Hedge funds have been enjoying something of a heyday, growing to an unprecedented $2.82 trillion in assets under management (AUM), since the dark days of the financial crisis. However, these lofty sums pale in comparison to the potential 11 trillion investment dollars controlled by an estimated 3.35 million high net worth individuals (HNWI) in the United States.

Brave New World or More of the Same

After more than 8 decades, the stranglehold of regulation has been loosened … or has it? Unquestionably, lifting the ban on general solicitation has opened new avenues for hedge funds to explore in terms of marketing investment opportunities to qualified candidates but, here is the rub: the pool of potential investors has not been altered by lifting the ban. Worse yet, the trade-offs hedge and other private funds must make to effectively market investment opportunities to HNWI may prove to be more onerous than first thought.

The Securities and Exchange Commission (SEC) has been painfully slow to establish hard and fast guidelines for the industry, and seems bent on making this already troubling situation worse as new definitions for “accredited investor” are mulled over by committee.

Then individual state laws governing securities will necessarily undergo changes. Although it is true that federal law will trump any state imposed anti-solicitation laws, states still retain their prerogative to regulate securities offerings.

Is There an Upside?

The short answer is—yes! Institutional investors frequently complain of the difficulties encountered in distinguishing one hedge fund from another and HNWI are primarily concerned with:

  • The firm’s reputation
  • Fund performance
  • Investment strategy
  • Transparency

In the absence of the ban, hedge funds are uniquely positioned to substantially address all of these issues, while avoiding the dangers represented by a sizable segment of the regulations being sown by the SEC like so many landmines.

Hedge fund managers should view this new paradigm as a safety net, affording the hedge fund the opportunity to differentiate itself from competing funds, tout its reputation, speak to its track record, expand on its strategy and demonstrate its transparency.

First Steps

Incredibly, in a survey of 3,100 hedge funds domiciled in the United States, fewer than five percent had developed a website. Can you imagine any other financial services sector business in this predicament?

Job one for any hedge fund interested in defining its identity should be the development of a website. If a hedge fund fails to establish its identity or brand, it risks allowing its competitor to define it to its detriment.

On the Employment Front

Those seeking a portal into the hedge fund industry by virtue of their skills in website development, copywriting or content writing, can see that opportunities are almost certain to arise among forward thinking hedge fund firms.

In conclusion, it is fair to suggest that in the post ban world of hedge and private funds, there is “much ado about something” but the players continue to wrestle with the vision of what that “something” is.

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No one in the hedge fund industry would challenge the proposition that data is a crucial factor in meeting these primary hedge fund manager objectives:

  • Investor transparency with respect to risk and performance
  • Accurate and timely compliance information for regulators
  • Adherence to operational best practices to enhance performance

The challenges of sorting, storing and utilizing the wealth of data generated by a hedge fund are among the most formidable that hedge fund managers confront today.

Managing the Avalanche

HF-DataAs the amount of data collected snowballs, it is becoming increasingly difficult to avoid being crushed under the weight. Smaller funds are the least able to confront these obstacles and have turned to various enterprise software firms for help. Smaller funds simply do not have the in-house resources necessary to deal with mountains of data. The days of relying on spreadsheets to manage this data crush are solidly in the rear-view mirror.

Excel pales in comparison to advanced data discovery systems. It is clear that a hedge fund’s competitive edge may well reside within its advanced analytic capabilities. Thomas H. Davenport, professor of IT and Management at Babson College and research fellow at the MIT Center for Digital Business is convinced that, “Decision making techniques and technologies will be the next competitive battleground.”

Data management solution providers have sophisticated systems which centralize, cleanse and place controls on critical data.

What Are the Options?

Hedge fund managers primarily have three options, largely driven by these two factors: a) the size (assets under management) and strategy of the fund, and b) competitive considerations.  Large funds with complex strategies would almost always opt for handling the entire data management process internally. Intermediate and smaller sized funds may opt to outsource regulatory reporting but retain control of data cleansing and critical oversight processes in-house. Other hedge fund managers may prefer outsourcing the entire data management and reporting functions.

The Major Obstacles to Outsourcing

Hedge fund managers are, by nature, cautious and circumspect individuals. Trading strategies and security allocations are typically held “close to the vest” which makes the release of such data to third parties a thorny issue. The second hurdle will be the hedge fund’s Chief Compliance Officer, who instantly recognizes that the asset manager retains legal liability, not the vendor.

One thing is certain. Complex strategies, increased regulatory burdens and heightened competition will force hedge fund managers into difficult decisions with regard to the efficient and comprehensive data management.

What about Jobs?

If you have had only marginal success in crossing the threshold of hedge funds, employment with a data management firm may provide a “back door”. Consider the opportunities for employment with firms like GoldenSource, Asset Control, Confluence. MIK Fund Solutions, and similar firms. Six figure positions are available and jobs in firms that offer services to the hedge fund industry have the potential to create enviable networking opportunities.

While this alternative approach for attaining the goal of hedge fund employment is not for everyone—it may work for some.

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What Will the End of ‘a House Divided’ Mean for Hedge Funds?

November 17, 2014

Tuesday’s election results rang the death knell for a divided Congress. Republicans have earned clear majorities in both the House and Senate for the first time in twenty years. How this will affect economic policy, tax reform and market regulation is the subject of considerable interest and no small measure of speculation in the hedge […]

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Millennials: Ignore Them at Your Peril

November 3, 2014

While perception and reality frequently converge, this is not always the outcome. Millennials are an excellent case in point. Conventional wisdom suggests that adult Millennials (a/k/a generation “Y”), those between 18 and 33 years old, have no money. Prudent hedge fund managers, particularly those aspiring to grow assets under management by way of the retail […]

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Judge Lamberth Stops Payment on Perry Capital’s Reality Check

October 20, 2014

The United States District Court for the District of Columbia rebuffed Perry Capital LLC, dismissing its much publicized lawsuit against The Department of the Treasury and The Federal Housing Finance Agency regarding the manner in which Fannie Mae and Freddie Mac profits are distributed. Perry Capital’s litigation was doomed from the outset. The boiler plate […]

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Big Investor Says Nine Out of 10 Hedge Fund Managers Are Overpaid

September 22, 2014

With most hedge funds substantially underperforming the major stock market indices year after year since the 2008 financial crisis, it is only natural for hedge fund investors to expect some concession on the fees they pay to hedge funds. However, despite reports of some hedge funds offering to lower asset management fees, it appears that […]

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Value Investing Hedge Fund Rinehart Capital Shuts Down

September 8, 2014

Nashville-based hedge fund Rinehart Capital Partners, which specializes in value investing, is closing its operations, lamenting that the current market does not reward funds that employ value investing as a strategy. The seven year old fund was funded, in part, by hedge fund veteran Lee Ainslie who himself is a specialist value investor and who […]

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