The decision to embark on an entrepreneurial journey, especially in the highly competitive investment management industry, can be a daunting one. It is almost impossible to make all the right choices when starting your own investment management company. But when we strive for such perfection, we must acknowledge that we may never be able to achieve it.
Smart people learn from their mistakes. But you can do what the wisest people can do and learn from the mistakes of others.
Our experience in facilitating the successful launch of investment management firms among other companies provides us with some perspectives on these lessons. We hope that the outline we have outlined will make you move forward with more clarity and confidence.
Portfolio managers are often motivated to create their own investment management firm for a combination of factors. While this is a personal, individual choice, most successful founders are driven in the same way. Based on what we know, we suggest that you ask which of the following degrees applies to you:
Reasons to start your own investment management company
1. You have an entrepreneurial attitude and try to maximize your positive impact for investors.
You may want to make a bigger impact on the society or the wealth management industry. In your heart, you have always imagined owning your own business and now have the experience to take the first step.
2. You have to offer a unique and unique value.
Your investment thesis is different and proven. There are opportunities for Alpha and you can take advantage of that opportunity in a repetitive and sustainable way.
Your. Your current organization is changing course, focus or mission.
The environment that helped drive your past success will not be the same in the future. It may be out of your control, but it can compromise your ability to offer investors the best value. For example, your employer may split a particular asset class or exit a particular strategy. You have the skills and talents to manage that asset class or strategy on your own.
4. Your current organization is closing.
You know that when it comes to starting your entrepreneurial journey, it is now or never, especially with the help of your former employers and colleagues. This may include coordinating collaborations with partners who are also starting their own organizations.
5. You appreciate that running a business is a lot different than managing money, and you want to do both.
Successful founders have the skills to run a book of assets, run a business and optimize talent. Do you have that skillset? Do you know how to take profitable and deliberate steps that strategically keep your organization for longevity, sustainability and profitability?
6. You appreciate the amount of reward.
According to Prakin, first-time hedge fund managers do better than established managers in their first three to five consecutive years. In addition, after the volatile first quarter of 2020, the smallest hedge funds return more quickly in the second quarter than their larger counterparts, while medium-sized hedge funds return on par with their larger competitors. In an industry driven by metrics, new and growing managers are demonstrating their competence and resilience.
Consider before you do
1. Are you limited by your obligations on your current or previous firm?
For example, are you bound by a tough non-competitor, non-request of employees and investors, or restrictions on ownership of your developed intellectual property for the firm?
If you are thinking of becoming a founder, your first step is to understand the scope and length of your existing limited contract. The answers to the following questions may provide clarity:
- Can you afford both the meaningless and the opportunistic to stand by for the full length of your competition?
- Has your expected investor base been invested with your current employer? If yes, can you actually launch a fund on a different or more limited investor basis while waiting for your non-request obligation to expire?
- If you can’t bring your team along, can you successfully implement your strategy?
- If you rely on trading algorithms, they probably belong to your current employer. Can you work your strategy without them?
2. Are you legally entitled to market yourself through your investment track record? If yes, will your current or previous firm allow you?
Unless otherwise discussed, an investment belongs to the track record Firm And not for any personal employee. As a result, if you are a potential founder, you must consult with your current organization – either at the beginning of your employment or perhaps after you leave – for the right to use your track record.
If the current firm allows under applicable law, you can market your new firm with that track record only if:
- You are the person who is primarily responsible for previous performance. (When you were a member of an investment committee, it was vetoed by many senior investment professionals and so on.
- The portfolio and strategy of the new fund are quite similar to those used in the previous performance, making the previous performance relevant for potential investors.
- Your previous firm includes a substantial amount of all similarly managed products, unless the exclusion of a product does not give a materially superior performance.
- Previous firms keep all the books and records needed to prove your track record as required by applicable law.
- Any marketing material reveals that past performance is related to the product operated by a different firm.
3. Can you identify and retain the best talent, including non-investor professionals, to run back and medium offices?
A strong Chief Financial Officer and Chief Consent Officer contribute to the success of any emerging manager. Surround yourself with talented C-level employees with qualities that complement and enhance your own and you prove yourself to be a strong asset manager. A strong team provides you with a bandwidth to focus on portfolio building and management, rather than on the more mundane necessities of running a firm.
4. Do you have the patience, connection and disposition to raise funds?
A special qualification and level of mental intelligence is required for fundraising and investor relationships. Do you have It can be a daunting process that requires time, perseverance and skill for tactful negotiation. So if you are a manager who does not enjoy this or does not excel, you may want to partner with a co-founder. You can both do what you have in your wheelhouse while growing the firm through both portfolio appreciation and new subscriptions.
5. Do you have a unique brand with authentic digital presence?
Fifteen or twenty years ago, a website was alchemical. Today, it is the foundation of your brand identity. When starting a new venture, your Internet reputation determines how investors will initially perceive you and will directly influence your decision to join the firm. Online reputation management (ORM) refers to strategies and techniques that affect what information about your business can be found online. A great digital presence creates opportunities and provides a competitive advantage that will help your employees, clients, partners and other stakeholders support your success. Fame is everything.
6. Do you have the strength to take risks?
Half of hedge-fund investors will consider evaluating hedge funds in the early life cycle, and fewer than that will actually invest with one. Although many industry participants invest enthusiastically with emerging managers, and also identify parts of their portfolios for their investments, these figures show the challenges that new managers face when raising capital, especially from institutional investors.
Don’t get me wrong: starting your own firm won’t be easy. So keep this in mind before making the leap.
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.
Photo Credit: © Getty Images / Krisanapong Detrafefat
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