than they used to be. Institutional investors are now expecting to spend a great deal more time carrying out on-site visits to managers before they invest. To pass this detailed scrutiny and secure an allocation, hedge fund businesses are expected to have in place an experienced management team and solid infrastructure that can sit alongside the trading ideas. Having dealt with many large scale hedge fund investors in their previous roles, the Gover brothers are confident they can put together the infrastructure 'skeleton' around which the flesh of top hedge fund talent can grow. Their expertise extends to ensuring that those time-consuming due diligence visits are dealt with smoothly, and successfully. In other words, they know which bricks need to be in place for Hedge-House to be successful.
"Managers can land with us running rather than walking," says Lucien Gover. "The downside of launching as a small start up with a small resource allocated to operations and infrastructure is that your asset building is slow. You will start with investors who will not be your core investors as you get bigger."
Part of the dynamic here is the fact that investors are more sophisticated in their investment tastes and requirements than they used to be: AIMA has helped to do this by raising awareness of the sorts of questions investors should be asking – where are returns being generated from; how is the investment approach being protected; how well can managers communicate with clients?
In addition, individuals have now had the opportunity to move around within the European hedge fund market, and ideas and processes have been disseminated to a wider knowledge base. Larger sums of money are being invested, bringing with them bigger and more sophisticated due diligence teams, accompanied by reams of complex paperwork. The industry has also become more litigious, requiring investors to keep detailed records supporting their portfolio management decisions. Strict fiduciary requirements are now in place, and need to be adhered to.
Hedge-House is seeking to attract "seasoned and successful" fund managers, ideally around eight individuals experienced in equity and fixed income strategies. Ideal candidates include veteran managers who are recognised in the market with a long track record in a large hedge fund or investment bank, or a big asset management house. They are the sort of 'name' manager who would be one of the first points of contact for an institutional client looking to allocate to that particular strategy.
Also of interest to Hedge-House are second generation managers who have worked with big investment names as their de facto lieutenants. They may not own their track record per se, but will be recognised as having contributed significantly to it. They might not have the same investor following as a consequence, but they will still have sufficient credibility to attract serious capital.
"We're offering an entrepreneurial environment where fund managers will be brought in as real partners and surrounded by like-minded and intelligent people," explains Julian Gover. "They will be backed by institutional-quality infrastructure. We believe that this way they will not fall foul of some of the problems of larger businesses while not losing that boutique atmosphere."
Hedge-House has been structured as a limited liability partnership, and new managers will be added as partners. Managers will be given control over their own funds on a day-to-day basis with minimum interference, and will be able to determine who they want to work with them. Risk management policy will be decided by the manager, and enshrined in a prospectus agreed with Hedge-House which the Govers would then police going forwards. In effect, the manager would be sitting within a boutique set up but with the security of a layer of infrastructure that would help him to attract institutional investment from a much earlier stage within his business cycle than might otherwise be the case.
Hedge-House says that although capital introductions will not be part of its initial offering, they can certainly help with introductions to investors. Preliminary discussions are already underway with a well known senior in-house hedge fund marketer and this service is likely to be added in due course. From inception, the firm will offer ongoing investor relations and communications systems and customer relationship management. Also on offer for the prospective Hedge-House candidate manager are internal risk management processes, product structuring, and institutional-grade IT support.
Hedge-House plans to make its money by taking a cut of the managers' fees, but would allow partners to retain the lion's share of their own fees and have the option to participate in a central pool of income in return. This would be retained in a central vehicle they would be able to draw down on. "The idea is that not all strategies work all of the time," says Lucien Gover. "They can make a decision on a yearly basis, and have a trail across the pool for a number of years, and they can keep rolling into it on a yearly basis." This means that even if a manager's own strategy goes through a slump, he would have more security of income than were he to be managing a fund on his own.
Participation in the pool would also allow the fund managers to increase their stake in the business. The Govers are keen to provide Hedge-House managers with a measurable share in the business, which they feel coincides with their long term view of the direction Hedge-House is going in. In Lucien's words, "It is important to share the business with the people who contribute to it. The long term solution is a good solution – it means we're concentrating on building up value in the business rather than profits. It means we're not interested in bringing in managers and forcing them to manage as much money as can possibly be thrown at them. We'd rather they concentrate on building a proper strategy that can then take assets when it's ready, up to the level that they're comfortable with."
As for which strategies the Gover brothers are particularly interested in helping to launch, they pronounce themselves fairly agnostic in this respect, although Julian Gover says "relatively straightforward" approaches would be preferred.
The Hedge-House investment offering will be structured as a multi-class feeder fund, with a high degree of commonality in the fund documentation, which will be of benefit for investors signing off their due diligence. The funds will also be designed for growth, to avoid some of the problems that vehicles can sometimes encounter, falling foul of their own investment restrictions for example. "There are a whole host of pitfalls you need to watch out for," explains Lucien Gover.
It is important to Hedge-House that its fund managers will have the environment they feel they can operate in. There are advantages to be had from having investment professionals sitting under the same roof, if only because of the scope for exchanging ideas or the intellectual stimulation that comes from working with like-minded people. The Govers accept readily that this is not for everybody, but their intention is to have the office space and facilities there for those managers who want to make use of it. Yet they're not ruling out the possibility of a multi-site set-up if required.
Hedge-House acknowledges that non-UK fund managers might eventually be able to participate, but it is unlikely that they will be amongst the first wave of several entrants to the partnership.
A non-UK portfolio manager would also be subject to an extra layer of risk management, with all contracts being run through the UK. Lucien Gover stresses that Hedge-House's vision is not about hiring managers as employees, or renting out desks as part of some kind of platform arrangement: he wants them to feel that they are partners in a business, and playing a crucial role in creating that business, and having a voice and a share in the company they're working for. "The key thing for us is the environment in which they will work, and the way in which they will participate," he says.
Right from the off, Hedge-House is making infrastructure a critical part of its offering. This will be of comfort in particular for an investment manager moving to Hedge-House from a larger institution where much of the infrastructure is already in place, and is being actively managed by someone else.
Thus, it comes as no surprise that a key part of the team at Hedge-House is Rob Thomas, who worked as the IT manager at IKOS for five years. His balanced experience of working with IT applications in the finance industry, includes what he calls "huge and lumbering systems" within large institutions like insurance companies, supporting over a million customers. This is an environment where dealing with disaster recovery and business interruption issues is paramount, the "no adventure please" side of financial IT. He then worked on the opposite side of the spectrum, on the cutting edge, high frequency, computational side of finance, including juggling multiple sites and time zones, and overseeing high volume transactions, with thousands of trades in a day. Data capture, real time reporting, and customised reporting have all been part of his previous job description.
And it may not simply be a case of replicating the systems environment a particular fund manager might have been used to at his previous firm; it is possible a superior technological infrastructure could be put in place, especially if there are less legacy issues involved. "Some of the things managers who might be joining might not have thought about are just where technology might be able to take them," says Thomas.
A good example is Excel, which is now being upgraded by designer Microsoft in recognition of the extent to which stat arb traders, quants, and prop desks have been relying on it. It is now possible to speed up Excel-based models substantially by distributing them across a cluster of servers.
Hedge-House wants to ensure that regardless of where a new fund manager comes from, it will have the flexibility to adapt its IT infrastructure to suit their requirements, and potentially to offer solutions that might not have been made available to them in their previous role. One of the joys of starting a business from scratch is building a new architecture without many of the evolutionary technological idiosyncrasies that can accrue within a large investment management business, and Thomas wants the funds he supports to take full advantage of this. "The cliché I like to use is 'the right tool for the right job,'" he says. "This means not rushing in, not throwing money around – anyone can throw money at a hedge fund-related problem. We're going to be recruiting IT staff who can work in this middle ground."
This all requires a team with experience of working with large and sophisticated hedge fund operations, including those that have assumed substantial dimensions, with billions of dollars under management across multiple time zones. As investors start to pay increasing attention to infrastructure issues, including the IT set-up, it makes sense to have the people in place to ensure the back up for Hedge House's investment operations is watertight.
The Hedge-House model makes a lot of sense. As the hedge fund industry continues to evolve and attain more institutional dimensions, it is likely we'll see other businesses structured along these lines being launched to provide good fund managers the opportunity to run their own businesses within a partnership framework.
"It is important now more than ever not to be side-tracked," says Julian Gover. "If you're running a portfolio, you want to be concentrating on what's in your portfolio, not how the business is growing or what corporate decisions you should be taking, or trying to wear a compliance hat. A lot of people underestimate the time it takes to run a business. Everyone we speak to who is either running a hedge fund that was a successful start-up, or has retired from a hedge fund that was not a successful start-up, will tell you how much time it takes to do all the other jobs it takes to run a hedge fund. As time goes on, more and more people will become aware of that, meaning this will be a growing trend."
"We are a team that has worked together for a long time, and worked together successfully," adds Lucien Gover. "While Hedge-House is a new venture, the team that we have started off with has over 40 years of hedge funds experience, much of that working together. In terms of ability and continuity, that adds a great deal of comfort. The key for us is finding fund managers who fit; somebody who is like-minded, who shares our values, and wants to participate in what we are building."
Julian Gover worked at IKOS from 1993 to 2006, ultimately performing the role of the CFO. He was also Compliance Officer, and Company Secretary to the IKOS companies and funds.
Lucien Gover joined Julian in 1995 and between them their duties included legal, fund structuring, financial control, compliance, and HR. The Govers were part of the business team that transitioned the development of IKOS from one of London's earliest hedge funds into a leading European multi-billion dollar operation.
Robert Thomas worked at IKOS from 2000 to 2005 as IT Manager where he developed and was responsible for database and back-office systems and data warehousing/mining. These multi-site systems were designed to handle tens of thousands daily transactions; tick data, mirrored and optimised for real-time access; trade settlement and reconciliation; and fund reporting.
Peter Martin worked at IKOS from 1994 to 2006 as Operations Manager, responsible for all aspects of trading operations. Prior to IKOS, he was an Operations Director at BZW.