Building an Institutional Infrastructure for Success

Post-2008, there is a lot of pressure for emerging managers to be ‘institutionalized’ on Day 1. However, what does that mean today? To what extent do you need to build the infrastructure of your new fund? Can co-sourcing be a legitimate option for key functions?

First and foremost, it’s important to note that having an institutionalized infrastructure will not raise funds. However, the lack thereof can certainly deter them. 

That being said, prematurely “over-engineering a fund” can lead to its demise. A new manager should first evaluate their budget – what amount of capital does the fund need to sustain itself? What is the breakeven asset under management (“AUM”) level? Successful managers build their businesses based on the AUM, strategy, and investor type, and co-sourcing can be an important component of that measured growth. Remaining lean at the beginning can be key, but having adequate resources to manage the portfolio and business/operational functions is required. Co-sourced resources to manage the middle/back office, legal/compliance and IT infrastructure are certainly acceptable to a large number of investors while endeavoring to successfully raise capital and manage a profitable business. 

The hedge fund industry as a whole has matured and service providers have more robust offerings.  Outsourced CFO, CCO and trading services have become key functions that funds are leveraging to manage their expenses. Outsourcing such functions is no longer taboo to operational due diligence (“ODD”) teams; however, it is important to have a growth plan and evaluate at what AUM level these functions should be internalized as well. 

While the responsibilities between the “book and the business” should be separated, the portfolio manager should still understand the middle and back office functions and processes that are taking place within the organization. You can outsource the function, but ultimately, you cannot outsource the responsibility.