What Is the Best Data & Operations Approach for Launching a New Hedge Fund?

Choice: single front-to-back platform or point solutions?

A PM spinning out will sell themselves short if they only think about the front office/execution needs — i.e., their area of domain expertise. While a single front-to-back solution might be cheaper, the quality and value are diluted. Conversely, hedge funds that take the approach of assembling an all-star team of best-in-class point solutions for EDM, treasury, IBOR, reconciliations, risk, and OMS will find they are slogging through a disparate data minefield, because those systems often do not communicate, leading to loss of value from not having that data centralized within a single source of truth. This choice can work if there’s a robust data platform keeping the data house in order. But the sweet spot is adopting a good quality front-office OMS and risk tool and a purpose-built investment operations system, both of which are layered with data infrastructure that centralizes and standardizes disparate data sets. Subsequently, the firm has clean data with which it can do analytics to make it smarter about capital deployment. Poorly balanced front-, middle- and back-office tech investment subsequently hampers agility and creates operational risk.

Day one readiness and day one-thousand readiness

Naturally, budget is the main consideration if you’re going out on your own. To compete and attract stickier institutional investors, new funds must demonstrate that they possess institutional grade infrastructure, people, and technology. Those that adopt institutional grade tech and managed services — and invest for the long term on day one — can avoid having to reinvest and redesign systems in 2 to 3 years to expand with the fund’s AUM. There are now cloud-native choices that achieve a couple of key objectives for new funds: They lower the total cost of ownership, and they enable scaling the business in all dimensions.

If you’re being seeded as part of that spin out, then you may wish to leverage the same tech and tools — often a front office platform. But that depends on the level of continuity both parties require and their operational footprint. It’s tough to compete for and hire top talent across the full front to back so it’s important to consider using managed services — especially if it’s tied to the tech. Additionally, sophisticated institutional investors expect new funds to have certain non-negotiable, buttoned-up capabilities, such as a reliable shadow accounting book in place. Lacking these capabilities can be one of the red flags that deter investment.^viii Further, having a marquee set of vendor platforms in the arsenal can accelerate the operational due diligence process with investors.

Finally, managers cannot forget there is a limited pool of talent available to run the complex internal systems required for a new fund launch. New organizations must find systems that are built for scale, thereby minimizing headcount increases for each jump in AUM. Very few investment firms afford themselves enough tech talent budget to build, maintain, and enhance their full front-to-back architecture. We work in the era of hyper uncertainty and perpetual transformation, all while navigating a complete restructuring of capital markets infrastructure. New hedge funds that do not neglect investment operations and build infrastructure that allows growth and thrives in complexity will win the day and be more resilient in the face of volatility and uncertainty.