Live from FX Hedgefund Expo 2020: Success stories and best places to launch
Live from FX Hedge Fund Expo 2020. Understand your product, learn your business method and it is clear to see that the electronic trading industry is more than capable of entering the hedge fund sector. The parameters are so similar
Reporting live today from the FX HedgeFund Expo 2020, hosted by Advanced Markets and sponsored by major institutions including Nomura, 360T, Draycliffe, Haysmacintyre LLP, and BOV Fund Services, FinanceFeeds is participating in the discussion that is vital in order to assist the FX industry gain closer ground with the important hedge fund sector, toward which the FX business should be aspiring.
Last year, FinanceFeeds held an institutional hedge fund conference in London, demonstrating that it is very clear that the hedge funds and professional wealth managers are very keen to work closely with the astute and urbane institutions of the electronic trading sector.
Today, The first panel discussion, introduced by Advanced Markets executive Raphael Ribeaucourt, consisted of important senior figures in the hedge fund industry across North America, including Clive Snowdon of Draycliffe Ltd, Rebecca Xuereb of BOV Fund Services, Sam Bratchie of Ifina Group, Mark Shaw of Wildgen and Dave Shastri of Truss Edge.
The audience, which hails from across the globe, consists of many professionals in the industry, from FX technology providers including Tom Higgins of Gold-i, Soren Laang, Founder at ECO Group on the exclusive launch of VisualStation by TickCOM, and Tony Cross of Monk Communications, to hedge fund managers, large and small, including boutique London-based electronic investment fund run by Sheetal Patel.
Before the panel began, FinanceFeeds spoke to Ms Patel, who told us about her hedge fund. “At Narratus Capital neither of the founders, Waqas or myself come from a conventional hedge fund background. We are proud to have started off in the retail space and have 10+ years of trial and error and making and losing our own capital we now have an institutional grade product with a 7+ year track record of managing external investors funds.”
“For us we believe our edge does not just lie in the statistical nature of our strategy but the fact we have an entrepreurial background and have launched businesses as well as managed money. We believe the FX world – especially the retail / get rich schemes have always had investors fearful of this as an asset class as part of their portfolio, but we feel with exceptionally tight risk management and the conservative use of leverage, institutional grade products can be build in the FX space” Ms Patel told FinanceFeeds.
It is certainly encouraging to see hedge fund managers looking to build bridges between their expertise and the technology and liquidity available in the FX industry.
Introducing the panel discussion, Dave Shastri explained “US has the largest number, at 47.3% of the world’s share, and others including Luxembourg, Ireland, Brazil and the British Virgin Islands have a smaller percentage of funds, but are important regions.”
Mr Shastri, who is a technology and service provider, developing front and back office technology to investment managers and outsourcing of portfolio operations, led the discussions, looking to Mr Shaw to begin the debate.
Mr Shaw represents clients across all investment strategies and scales for the full lifecycle of their fund set up, based in Luxembourg. He is expertise in cross jurisdictional consultation to hedge funds. His approach is to offer a more Anglo-American service model to funds.
Mr Shaw elaborated on the attraction of Luxembourg for hedge funds “When people come and talk to me, I try not to push Luxembourg too hard. It is right for managers in many cases, but there are cases where it is not right for them. There is no point going into a jurisdiction and it not being right for you” he said.
“Where things fall to Luxembourg is taxation. Whilst it has a reputation for being expensive, and there is some truth to that, there are some advantages that offset that. Depending on your liquidity profile, what tier of regulation you want and investment requirements, there is something to fit you. There are an incredibly high range of investment vehicles” he said.
“The tax regime is very attractive too” said Mr Shaw. “I think you would consider Luxembourg to be an onshore jurisdiction within the EU and it has a substantial tax treatment advantages, so when you look at the total expense ratio, it is favorable. Luxembourg has a AAA credit rating and is incredibly stable, and has been founded on its fund services industry and as a consequence that should never change” he said.
“Yes, Malta and other regions like that can be considered similar, but Luxembourg has attracted all of the leading service providers, which all work across a full range of cost and type, and its a virtuous circle of growth as a result. Luxembourg funds are very recognizable across the world, and that helps. It is more distributable than most and feeds itself in this growing cycle” said Mr Shaw.
Mr Shastri then said “There are reasons on both sides of the balance sheet for portfolios to look at this. Rebecca, I’d now like to move onto Malta, another EU regulated jurisdiction, but offers something a bit different.”
Ms Xuareb, whose expertise is in fund administration, maintenance of shareholder registry and back office reporting requirements for a fund, and whose company provides a one stop turnkey solution in establishing funds and asset managers, handling the whole process from regulation to licensing, said “Over the years, Malta has been expert in servicing smaller to medium size managers, and has initiatives such as the Professional Investor Fund. When considering other products that fall outside the scope of other regions, there are no leverage restrictions, no diversification requirements, no need to appoint a custodian – instead a notary or a specific lodging with the Prime Broker would suffice”
“The method in Malta allow the funds to focus on starting up their funds, and cost competitiveness and the pro-business approach of the regulator creates the right environment for small to medium sized managers. If we have more experienced managers which want to passport their funds throughout the EU, we have solutions which offer a full set up within 10 working days” she said.
“The niche has been created in the smaller to medium sized space, to allow firms to start up and grow their funds” said Ms Xuareb.
Mr Bratchie, based in England, has a background in investment management spanning 35 years, starting his career at a 1.5 billion pound family office, who now offers a full fund solution, in which 90% of his clients are startups, providing a bespoke service, then continued the discussion, looking at the Cayman Islands, one of the most popular regions historically for funds.
“Cayman is our main jurisdiction for funds even though we are FCA regulated. We specialize in startups, $15 million or less. These are the guys who are often managing their own money, or managing managed accounts and they want to move to hedge funds. We only deal with private or professional funds, we don’t do any retail, and they all recognize the Cayman funds ethos” said Mr Bratchie.
“Also, the regulatory regime in Cayman has tightened up due to pressure from the EU and OECD, they’ve had to harmonize more with the EU fund solutions. We have a platform in Malta, however Cayman seems to be the chosen jurisdiction for most of our clients, and it is fully regulated, fully audited and is growing as a chosen region from our perspective” said Mr Bratchie.
“There are no secrets anymore, everything now has to be balanced and in terms of startups, we see Cayman as the preferred region for startups” said Mr Bratchie.
Mr Snowdon, a consultant to the hedge fund industry, set up his first hedge fund in 1997, and had two hedge fund managers in London, before expanding to Switzerland. He built the infrastructure for Gotex. He then became CEO of Credit Suisse hedge fund portfolio in Channel Islands, began the discussion, his expertise on structure and strategy in setting up hedge funds being instrumental to this discussion.
“For me, I come from the manager side and have set up funds in all the major jurisdictions, and the overriding decision is to figure out what they want. I cannot just build a fund and say here it is, come and get it!” said Mr Snowdon.
“Cayman is well understood by investors, so that is the norm. If you are not doing Cayman, why are you not doing Cayman? That’s the way I look at it. If you start with this premise, there may be funds in Europe that like European funds, or they like the way the European model is more explicit in how you have to manage your funds. I don’t think that makes it any better, it is just a matter of preference for those who like the explicit control model” said Mr Snowdon.
“If you market to a specific region, look carefully where your investors are. If they’re in Switzerland, that’s not in the EU, and if in Brtiain, that won’t be in the EU for much longer too, so it’s important to look what you need to service these clients” he said.
“You could start in Cayman, and then if you get clients that want Europe, you add a European fund, simple really. I think it should be kept simple, Cayman is the default. When I was setting up funds over the years, I could do unit trust for distribution into Japan, or a Delaware feeder to bring URESO money in, it all depends on what the investors want and what cash they are bringing in” said Mr Snowdon.
“All the European providers have good products and good regulation, they’re all my friends however I think Cayman remains the default place to start” he concluded.
“It’s a product” said Mr Shastri. “Therefore you have to know your customer, just like anything else.”
“The world is full of great products that never got sold, so I think what we have spoken about today is how to look at producing the right kind of structure for your client base” he said.
Mr Shastri said that fees have fallen over the last few years, and looking at running the business, it was very evident that similar expertise is required to operate a hedge fund as it is for electronic trading firms. This is highly encouraging, and from FinanceFeeds perspective, it is clear that all good brokers in this industry are more than capable of entering the hedge fund sector.
“To deliver, you need someone who understands who all the investment managers are doing. If you come from a bank and used to be a trader, you know a good ops guy who can do the operational stuff, but the investors are not buying into those skills in settlement, you need to understand how to best service the investment that is being made. If you are an FX manager setting up an FX fund, that is a tricky asset class, so someone has to understand the investment part to put that together” said Mr Shaw.
“You need a portfolio management system, and investors are not looking for you to run a fund from a spreadsheet. That portfolio has to capture what your managers understand, they may have come from a bank, and need to put in their trades and you need to understand their view. Their view and that technology will link to all their third parties, and the first stage of risk is seeing your portfolio and knowing the value of it” he said.
“Applying risk, concentration limits and control of information from investments is vital. Wrapping it all otgether is governance. I don’t think of governance of checking on investors in Cayman, it is more how your business is run, your product governance and interaction with third parties, and asset security governance so you don’t lose assets due to not being on top of it” said Mr Shaw.
These are all attributes that FX executives know well.
Mr Bratchie then added that cost is crucial, and having a structure which is fully integrated is important. “On an ongoing basis, because a portfolio is part of the SPC, we can offer audit costs at a very competitive price, and can set up a structure very quickly as a new cell within existing corporate structure, and then the manager can get trading. For year one, your costs will be around $45,000 to operate the entire business.”
The organizers of the conference today conducted a poll to assess the audience’s perspective on jurisdiction, with Cayman Islands being by far and away the leading choice among participants today as a place to start a hedge fund, with 49% of those polled considering it the right region, compared with Ireland (5%), Luxembourg (33%), Malta (16%), Singapore (28%) and US (12%).
Stay with us for the full coverage of the FX Hedge Fund Expo 2020 as the event takes place!