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Hedge Fund Platforms
Recently I wrote a newsletter article entitled "Looking at Starting a Fund or Working for a Start-up ?" In this article I discussed some of the traits that a start-up Hedge Fund must possess in today’s competitive investing environment if the fund is to have a realistic chance of being successful. From this article I received numerous e-mails asking about Hedge Fund Platforms, whether as separate stand alone entities or as entities within a larger multi-strategy fund.
For those not familiar with the idea of a Hedge Fund Platform, this is an organization which has been created to offer managers an opportunity to join a firm where their primary responsibility is to manage assets and ensure strong performance. The platform itself takes care of all business, marketing, risk management, and accounting functions for the fund which the portfolio manager is running. Having the platform firm manage all of these components of the fund makes the fund itself more institutionalized, which is very important in today’s investing market. Furthermore, this set up allows the portfolio manager time to concentrate on performance hopefully allowing the fund to achieve extra alpha which in return makes the fund more competitive.
An example of a successful Platform was FrontPoint Partners based in Greenwich which was bought by Morgan Stanley in 2006 for $400 million. FrontPoint Partners was founded to be a Hedge Fund Platform and it became a premier player in the platform space in a very short period of time. FrontPoint was able to create a system which allowed the firm to review and perform due diligence on potential managers and then bring those few desired managers onto their platform. The assets and reputations for the majority of managers allowed to join the FrontPoint model grew tremendously. At one point Front Point was one of the fastest growing hedge funds families in the world.
One of the great values of a Hedge Fund Platform is that not only does it make the managers on the platform more institutionalized, but also once the platform’s foundation has been established there is the capacity for tremendous growth. Achieving this capacity is not cheap and it means numerous professionals need to be hired and first class technological systems must be put in place, but once these components are entrenched the growth can be rapid. The stronger the foundation the faster the platform can grow and the easier the integration of managers onto the platforms become.
Furthermore, a strong foundation allows the platform’s marketers to have numerous products to sell which can be a very valuable tool in a competitive investing marketplace, especially when the platform can then hire marketers who specialize in each of the investor categories rather than strategy categories. The final maturation of a Hedge Fund Platform is when the platform groups their platform funds into a single product forming their own private label Hedge Fund of Funds.
As a portfolio manager you must understand that this institutionalization can come with significant cost, and that the price depends on the platform you join. However, in many cases it does mean that the platform receives equity in the fund or at the least a cut of the hedge fund’s revenues. Furthermore, there are additional fees which come from this system, but most professionals who have had a relationship with a strong well run platform would agree that the platform costs are offset by the value they provide, especially in the earlier years when raising assets is hard and you can never find time to do everything if you were running your own shop without the support of a platform. Over my 12 years of recruiting and consulting in the space I have heard numerous stories and watched first hand numerous funds collapse because the founding Portfolio Manager felt they could do everything and quickly found out that when you try to do everything performance suffers.
The cost associated with a platform, especially the equity component, makes the platform option not right for everyone, but you are doing yourself and your future investors an injustice if you do not seriously look at the idea. Due to the success of FrontPoint Partners and others; numerous platforms have been created over the years and will continue to be created, making platforms a very legitimate choice when looking to start your own firm. Platforms can provide a new fund the added juice a fund needs to not only survive but flourish in today’s competitive investing marketplace. |
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