How high school students are making more money than top analysts jobs by flipping jpegs online

You’ve probably already rolled your eyes, either at the large resell values or at the concept of NFTs in general. Since March, when nonfungible tokens first became popular, the reaction hasn’t altered much. The general public has criticised them as wasteful and damaging to the environment. The bigger the sale, the more egregious the wrongdoing.

With the average financial analyst jobs starting salaries at [1]£30,000 in the UK, NFT’s are proving to be an alternative source of income for the younger generation.  

When the bids started rolling in, Jaiden Stipp was watching a Star Wars movie with his afternoon youth group in Tacoma, Washington. It started with a fraction of an Ethereum currency, which was valued around $300 at the time. Then there was something else. Stipp, who is 15 and about to begin his sophomore year of high school, eventually sold his artwork, a digital illustration of a waving, astronaut-like cartoon figure, for 20ETH. (That worked up to almost $30,000, and it was sold for nearly $60,000 a month later.) 

Victor Langlois, another 18-year-old digital artist, was one of the first to bid on Jaiden Stipp’s work.  He has reportedly cashed in over $18 million in the past year on his own NFT sales.

OpenSea, the main trading platform for NFT’s surpassed $14bn trading volume in 2021. The platform takes a 2.5% cut on each transaction, leaving its rival platforms far in the dust. The most popular projects on OpenSea include the BoredApe Yacht club, where prices originally started at $190, and now can reach into the millions.

As the NFT market adapts and grows, developers are allowing users to earn money as their avatar is used in games. Bringing in more ways to cash in on your Jpeg.

But will the wider public take interest into this booming industry, or will the younger generation continue to take control. 

[1] Rober Half, 2021. Average financial analyst salaries in the UK – 2021. [Online] 
Available at: https://www.roberthalf.co.uk/salary-guide/accounting-finance/financial-analyst-salaries
[Accessed 12 01 2022].


How To Be More Elastic In An Age Of Continuous Disruption

By Daniel Page, Head of Asset Management Advisory, KPMG in Ireland (London)

Given the events of the past 18 months or so, I will spare you the diatribe on why Alternative Asset Managers (“Managers”) should focus on elasticity in their management companies. When I talk with Managers’ Chief Executive Officers (CEOs) or Chief Operating Officers (COOs), I’m rarely asked why more flexibility is needed anymore. But I’m always asked how it can be achieved.

Ultimately, what Managers are looking to achieve is the ability to scale up and scale down, as needed and across their business, in an efficient way. More elasticity within their infrastructure can mean better control over operating margins. That, in turn, can make you both more resilient and more attractive to high-performing professionals. It doesn’t matter whether you manage an AUM of $50 million or $5 billion, greater elasticity is critical to successful Enterprise Risk Management (ERM).

Think value

My advice to Managers? Make yourself accountable for stakeholder value as if you were a corporation – and one that you intend to sell. That means making every ERM decision with Enterprise Value (EV) in mind. That, in turn, can show you how to become more flexible, attract the right talent and focus on the right outputs.

“Easier said than done,” I hear you groan. And I’m not denying that enhancing elasticity in a Manager doesn’t take experience, industry insights and smart tools. Not all CEOs and COOs have first-hand experience running corporations with shareholder accountability; it’s not always easy to take an independent and objective view when you are on the inside and have a complex business to run day-to- day.

Peeling back the complexities

Knowing where to start and how to balance the key considerations can often be a challenge. Take human capital, for example – it’s arguably the largest cost for any Manager. One way to enhance elasticity is by achieving a clear and independent view of your human capital – layer by layer – to understand exactly what flexibility you have and, therefore, how elastic your workforce actually is.

Workforce models should also be reviewed to identify where more elasticity and flexibility can be achieved – not only in terms of people and real estate costs, but also to identify areas of potential enhanced efficiency. Yet this raises some difficult questions: who must be in the office in order to create value; how do you empower those that are not in the office; and how do you ensure they remain accountable and compliant?

Know where to look

Obviously, the need for greater elasticity should be managed against the realities of the business. Managers still need to compound returns for the long term to their investors, which is ultimately what investors hire them to do; they still need to reward and retain their high-performing staff; and they still need to ensure they abide by relevant laws and regulations. Those three pillars must remain protected.

But that still leaves significant room for Managers to enhance their elasticity – through greater use of outsourcing, through a more flexible and scalable IT environment, through smarter vendor management, through better talent retention and rewards, and more. The opportunities may not always be evident, but if you know where to look, they can deliver large rewards in terms of elasticity.

Get help

This brings me to my final point: if you don’t know how to enhance your management company’s elasticity, you may want to consider tapping into a professional, or team, that does. You likely already use external vendors for support across your business. Why would you not do the same for your management company elasticity and an independent view of your ERM?

KPMG Asset Management Advisory professionals know how to help create management company elasticity. In fact, KPMG firms are known for helping Managers of all sizes and AUMs to accelerate their journey towards greater elasticity and, ultimately, a more efficient and robust organisation. If you would like to discuss where to start, give our experienced and friendly team a call.


Why a Global Corporation Tax Rate is Good News for Hedge Funds

Finance leaders from the leading global economies have come together and look like they are close to agreeing a new global corporation tax, with a minimum floor of 15%. Rishi Sunak has led the talks in the UK, with the historic talks intended to end the world’s biggest companies avoiding tax in countries they do large amounts of business in.  

For Hedge Fund managers the idea of a minimum floor for corporation tax is maybe at first alarming, but on closer inspection offers a vast array of new opportunities. The new corporation tax rate would create transparency into global companies, allowing more data to be open to the public, creating opportunities for Hedge Fund managers. The data could help Hedge Funds better prepare for future trades. Companies In a new transparent era  will no longer be able to obfuscate their financial dealings, and enabling Hedge Funds to take advantage utilising their ability to act on information and data faster than other investment vehicles. 

The second advantage is for Hedge Funds to replace those that will lose out from a global corporation tax floor. 

The largest losers will be developing countries, and whilst it is difficult to envisage Hedge Funds from actually replacing a government, it is possible through the acquisition of government debt or by utilising tools more readily associated with Private Equity funds, for Hedge Funds to become the primary investors within developing countries.  

Countries have competed against one another for corporate investment, leading to a race to the bottom as statutory corporate tax rates have continuously fallen globally for forty years.

This has led to a scenario where large Foreign Direct Investment figures don’t reflect economic activity but rather empty corporate shells fashioned to lower tax bills. With the UK and in particular London primed for greater investment through the Hedge Fund sector this can only benefit those Hedge Funds already in London, as they already have the local expertise


Why Hedge Funds Don’t Like Discord Groups

As most of the population was under lockdown conditions over the past year, the use of social networks soared. The rise discord users grew and became a hot topic for many. A discord group is a community of online users who communicate through an instant messaging platform.

Some individuals saw this as an opportunity and created stock discord groups that now consist of thousands of members. The groups have become considerably influential and are taking the hedge fund world by surprise.

The discord groups are made of like-minded members looking to make trades that will bring in profits. Some are looking to invest their money and make quick profits, and some in for the long run. The ‘experts’ in the group will provide the stock tips to the rest of the group. The experts are made up of professionals, amateurs, and analysts.

Those in the discord groups use the pump and dump scheme. This is when a large number of people will inflate the price of a stock, only for those ‘in the know’ to then go and sell their shares, benefitting from everyone’s losses. This scheme is dangerous for those who are amateurs and viewed as securities fraud.

With increasing amounts of discord members investing in the markets, and working together, is the era of hedge funds domination over the markets coming to an end?

Hedge fund managers will spend decades as analysts studying the markets, with many gliding their way through the markets from thereon afterward. However, with the creation of Robin Hood and Etoro, many non-professional individuals are taking it upon themselves to play the stock market. This has caused hedge funds much anguish, with examples including the GameStop fiasco, where hedge funds lost billions of dollars, and some, including Melvin Capital, had to be bailed out. All because members who were a part of a forum on Reddit decide to manipulate the price.

What happened was not illegal, but hedge funds were taken by complete surprise, giving them a wake-up call some will never forget.

Discord groups and Reddit forums are the results of people coming together to fight against the big hedge funds and give them competition they have never encountered before. How will hedge funds tackle these amateur, impacting investor groups?


Top100 Most Influential People In Service Provision For The Investment Space

The TwoandTwenty Top 100 list was released this week and has led to celebrations as well as disappointments. The vast amount of positive feedback has put the 220 creators in high spirits, where they have been working hard behind the scenes to ensure the operations are running smoothly.

The 220 Top 100 list of the most influential people in service provision for the investment space, was created to help partner up the best in service provision for those in the investment space. A huge congratulations to all the influential individuals who made the list, especially to the 1st position, Peter Hughes from Apex.

This Top100 list was developed and concentrated on service providers with more of a tech emphasis. However, we hope to eventually create a list of service providers that also encompasses those from the ancillary services in order to give a broader spectrum to the list.

We have deliberately stayed away from providers who work with investment tools and Prime Brokers, as we don’t feel it’s our place to offer an opinion in areas covered by regulatory authorities.

Please take this opportunity to understand more about our services: https://twoandtwenty.co.uk/ourservices/

While you are here, why not take a look at our other lists: https://twoandtwenty.co.uk/cecilias-list/

We look forward to hearing from you.

Ethan


Starting a Hedge Fund: Requires an MSP

The traditional market approach to creating and launching a hedge fund would require a future hedge fund manager not only to run the strategy, but also to oversee many other elements simultaneously. The hedge fund manager must recruit an executive team and support staff, locate office space and negotiate a lease, and select various service providers to be key players in assisting with the operational management of the new hedge fund. All this comes with risk, but without risk and volatility, a hedge fund simply won’t gain high returns

Well-established hedge fund MSPs typically bring a more seasoned and reputable management team than young, inexperienced companies. These individuals are more familiar with the nuances of hedge fund industry and ideally positioned to understand your firm’s unique business needs. Equally as important, having an experienced team typically helps a hedge fund MSP attract, develop and retain the best and brightest technical staff, including highly skilled engineers and analysts.

In addition to having a top quality team, established MSPs are much more likely to have a greater depth of staff available to service their hedge fund clients. It is recommended to select an MSP that can provide a dedicated project manager and an accompanying project management team that is responsible for ensuring that your hedge fund’s projects and initiatives are designed, managed and implemented to meet your exact technology requirements.

A hedge fund product can be constructed as a single U.S. domestic hedge fund, as a single offshore fund, or as a combined domestic and offshore fund. The decision regarding whether to use a domestic versus an offshore structure will be based primarily on the tax considerations and implications for potential investors. 


Why Penetration Testing Is Important

What is a penetration test?

Penetration testing is a service that evaluates the security of the client’s IT infrastructure and finds organisational vulnerabilities. An ‘attack’ on your business is performed, safely gaining an assurance in your organisation’s vulnerability and management process. Therefore making it harder for cyber- criminals find vulnerabilities. The tests are carried out by a penetration testing professionals, who comply with the highest ethical standards and perform the test without harming your businesses systems.

Why are they needed?

Most businesses hold high value data and confidential information on clients and customers. Losing important data could have devastating effects on your business. Cyber -criminals are becoming a danger for the growth of businesses whether large or small. In order to fight cyber- criminals head on and protect yourself against these criminals, businesses will need to spend time and money to understand the threat, and mitigate these threats with the help of cyber security firms penetration testing.

Cyber – criminals are able to gain access to ‘secure’ information on your businesses services, and sometimes you won’t ever know they ever accessed the servers. Penetration testing allows a cyber security company to secure any vulnerabilities in your business servers and mitigate further threats to your business.

Securing your businesses cyber presence will increase your investors and clients trust in your ability to operate safely and securely. Peace of mind is always appreciated, especially amongst investors who’s finances are on the line, as well as client data who wish to remain anonymous.


In-House Cybersecurity vs Outsourced Cybersecurity

Cybersecurity is the protection of computer systems and networks from information disclosure, theft of or damage to their hardware. Protecting your hardware is essential, but whether the protection is in-house or outsourced can make a huge difference.

In-house cybersecurity is when the company itself hires employees to protect their own hardware. This can be an expensive method with a CISO (chief information security officer),a SOC (security operation centre) engineer, a DPO (data protection officer), and a cybersecurity analyst. The average salaries of these include £130,000 for a CISIO, £35,000 for a cybersecurity analyst, £40,000 for a SOC engineer, and £80,000 for a DPO, meaning  £285,0000 per annum for your in-house cybersecurity team.

In-house cybersecurity also means that your company would need to train the cybersecurity specialists. In order for the specialists to remain specialists, they would need to be regularly sent to training courses, and they would learn new things on the job but at a risk of missing certain criteria and therefore causing potential risk to your companies cybersecurity vulnerability.

Even if your company were able to train their cybersecurity specialists, and spend large amounts of resources on them, the chances of them being headhunted are high. Their departure could cost your company time and finances, which most companies can’t afford to lose. Consequently your company will have to start again with a new employee, and this cycle can be repeated countlessly.

Another option is outsourced cybersecurity. This is when a company hires a third party to perform cybersecurity services to protect them. Outsourcing causes responsibility to be abdicated. A company will be trusting all their confidential information, including client details, employee details, and the companies financial information, with a cybersecurity company they might not know very well. The outsourced cybersecurity company can be based far away from the company they are protecting, and is made up of employees that are able to access clients information.

In order for an outsourced cybersecurity company to keep your company protected, the set – up costs can be expensive. The set-up costs include risk assessments which start at £12,000 , or penetration testing at £6,000. This would be in addition to monthly costs, which for a small fund costs a £10,000 a month. Meaning that regular large payments will be debited from your accounts to the outsourced cyber company.

An outsourced cybersecurity company will be catering to businesses of all sizes and of all different industries. The outsourced company will likely have generic solutions to protecting your specific company, and therefore the likelihood of hackers accessing your company through backdoors is high due to a hackers targeted attack, and the outsourced cybersecurity companies generic protections. As oppose to a outsourced cybersecurity company that has bespoke cybersecurity solutions and robust security programmes.

Given that over 50% of UK businesses outsource their cybersecurity, the difference of outsourcing relies in 2 categories, an MSP, and an MSSP.

MSP’s (managed service provider) are expensive and generic due to their lack of specialist services.

MSSP’s (managed service security provider) are recommended due to their advantages over an MSP. MSSP’s are more likely to be cost effective and therefore more viable for your company. MSSP’s are bespoke and will offer your company a roadmap to robust cybersecurity strategies.

We recommend the cybersecurity consultancy, Remora,  for your companies cybersecurity needs.

www.remora.co.uk


Why Family Offices Need Cyber Security

Family offices hold important and sensitive information, similar to that of a large organisation. The problem being, many family offices don’t have the same cybersecurity implementations in place as large organisations do. Family offices are set up to hold, invest and expand a family’s wealth for future generations, meaning there is a hi-profile, wealthy target who will constantly be at risk from cyber-attacks.

Family offices are usually made up of a small number of employees, who will have access to information but are careless with securing it, due to a lack of cybersecurity knowledge, creating opportunities for attackers to steal sensitive information.

The main threats to family offices from cyber attackers include:

  • Extortion (Ransomware)
  • Fraud (Business email hack)
  • Espionage
  • Cyber-enabled physical threats (Home’s, estate’s, superyachts compromise)  

The listed threats can cause a family office to lose out massively if implementations are not in place to mitigate these threats. Being prepared is the first step to mitigating cyberattacks. Ways of being prepared include:

  • Risk assessments
  • Penetration testing
  • Cybersecurity training
  • Data & employee monitoring  

Testing your own systems for vulnerabilities is vital for your protection. It allows you to find the vulnerabilities and patch them up, before hackers do and cause harm to your family office.

Securing the family office is not enough. The need to secure the family assets and social media usage is also important. Cyber attackers are known to use more than just their keyboard to infiltrate their target. Attackers can collect information from unwanted attention such as, photographing the target in public, following the targets cars, or social media tracking.

It is essential all aspects of cyber-enabled vulnerabilities are ‘patched up’ to ensure a family office is secure from cyberattacks.  

With the hi-profile individuals and employees being cyberaware, and the family office being cybersecure, the potential of hackers being able to infiltrate is extremely low. The need to be cautious of unknown threats is vital to the future of keeping family offices secure.


Hedge Fund Managers and CGT

Hedge fund managers drawing down income and CGT rather than PAYE may have been worried about yesterday’s budget. Rishi Sunak steered away from CGT, allowing hedge fund managers to be free from increased taxes. As many funds were sceptical of potential tax hikes, their ability to move abroad was not out of the question. But with Rishi Sunak’s tactical play, hedge funds will be staying put for now.

Most Mayfair Hedge fund managers are compensated with through carried interest. The income they receive from the fund is taxed as a return on investment as opposed to a salary or compensation for services rendered. The incentive fee is taxed at the long-term capital gains rate, so it would have come as a shock to many that this was under consideration to be closed as a method of payment.

The need for investment especially into government debt through the purchase of bonds and gilts may have been a deciding factor in why Rishi Sunak decided not to tamper with the taxation of Hedge Fund Managers, and the soon to reopen bars, restaurants, and clubs will be grateful to the treasury for not hitting Hedge Fund Managers in the pocket.


Why MSP’s Are Important For Hedge Funds

What are MSP’S?

A ‘Managed Service Provider’ delivers services, such as network, application, infrastructure and security, via ongoing and regular support and active administration on customers’ premises, in their MSP’s data centre (hosting), or in a third-party data centre.

The MSP’s responsibility is to take on the tasks of what your current IT staff are doing.  Available to hedge funds of all sizes, MSP’s also provide:

  • Subscription-based management of cloud-based, on-premise & other IT assets;
  • Onsite project-based services;
  • Hardware / software re-selling & implementation.

Why they are important for Hedge Funds

In order for hedge funds to maximise their time and investments, the incorporation of an MSP is critical to supporting a hedge funds infrastructure. The correct MSP allows a hedge fund to redirect their investments in physical infrastructure and onsite support of that infrastructure to other more important projects.

Using the correct MSP is not as straightforward as it may sound. The hedge fund will need to document their key activities and compare it against the MSP’s goals to see if the MSP is suitable for use. 

Hedge fund managers use a wide range of tools to analyse markets, research investors, execute orders and perform many other functions. They often manage multiple funds , MSPs offer cloud solutions that allow managers to interconnect all of these types of tools, improving efficiency.

Cloud providers are take security very seriously, and that should help alleviate the concerns hedge funds have about the cloud. If MSPS’s work with providers that are compliant with SEC’s guidelines, they should be able to put hedge fund client’s minds at ease.

What ‘Good’ MSP’s look like:

Higher Value-added service offering   The best way to determine how commoditised an MSP’s service is, is by looking at their gross profit margins. The ideal gross profit margin should be in excess of 30%.
Strong Recurring Revenue Retention MSP’s have been proven to capture more recurring revenue. Investors are generally going to want to see 40-50% of an MSP’s revenue tied to recurring maintenance and monitoring services.
High Client Retention   A benefit of MSP is the tendency for service providers to retain clients. MSP’s do a good job of not losing accounts. Resulting in annual client retention being in excess of 90% for a good MSP.

Have Family Offices Been Affected By Covid-19?

As Covid-19 has affected billions of individuals globally, it has also had great impacts on global markets and businesses. Including the framework that supports family offices. Family offices need to ensure family wealth is properly managed and eventually distributed to successive generations. However, with Covid-19 posing a great threat, family offices will need to be ready and prepared for the incoming threats.

Though the markets recovered from a sharp nosedive at the start of 2020, family offices still have questions.

According to a Citi bank report, three out of four family principals and office heads indicated a “mostly cautious investment outlook” for 2021. They are cautious because of the ongoing pandemic, as well as uncertainty over monetary and tax policies. Overall, wealthy investors are expecting “meager” 1% to 5% portfolio returns for 2021, as stated in the report.

Working from home

Due to the UK government placing the country into lockdown and offices being closed, employees have been working from home and have been vulnerable to cyber-attacks because of this. Of the 78 global family offices surveyed, 96% of respondents said they have experienced at least one cybersecurity attack. Employees are accessing the family office confidential information on their laptops, whilst being connected to their unsecure home WIFI’s. Allowing hackers to easily gain access to the information on the employees laptop.

Impact investing

High-net worth families are increasingly conscious of how they are perceived by the public and how their investments affect society and the environment. As a result, impact investing has become a popular way to contribute to a greater societal good. As millennials are growing older and holding their values as they grow, their preference to invest and donate is higher than their preference to spend on luxurious such as yacht and jets. The behaviour of millennials could affect the way family offices operate in the near future, as they prefer to support social and governance projects.

The Biden administration has given support for sustainable, socially responsible projects.


Gamestop

GameStop has pitted stock market professionals against the armchair investor, whose numbers have swelled during the coronavirus crisis as they seek to make their money work for them at a time of ultra-low interest rates.

Institutional investors, including the $13bn hedge fund Melvin Capital saw an opportunity to make profit from betting against GameStop’s share price, or short selling.

All of this was unremarkable until users on a Reddit forum called “WallStreetBets” decided to buy into GameStop shares or options to buy them, initially because they thought it was undervalued, then to send a message to the short-sellers.

Acting in unison they pushed up the share price to astronomical levels causing massive losses for short-sellers.

The hefty losses for hedge funds came as shares of highly-shorted GameStop jumped more than 1,000% in the past week without a clear business reason, forcing short-sellers to buy back into the stock to cover potential losses — defined as a short-squeeze — while retail investors then piled in to benefit from the surge.

Now the battleground has shifted to other shares that have been bet against by hedge funds including BlackBerry, cinema chain AMC and American Airlines. Where loss-making short positions on more than 5,000 U.S. firms.

Its data also showed that estimated losses from shorting GameStop at $1.03 billion year-to-date, while those shorting Bed, Bath & Beyond were looking at a $600 million loss. The company sources short interest data from submissions by agent lenders, prime brokers, and broker-dealers. 

The concern here among regulators is abnormal functioning of markets, usually based on information, becoming a risk to financial systems through disinformation and muddied motives of social media chatroom users. Hedge Funds have been put on the back foot, how they respond will be interesting to see and to evaluate over the coming months.


Hedge Funds vs PE Funds

Hedge Funds and private equity funds have homogeneous investor profiles drawn from ultra-high-net-worth individuals and high-net-worth individuals, as well as institutional investors, who manage large amounts of cash assets of insurance companies, corporations, and trust funds., work for pension funds for corporations, public sector, or trade unions.

In the UK institutional investors provide 65 percent of the capital invested in hedge funds.

Hedge funds use pooled money to invest in virtually anything and everything from individual stocks (including short selling and options), bonds, commodity futures, currencies, arbitrage, derivatives—whatever the fund manager sees as offering high potential returns in a short period of time.

Hedge Fund investments in the UK are primarily in highly liquid assets, enabling the fund to take profits quickly on one investment and then shift funds into another investment that is more immediately promising. The focus of most hedge funds is on maximum short-term profits. Hedge funds use leverage, or borrowed money, to increase their returns.

Hedge funds benefit from being less regulated than mutual funds and other investment vehicles.

Private equity funds more closely resemble venture capital firms in that they invest directly in companies, primarily by purchasing private companies, although they sometimes seek to acquire controlling interest in publicly traded companies through stock purchases. They frequently use leveraged buyouts to acquire financially distressed companies.

Unlike hedge funds focused on short-term profits, private equity funds are focused on the long-term potential of the portfolio of companies they hold an interest in or acquire.

Once they acquire or control interest in a company, private equity funds look to improve the company through management changes, streamlining operations, or expansion, with the eventual goal of selling the company for a profit, either privately or through an initial public offering in a stock market.

To achieve their aims, private equity funds usually have, in addition to the fund manager, a group of corporate experts who can be assigned to manage the acquired companies. The very nature of their investments requires their more long-term focus, looking for profits on investments to mature in a few years rather than having the short-term quick profit focus of hedge funds.

Whilst similar in many ways there are some key differences between Hedge Funds and Private Equity Funds, including Time Horizon, Investment Risk, Lock-up and Liquidity, and Investment Structure.

Time Horizon: Since hedge funds are focused on primarily liquid assets, investors can usually cash out their investments in the fund at any time. In contrast, the long-term focus of private equity funds usually dictates a requirement that investors commit their funds for a minimum period of time, usually at least three to five years, and often from seven to 10 years.

Investment Risk: There is also a substantial difference in risk level between hedge funds and private equity funds. While both practice risk management by combining higher-risk investments with safer investments, the focus of hedge funds on achieving maximum short-term profits necessarily involves accepting a higher level of risk.

Lock-up and Liquidity: Both hedge funds and private equity typically require large balances. Hedge funds may then lock those funds up for a period of months to a year, preventing investors from withdrawing their money until that time has elapsed. This lock-up period allows the fund to properly allocate those monies to investments in their strategy, which could take some time. The lock-up period for a private equity fund will be far longer, such as three, five, or seven years. This is because a private equity investment is less liquid and needs time for the company being invested in to turn around.

Investment Structure: Most hedge funds are open-ended, meaning that investors can continually add or redeem their shares in the fund at any time. Private equity funds, on the other hand, are closed-ended, meaning that new money cannot be invested after an initial period has expired.


Hedge Fund Bonuses Beat City Bonuses

Traders in the square mile and Canary Wharf are facing an uncertain time as we hit the Christmas period, the reality is that bonuses, are likely to be smaller than usual. Traders who are used to getting bonuses that range from 50% to 100% of salary are this year more likely to have to settle for between 10% and 30%.

Even those traders who saved their firms’ bottom lines in the first half of 2020 are facing the reality of Covid with most businesses facing declines of 10% or more. Even bond traders are likely to find year-end rewards do not line up with the cash they generated, as firms face loan losses and pressure on costs.

With that in mind those from the East will be gazing with envy on those from the Mayfair and St James environs. There will be a large polarity of results when Hedge Funds and PE funds announce their results with the rumours that some Hedge Funds have been negatively impacted this year, whilst others have flourished.

Amongst those Hedge Funds to flourish, with over half of the new fund launches in London following equity strategies, the new launches are in line to show a larger than average first year return.

The successful Hedge Funds have excelled this year due to the rising public equity market, fuelled by monetary and fiscal policy responses to the Covid-19 pandemic in developed markets. Which should augur well for 2021 as well.

It should also mean that the frugal bonuses of the city will not be reflected in St James and in Mayfair. Which is good news for the wine clubs, the art dealers and boutiques that can all expect to be busy, so long as they remain open.


Starting a Hedge Fund: Service Providers  

Starting a hedge fund and ultimately running the fund in a professional manner requires the assistance of several key service providers. These service providers should be independent to avoid conflicts of interest and assure investors that adequate checks and balances exist to provide robust procedures and controls. These service providers include: 

  • an independent third-party fund administrator 
  • an independent certified public accountant for audit and tax services 
  • a broker (prime broker or otherwise) 
  • a custodian or custodians 
  • Independent legal advice or general council  
  • Managed Service Provider 
  • Managed Security Service Provider 
  • Virtual CISO 
  • Virtual DPO 
  • Independent Compliance Officer 
  • Independent ESG Team 

Each of the foregoing providers plays a critical role in the process to start a hedge fund and successfully operate the fund in a manner that ensures compliance and safekeeping of funds and securities. 


Raising Capital 

Raising capital is the greatest challenge of all because of the enormous competition for investor dollars between traditional and alternative investments alike. Despite the challenges, hedge funds that can present investors with a compelling investment proposition can amass significant investor assets

Hedge fund managers that are successful at capital raising will have: 

  • a strong understanding of their fund’s value proposition and target market 
  • a coherent offering from an investment strategy and structural perspective 
  • an organised marketing plan 

Additionally, hedge funds that are looking to attract institutional capital will have implemented operational risk controls designed to show institutional investors that the fund is “institutional quality.” Operational risk controls are designed to limit the catastrophic business risk that often makes institutional investment in an emerging fund unrealistic or impossible. 

Prospective hedge fund managers should “pre-market” a hedge fund by soliciting non-binding indications of interest from prospective investors. Hedge fund managers typically develop some basic, collateral marketing material to facilitate the early and ongoing marketing process. Any such material should be reviewed by counsel and should include robust disclaimer language prepared by a competent hedge fund attorney. Pre-marketing and other early “soft” sales can assist a prospective fund manager in assessing the feasibility of a potential hedge fund launch and will provide valuable feedback from investors on acceptable terms and conditions for the fund’s structure. 


Starting A Hedge Fund Overview

Starting a hedge fund demands a concentrated effort on the part of the manager, sponsor, and key personnel that will form the core operating team for the fund and adviser. Managers and sponsors that do not effectively delegate launch responsibilities among team members and service providers will find the process to launch a hedge fund to be a challenge. This does not have to be the case. 

In general, the process to start a hedge fund involves: 

  • developing the investment strategy and organising the hedge fund structure 
  • forming entities to serve as the fund and management company 
  • obtaining necessary registrations with industry regulators 
  • forging important service partner relationships 
  • developing robust offering and governance documentation 
  • creating effective marketing communication materials 
  • solidifying a marketing strategy for the hedge fund business 
  • opening bank and brokerage accounts 
  • approaching prospective investors 
  • implementing the fund’s strategy in live trading

All of these processes can and should run smoothly with sound guidance and diligent support. However, many managers set on starting a hedge fund never get their funds off the ground because of missteps at critical points in the hedge fund startup process.


What Is Two and Twenty?

Two and twenty (or “2 & 20”) takes its name from the standard fee arrangement in the hedge fund industry and is also common in venture capital and private equity. Hedge fund management companies typically charge clients both a management and a performance fee.

“Two” means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets.

“Twenty” refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.