Hedge funds have been super active this year, and a 5-year record has been broken in terms of newly founded funds. It costs $50,000 to start a hedge fund under an umbrella structure, which is about the same as starting an FX broker. What are we all waiting for?
The day which marks the end of the year in which the whole world’s social and economic structure was decimated by democratically elected governments which have turned on their electorates, using tactics which have not been seen since the Communist revolutions in the early 20th century.
What the global cabal of power hungry despots do not grasp, however, is that human beings are inquisitive and adaptable by nature, and pushing boundaries, inventing new directions and improvising to suit circumstances are traits which can never be extinguished.
Thus, during the draconian state operated wing clipping attempts of 2020, those with a will to prosper have been working hard, and one such notable area of expansion is the hedge fund and wealth management business, which has become the subject of huge interest from banks, institutional trading companies and technology start ups wishing to offer housebound populations worldwide the chance to remain financially strong and independent in an environment in which people are not even allowed to go to work to earn a living.
It has been clear that the lockdowns would drive most businesses online, and in that respect the electronic financial services sector had a head start over business sectors with analog or physical products, in that lockdowns, combined with the market volatility that has ensued due to such an uncertain future have simply accelerated demand for online trading.
It is not enough just to rest on laurels and ride the wave of volatility within spot FX markets and make hay from existing client bases, however.
There has never been a more appropriate time for diversification than now, and with the hedge fund sector very much within the remit of what is possible for electronic trading companies, 2021 is very much set to be the year in which hedge funds are the point of interest for investors and trading firms alike.
New hedge fund launches increased to an estimated 151 in Q3 2020, the highest quarterly launch total since 2Q19 and exceeded the estimated quarterly liquidations for the first time since 2Q18. Launches in the most recent quarter exceeded the 2Q estimate of 129 new funds, bringing the YTD 2020 launches to 364 through Q3, a period which included a record low number of fund launches in 1Q as the lockdowns began.
Fund liquidations fell to an estimated 137 in Q3 2020, the lowest liquidation total since 2Q18 and marked a decline of over 50 percent from the 304 liquidations in Q1 2020. Through Q3 2020, an estimated 619 funds liquidated in 2020, with nearly half of those occurring in Q1 2020 according to the Market Microstructure report by HFR, released this week.
Average hedge fund management fees remained flat from the prior quarter at an estimated 1.37 percent, while the average industry-wide incentive fee declined by 1 basis point to end Q3 at 16.36 per cent. Both figures represent the lowest level for both fees since HFR began publishing these estimates.
For funds launched in Q3 2020, the average management was an estimated 1.36 per cent, in line with the global industry average of 1.37 and above the 2Q average of 1.27 per cent. The average incentive fee for funds launched in Q3 2020 was an estimated 17.97 per cent, above the total industry-level average of 16.36 but in-line with the average incentive fee of 17.44 for funds launched last year.
This activity comes at a time which is vital for FX firms in terms of adapting their infrastructure to be able to offer a genuine multi-asset solution.
Being hamstrung with subservience to MetaQuotes and its 16 year old MetaTrader 4 platform which places the destiny of brokers firmly in the hands of MetaQuotes and does not allow brokers to self determine means that not only are the same small, novice clients from far flung places the main audience, but offering a high quality product range and access to diversified markets is not possible, therefore brokers miss out on the chance to develop their client bases toward experienced traders with larger portfolios.
Also, people are wise to being treated like a ‘lead’ and being badgered for deposits by people with false names and thick accents from several hundred white label brands of MetaQuotes offering the same thing. This is not a casino business, it is a proper electronic financial services business and should be moved forward on that basis.
Retail electronic trading should now be able to move up toward being a technology driven market integration business for high quality experienced traders of all asset classes, and leave behind any affiliate marketing/revenue share related obsolescence.
The statistical demonstration that new hedge fund launches increased to the highest level in five quarters in Q3 2020, added to the new solutions which mean that brokerages can start a hedge fund for $50,000 using a turnkey solution should be food for thought.
Recently, FinanceFeeds attended the 2020 Hedge Fund Expo hosted by Advanced Markets, all the panellists and audience agreed that the cost of startup is around $50,000 which is approximately the same as starting an FX broker under an umbrella system.
What is worth considering is that if these professionals exist, and brokers which are far more technologically savvy than hedge fund managers can get in on the action and gain funds with good assets under management that are far more stable than retail FX lead acquisition for small value/low lifetime value, it is definitely an easy sector for FX firms to move into.
Where would you set up? Unanimously, the audience considered Cayman Islands as the most attractive region to set up a hedge fund by 48% under an umbrella, closely followed by the United Kingdom, with 30% of the audience going that way.
Looking for a good auditor, and then considering the cost, complexity of strategy, trading volume, duration period looking to be verified, are all aspects to be dealt with by accountants.
During the discussion, the compatibility between hedge fund and electronic trading companies was part of the discussion.
Ronald Richter, Managing Director of Bride Valley Partners, a capital introduction business and third party marketer helping asset managers in the alternative asset space to find investors, and has been active in hedge funds for 24 years, said “Investors are looking for pedigree, track record and stability so if you cannot show an extremely relevant past, making a sacrifice of a couple of years by being on one of these platforms if you are able to get into an asset manager where you are able to build this is worthwhile. You see a lot of asset managers with a great track record and some don’t have the background of the big asset managers, but some others should spend two to three years in an asset manager to get proof of concept.”
Andrew Gillibrand, a former Credit Suisse quant who is now CIO at UNION said “I think it comes from the other side of the spectrum, and I’m pretty sure that everyone in the audience today aren’t so worried about the objective aspects, more building up the network. Some of this was addressed in Chris Anderson’s book called The Long Tail saying anyone can write a book, sell things on Amazon or run a fund.:
“In order to build a sound record, you need good assets so you can commit time to it, you need to do it in a place where it costs very little, and use the idea of organizing for success. You do not want to be fragmented and have an account with 4 different brokers and push signals all over the place. You need a venue with good suitability, and engage today with any potential customer you may have in the future as it takes a very long time to convince someone to give you $5 million and longer to get them to give you $5o million” said Mr Gillibrand.
Juan Colon, the charismatic founder of Darwinex who has now gone on to lead Machine Markets then said “What I hear from the big guys is that is is not always clear to me that track record acquired when working for them is not actually yours when you leave. I think you need to create online trust, and this is a challenge that at some point someone will break through it. I agree with Andrews’ point about not spreading across various venues that takes up bandwidth, however we shouldn’t need to force people to go and work in London for two to three years and give up on their independence.”
Mr Gillibrand said ” I agree. the language that supports the underlying product has not been organized . You cannot call it an ETF, and people talk about alternative investments that they are pursuing, but we should organize the language around trust and the objective ways of delivering these alternatives into capital. We need an organized language that includes subjective and investable attributes.”
Mr Colon said “You don’t have to go for a $150 million operation, you can charge 20% success fees on a smaller fund and I would sign up for that. The traditional way has always been there, there are leaner alternatives should people want a journey toward something bigger, however, you could continue to be a quant doing something different to finance and making a side living to help you with your daily expenses”
Once again, a similar structure exists, albeit for a more complex type of trading, to that available within the FX sector, thus our seasoned executives in the electronic OTC trading business would likely find it an easy read across to get hedge fund clients on board, especially when considering Ms Pittas’ perspective that managed accounts are super easy to audit! What are we waiting for?