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Getting Past the Gate: Capital Introduction at Prime Brokerage Firms
Posted on 9/14/14 at 12:07 pm
Posted on 9/14/14 at 12:07 pm
Hedge fund start-up services, or "capital introductions," are what helps an asset manager break into the lucrative Shangri-La of institutional investor funding. We've discussed i-banking & PE & VC on this board before, but prime brokerage services are not something that gets brought up very often. But if a person can manage to get past the gated barriers to being able to raise funds for an alternate investment firm, then the sky is the limit.
With that in mind, I'm interested in learning more about what it would take for a person to be able to make that transition. I think I'll break this up in 4 parts, dump the first part this afternoon, and come back and do the last 3 parts later.
I. THE PRIME BROKERAGE LANDSCAPE
II. STAGES OF HEDGE FUND DEVELOPMENT
III. STRATEGIES FOR GENERATING ALPHA
IV. ASSEMBLING A MARKETING TEAM
I. THE PRIME BROKERAGE LANDSCAPE
So first, let's look at the landscape. One article I read from 2012 cited a Hedge Fund Intelligence survey that indicated these as the top 5 prime brokerage service providers:
Goldman Sachs: LINK
Credit Suisse: LINK
JPMorgan: LINK
Morgan Stanley: LINK
UBS: LINK
Others near the top 10 included:
Citigroup: LINK
BoA / Merrill Lynch: LINK
Wells Fargo / Merlin Securities: LINK
Barclays Capital: LINK
The last 3 each are particularly interesting for different reasons. With BoA/ML, they claim to be rated "#1 Capital Introductions (third consecutive year)" on their webpage.
For Wells Fargo, they are a new player on the scene trying to break into this market, and they acquired Merlin Securities to help do that. This is sort of interesting, because VC and Sequoia Capital have just been discussed on this board lately, and they were associated ( LINK) with Aaron & Steve Vermut over at Merlin Securities before the WF acquisition. Additionally, the Vermut brothers are now running Prosper.com ( LINK), "America's first peer-to-peer lending marketplace," which may be of some interest to those budding entrepreneurs on here who are looking for angel investors to help with their start-up business plans.
Moreover, WF seems to be the only one that actually has PPT slides on their webpage freely available to the public: " Manager Marketing Toolkit" & " Hedge Fund Best Practices: A Guide for Alternative Asset Managers."
Barclays is somewhat interesting because of how much they advertise their expertise with trading technology platforms, seeking to market the algo trading craze that's been so big the last few years. See, for example, their QPS: "Quantitative Prime Services (QPS) offers state-of-the-art SubMSM technology with low round-trip latency and a scalable architecture to maximize trading opportunities. For seamless trade execution, financing and reporting, executed within a rigorous risk management framework, Quantitative Prime Services delivers a unique competitive edge. ( LINK)"
With that in mind, I'm interested in learning more about what it would take for a person to be able to make that transition. I think I'll break this up in 4 parts, dump the first part this afternoon, and come back and do the last 3 parts later.
I. THE PRIME BROKERAGE LANDSCAPE
II. STAGES OF HEDGE FUND DEVELOPMENT
III. STRATEGIES FOR GENERATING ALPHA
IV. ASSEMBLING A MARKETING TEAM
I. THE PRIME BROKERAGE LANDSCAPE
So first, let's look at the landscape. One article I read from 2012 cited a Hedge Fund Intelligence survey that indicated these as the top 5 prime brokerage service providers:
Goldman Sachs: LINK
Credit Suisse: LINK
JPMorgan: LINK
Morgan Stanley: LINK
UBS: LINK
Others near the top 10 included:
Citigroup: LINK
BoA / Merrill Lynch: LINK
Wells Fargo / Merlin Securities: LINK
Barclays Capital: LINK
The last 3 each are particularly interesting for different reasons. With BoA/ML, they claim to be rated "#1 Capital Introductions (third consecutive year)" on their webpage.
For Wells Fargo, they are a new player on the scene trying to break into this market, and they acquired Merlin Securities to help do that. This is sort of interesting, because VC and Sequoia Capital have just been discussed on this board lately, and they were associated ( LINK) with Aaron & Steve Vermut over at Merlin Securities before the WF acquisition. Additionally, the Vermut brothers are now running Prosper.com ( LINK), "America's first peer-to-peer lending marketplace," which may be of some interest to those budding entrepreneurs on here who are looking for angel investors to help with their start-up business plans.
Moreover, WF seems to be the only one that actually has PPT slides on their webpage freely available to the public: " Manager Marketing Toolkit" & " Hedge Fund Best Practices: A Guide for Alternative Asset Managers."
Barclays is somewhat interesting because of how much they advertise their expertise with trading technology platforms, seeking to market the algo trading craze that's been so big the last few years. See, for example, their QPS: "Quantitative Prime Services (QPS) offers state-of-the-art SubMSM technology with low round-trip latency and a scalable architecture to maximize trading opportunities. For seamless trade execution, financing and reporting, executed within a rigorous risk management framework, Quantitative Prime Services delivers a unique competitive edge. ( LINK)"
4
Posted on 9/14/14 at 12:12 pm to Doc Fenton
Thanks. Some good info here...especially the WF links.
Posted on 9/14/14 at 12:29 pm to Doc Fenton
Actually, I think I will go ahead and at least do a "Section A" for Part II this afternoon, because a big part of my whole premise for starting this thread is that learning how to get to the capital introduction stage will also help one get off the ground in the first place past the seed stage.
Maybe I'm putting the cart before the horse here--I don't know--but in any case, this would be the life cycle stages of development for an aspiring hedge fund.
II. STAGES OF HEDGE FUND DEVELOPMENT
Now I know that securing that initial investment capital will be the hardest part. This is where you need to tap into the following categories of potential investors: "Partners, Friends, Family, and Angels"; "High-Net-Worth Individuals" (HNWI); and "Seeders and Acceleration Capital."
So if you are a person without many connections to rich people with a lot of free money to invest, then it seems that it would be impossible to start up a hedge fund without actually having investing experience at a hedge fund. (Some academics have set up their own hedge funds based on academic theories and their own research, but I seem to remember reading that these don't have that good of a track record.)
So then the next question to ask would be this: Could a person, after just a year or two at a good hedge fund, manage to assemble a team together and make a pitch to investors to get a new hedge fund up and running off the ground? If a person did enough academic research on options pricing strategies for asset classes with peculiarly fat-tailed risk distributions, would it be possible to bypass the need for experience at an actual hedge fund, and perhaps form a small team (one person with marketing skills, and another with actual hedge fund experience, etc.) to help get a new firm off the ground? What would be the minimum amount of people needed to get such a new hedge fund up and running? How many lower associate hires, if any, would be needed?
These are just some thoughts I've been kicking around in my head lately...
Maybe I'm putting the cart before the horse here--I don't know--but in any case, this would be the life cycle stages of development for an aspiring hedge fund.
II. STAGES OF HEDGE FUND DEVELOPMENT
quote:
A. Four Stages of Hedge Fund Development
Stage 1. Launch and Initial Fundraising, represents the very early days of a fund's development, including the prelaunch activities of securing initial investment capital. The types of investors are typically individuals known personally to the manager or seeders which require only a baseline of institutional preparedness.
Stage 2. Getting Beyond Retail, should also take place relatively early in a fund's lifecycle, ideally within the first 180 days. At this stage, managers have established a groove, the fund is functioning well on a day-to-day basis, core personnel and systems are in place and the fund has established clear marketing materials for targeting entry level institutional investors.
Stage 3. The Institutional Threshold, represents a significant hurdle for most funds. At this stage, managers have received several small institutional commitments, perhaps from family offices, consultants and third-party marketers. Now they are ready to break into institutional investors who will require significantly more during the due diligence process.
Stage 4. Major Institutional Fundraising, is only attainable once the manager is able to articulate their "edge," adhere to best practices and demonstrate a significant track record of repeatable performance with minimal volatility. Even when all these conditions are met, getting institutional capital is difficult and takes significant time. In today's environment, institutions can take many months reviewing a small number of funds and ultimately pass on most of them. When they do commit, however, these investors typically bring significant capital to the table.
Now I know that securing that initial investment capital will be the hardest part. This is where you need to tap into the following categories of potential investors: "Partners, Friends, Family, and Angels"; "High-Net-Worth Individuals" (HNWI); and "Seeders and Acceleration Capital."
So if you are a person without many connections to rich people with a lot of free money to invest, then it seems that it would be impossible to start up a hedge fund without actually having investing experience at a hedge fund. (Some academics have set up their own hedge funds based on academic theories and their own research, but I seem to remember reading that these don't have that good of a track record.)
So then the next question to ask would be this: Could a person, after just a year or two at a good hedge fund, manage to assemble a team together and make a pitch to investors to get a new hedge fund up and running off the ground? If a person did enough academic research on options pricing strategies for asset classes with peculiarly fat-tailed risk distributions, would it be possible to bypass the need for experience at an actual hedge fund, and perhaps form a small team (one person with marketing skills, and another with actual hedge fund experience, etc.) to help get a new firm off the ground? What would be the minimum amount of people needed to get such a new hedge fund up and running? How many lower associate hires, if any, would be needed?
These are just some thoughts I've been kicking around in my head lately...
Posted on 9/18/14 at 6:55 pm to Doc Fenton
I am getting very frustrating not finding a few things that I was looking for tonight regarding alpha strategies, hidden risks, and various attempts at hedge fund performance replication algorithms.
I'll just dump a couple of links (they are both in presentation slides format again) here for tonight:
" Alternative Beta Strategies" (by Dr. Lars Jaeger, Head of Alternative Beta Strategies at Partners Group)
" Hedge Fund Replication and Alternative Beta" (by Thierry Roncalli & Guillaume Weisang)
I'll just dump a couple of links (they are both in presentation slides format again) here for tonight:
" Alternative Beta Strategies" (by Dr. Lars Jaeger, Head of Alternative Beta Strategies at Partners Group)
" Hedge Fund Replication and Alternative Beta" (by Thierry Roncalli & Guillaume Weisang)
Posted on 9/25/14 at 9:07 pm to Doc Fenton
I work with a lot of start-up hedge funds and can tell you that the failure rate is high. There is somewhat of a changing landscape in fees that is causing new funds to have shorter, or totally eliminating, fund lockups. This obviously leads to the inevitable where skittish investors pull their money at the first bad turn.
From my limited experience, the most successful funds are spin-offs of other major funds who start with > 100 mm AUM.
I think people vastly underestimate the effort and costs that goes into launching a legitimate fund. Once you go institutional, potential investors will come in with very extensive and detailed requirements that range anywhere from maximum commissions paid to what kind of technology provider you use for trading and compliance systems. Getting out ahead of these things so that the funding process is smoother for your investors has a substantial upfront cost.
From my limited experience, the most successful funds are spin-offs of other major funds who start with > 100 mm AUM.
I think people vastly underestimate the effort and costs that goes into launching a legitimate fund. Once you go institutional, potential investors will come in with very extensive and detailed requirements that range anywhere from maximum commissions paid to what kind of technology provider you use for trading and compliance systems. Getting out ahead of these things so that the funding process is smoother for your investors has a substantial upfront cost.
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