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George Ralph, RFA

Checklist for alternative investment start-ups


By George Ralph (pictured), RFA – 2017 is as good a time as any to be starting a new alternative investment firm, certainly better than it would have been a decade ago, but there are some key areas of focus that start-ups should be on top of. Here are some thoughts on how to help set your start-up to be successful:

Start out with a great investment strategy

Great alternative investment firms need a great investment strategy. Global macro, equity hedge, event-driven, relative value strategies, distressed securities- it doesn’t matter as long as the chosen strategy has been proven to work time after time and can be articulated to investors. Understand what differentiates you and your strategy. How can you get an investor to put their trust and cash into your fund if you can’t explain how your fund will outperform the competition?  

Build a strong advisory board

As a start-up you might not have the funds to hire employees on day one with the necessary level of expertise that you need in finance, compliance, risk management, cybersecurity, public relations and legal, but a good quality advisory board can be begged, borrowed and bought in from friends, clients, peers in small quantities. It can make a difference to your firm to receive regular good advice from a sound group of industry experts and trusted advisors, and it can also add credibility from an investor’s perspective.

Ensure regulatory compliance

Firstly, the FCA will scrutinise start-up firms closely before even granting approval to trade. That scrutiny will cover finances, staff, systems and controls to manage the fund. It will include business conduct, records and reporting, compliance and complaints. Secondly, investors will be keen to ascertain that a start-up is abiding by the rules before even considering any investment. Thirdly, there are huge financial penalties for firms found non-compliant with regulations such as GDPR, MiFID II and AIFMD.

Whether you employ someone, or decide to outsource your compliance requirements, you should consider that whilst an independent Chief Compliance Officer is a great asset, they must also be sufficiently embedded in the firm to be effective. Compliance is not a one man job, it is the responsibility of the whole firm so the relationships and the deep understanding of the day to day processes have to be there. Ensure also that they are transparent in their investigations and tests, to allow you to demonstrate the process to the authorities.

Take a technology-first approach

Start-ups are in a unique position over established firms, in that they can pick and choose the technology that suits them best, without having to consider legacy hardware and software that might not meet the needs of the business. With so many cloud based platforms available to handle functions in the back office and middle office, for fund management, marketing and reporting, start-ups might not need any on-site IT, or IT staff. In addition, an over-provisioned IT estate could bring inflated costs and might be unappealing to potential investors, whereas a robust, forward thinking technology strategy can not only streamline business processes, it can be a great selling point. Choose the right technology partner, who can provide you with the right solutions, understands the specific challenges you are facing, is fully compliant with the current and imminent regulations in your region and can scale with your firm, as you (hopefully) become more successful.

Understand your risks

Investors need to know that you take risk management very seriously. Risks are many and varied, so consider employing or bringing in a Chief Risk Officer, on to the advisory board, or in some way. Market risks can be studied, dissected and planned for, with rigorous testing. Business or operational risks can include ensuring that your business plan is viable and robust enough to allow the firm to prosper, with solid plans for raising more capital and having achievable growth plans.  Another big risk is that of cyberattack, security breach or data loss. Cybersecurity incidents can happen for a variety of reasons, malicious attack, risky employee behaviour, or accidental data loss, but start-ups should try and cover all the bases and prepare for the worst. A robust cybersecurity plan, backed up by a realistic policy, multi-layered software and regular employee training is a great start.

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