A Guide to Starting Your Hedge Fund

Chapter 9Operations and Infrastructure

I'm not into this detail stuff. I'm more concepty.

Donald H. Rumsfeld, former US Secretary of Defense

Introduction

If your approach to operations and infrastructure functions echoes the excerpted statement made by the former US Secretary of Defense, then things do not bode well for your hedge fund endeavour. Generally, clients invest in alternative investments, such as hedge funds, for superior risk-adjusted returns that offer capital protection and capital appreciation. Clients expect hedge funds and other investment firms to achieve this goal through consistency. Sophisticated clients want to see evidence of consistency in the investment process, risk management, operations, and across other core functions from any investment manager.

During a meeting, we once heard a highly regarded trader mention a key tenet of managing a successful investment enterprise. He said something to the effect of: ‘You can be the best trader in the world but if you don't have a good operations staff, then it doesn't matter.’ We wholeheartedly agree with his statement. Accordingly, this chapter is about the key concepts we have found essential for ensuring that operations and other back-office functions contribute to the overall success of the investment management enterprise.

As different hedge funds will undoubtedly have different operational needs depending on investment style, asset class, use of derivatives, frequency of trading, jurisdictions and geographies ...