Gordon Casey, Managing Director, Front Shore
Many new hedge fund managers used to work at investment banks, at trading desks. They leave their jobs behind because they have an idea, a trading strategy or an algorithm, let’s say; something that they believe enables them to beat the market.
They do not start their hedge funds because they enjoy filing forms with the regulator, or negotiating contracts with banks, or dealing with HR issues, or spending days with real estate agents looking at office space… yet those are the tasks that will take up 50% or more of their time during the first few months on their own.
You might not be a hedge fund manager but does this sound familiar?
The answer to the question in the title is that hedge fund managers are not hedge fund managers when they are entrepreneurs. And the same applies to anyone.
Many of us fail to understand, when we start our own business, that the product or service we are about to launch is secondary to all of the minutiae involved in actually running a business, and especially so during the initial phase, pre-launch; the start-up phase.
With a few notable exceptions, there is no idea that is so great that it will overpower the administrative burdens that face every entrepreneur, every business-owner, every startup.
The term “startup” seems to imply “tech startup” these days and they are leading the way in innovation around the business of starting up, but we are all startups when we first begin.
A fund manager should therefore look to the best practices in the startup world in order to ensure that his or her own startup, the fund, will be competing with the best.
Any entrepreneur that conceives of themselves as such will already be slightly ahead of the pack; if you’re willing to take it a step further and find an approach and some tools to go with that, then you’re light years ahead and you can hopefully focus on the core of your business.
The approach that is most admired these days goes by a number of names: in manufacturing it’s known as the Toyota approach, kaizen, in software development it’s called Agile or Scrum, and in the Startup tech world it’s called Lean. It doesn’t have a name in financial services because hardly anybody is using it.
The principle is simply this: improve constantly, minutely and iteratively. There are a host of implications in that simplicity – you need to be measuring in order to determine if you are really improving, your staff must all be equally empowered in order to recognize where improvements can be made and your teams must be the right size to be effective.
In fact, even basic waterfall-style project management would be a huge improvement on the way most new hedge fund managers approach the launch of their fund.
There’s also a simple tool that has been championed of late and can have a dramatic effect, especially in the areas outside of the new fund manager’s core expertise (administration, compliance and HR). That tool is the humble checklist.
Properly developed and refined (using the approach described above), a simple checklist can deliver reliability, consistency and excellence. It can not only ensure that the basic steps are being followed, it can ingrain any of those tiny improvements identified by your team and deliver change across your organization.
And with the basics taken care of, the fund manager can, finally, focus on delivering Alpha to his investors and raising more capital, which is why she got into the business in the first place!
If the focus can shift ever so slightly away from investment performance and towards delivering outsized returns at every level of the operation from office space to hiring policy to contract management, then a fund manager will not just be a fund manager, she will be an entrepreneur, a founder, with as much cred as any of the tech wunderkinds that are scattered around the startup space before they even have their first great idea.
Those kids understand how much effort it takes to get their idea from conception to the market and they are working on those skills before they even hit day one. The financial services industry could do with a bit of that Y Combinator magic. All we have to do is start it up!
[Image courtesy of Stuart Miles at FreeDigitalPhotos.net]
About the Author
Gordon Casey is the managing director of Front Shore, a hedge fund consultancy he founded in 2004, and the author of The Cayman Edge: How to Set Up a Cayman Fund. Learn more about Gordon at www.gordoncasey.com and connect on Twitter, @gordoncasey2 and Facebook, www.facebook.com/caymanedge.