Chapter 2

Institutionalization and Operations

The most important contribution management needs to make in the twenty-first century is to increase the productivity of knowledge work and the knowledge worker.

—Peter F. Drucker

A study in 2006 by Capco shows that at least half of hedge fund failures are due to operational reasons rather than performance reasons. This runs contrary to what most would expect. To make matters more challenging, most fund managers come to the business with portfolio management or trading experience, not operational fund management experience. This chapter provides some operational best practices, tips, and recommendations from experts in the industry.

Why important: Everyone, including traders, service providers, marketers, and portfolio managers, contributes to the institutional processes and operations of a great hedge fund, and there are hundreds of tactics that may be employed as a fund's business grows. One thing is certain: If you are looking to grow your hedge fund to over $100 million in assets, not knowing how to improve the institutional quality of your hedge fund will result in a loss of assets to those who do understand and adapt to the institutional demands on hedge funds.

The hedge fund industry is becoming simultaneously more competitive and diverse. A fund manager starting business today will face more hurdles than any manager in the past in terms of regulations, objections, and gatekeepers. One of the most difficult ongoing challenges ...

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