5 Reasons Why 2023 Could Be The Year To Launch Your Hedge Fund
The private funds and alternative investing landscape is going to shift dramatically over the coming decade, with analysts widely agreeing that the space is poised to explode both in terms of size and number of funds on the order of trillions of dollars. At the same time and from a macro perspective, the ongoing and upcoming market reset presents an ideal opportunity to begin deploying capital as valuation cycles reset.
Gone are the days of months of planning, endless emails back and forth with various providers, or CSV and PDF based fund subscription and investor relations. Managers today – and their investors – increasingly demand modernized fund operating solutions that delight investors while giving managers back time. Although fund launches per year generally decreased from 2014 to 2018, In recent years, there’s been a rising tide of of new fund launches from traders leaving their desks and non-traditional retail investors launching micro funds, with 2023 on track to potentially be one of the highest volume years in terms of fund launches this century.
Here are 5 reasons why 2023 could be a record-setting year for new funds.
#1 - New Technology and Service Providers Make Launch Easier than Ever
It’s well established that technology improves business efficiency, but the financial services industry – and private funds in particular – have been slow to modernize. While fund managers are sophisticated investors, the systems they utilize are often manual, outdated and cumbersome, and often require hours of administrative time per week.
Managers have historically relied on assembling a team of disparate vendors and systems to run their funds. This not only is a painful process for the manager, but it also often means a frustrating experience for investors. Investors today expect the same modernized experience they’ve become accustomed to in other areas of their life, but interact with the funds they deploy hundreds of thousands or millions of dollars into primarily via emails and one-off PDFs.
Ultimately, making formation for managers and investing into funds for investors simpler, faster, and more affordable means that aspiring managers who previously lacked the resources or knowledge and tools to launch a fund are no longer gated as they have been in the past. Newer, more modern professional services providers and technology-first fund services platforms make becoming an emerging manager more feasible than ever.
#2 - Generating Alpha is Easier When You’re Smaller
The strategies that multi-billion dollar funds can utilize are inherently more limited in potential than smaller funds. This trend has been especially visible in the closed-ended fund world, with venture capital firms notoriously delivering lower and lower return on invested capital (“ROIC”) as they’ve grown larger and larger as compared to their earlier vintages, when they had less AUM. The same has been true in the hedge funds space, with many large funds suffering from less alpha generation as they’ve scaled. The reputation of many fund managers who manage large funds derives largely from their days when they ran much smaller funds, rather than their success in the present.
A parallel factor for large funds dominating the market historically has been access and supply. The biggest funds are simply the most well known, and it’s historically been harder to find small funds. This is changing quickly, however; as technology for fund managers improves, it’s not simply launch and management that’s getting easier – marketing, awareness, and access to investors is also increasing, and investors themselves are better able to find interesting and diverse capital allocation opportunities, instead of being limited as they have been in the past.
#3 - It’s More Affordable than Ever to Launch a Fund
First pioneered by closed-ended fund technology platforms like Angellist, launching private fund vehicles across both open and closed ended structure and assets is now cheaper than ever. Instead of going to a law firm to spin up a venture special purpose vehicle, you can now launch an SPV in days and with a few thousand dollars. Micro-SPV platforms exist that allow micro-vehicles as small as $100,000.
Similarly, platforms such as Repool make launching a fund more affordable than ever. Instead of spending $50k – $100k for a simple domestic fund in year 1 – and therefore requiring at least a few million dollars in assets under management to get started – fund managers can have end-to-end setup and operations for as little as $20,000 a year, making funds that were previously nonsensical, viable.
As technology players have moved into a traditional professional services dominated landscape, pricing pressure has pushed the cost of doing business even amongst traditional providers down as well. Even when not using tech-first platforms like Repool or Angellist, traditional fund services firms are offering their services for less as a result of the competitive pressure and commoditization of their services increases. Today, we see college students and talented retail investors launching funds that start in the hundreds of thousands of dollars ranged – a previously laughable idea, or, at least, a financially committed one.
#4 - Automation Improves Efficiency
Many traditional funds persist in manually tracking fund performance and accounting. Money is spent on consultant fees or hiring a college grad to handle fund accounting and an egregious amount of time is spent crunching numbers and creating intricate spreadsheets to analyze investment performance. Not only does this leave the fund open to errors that are likely to be discovered during an audit, but it is also extremely challenging to maintain a single source of truth.
A modernized back office enables new fund managers to trust their data, easily generate accurate lists of transactions, automate reporting, and manage personalized investor communication at scale. With the time saved they can focus on using the data at their disposal to make informed investment decisions that help to grow their small fund.
#5 - The Rise of Alternative Investing and New Asset Classes
New brokerage and securitization platforms are emerging constantly across a wide variety of asset classes, democratizing access and making it easier to gain diverse exposure to traditionally obscure asset classes. From investing in wine to trading cards to real estate to digital assets, more investment opportunities are available than ever before, and accordingly, sophisticated traders are emerging in non-traditional asset classes at an unprecedented rate.
While alternative asset funds have always existed, the number of fund managers with access to the infrastructure and tooling required to succeed in those asset classes has always been limited. Not only are asset classes themselves more accessible, but such accessibility is driving innovation intra-asset class which itself leads to more interesting trading strategies and potential, such as the rise of fractional real-estate investing, securitization of revenue, lending innovation, and digital asset marketplaces for novel protocols and non-fungible tokens.
Hedge Funds Of The Future
The opportunity for small funds to contend with traditional larger funds already exists. For decades, investors have had no choice but to put up with a subpar experience. The small funds of today are proving that they can provide a modernized and superior experience for their investors, with real-time reports, accurate data, and streamlined communication.
The growing adoption of modern software, artificial intelligence, and machine learning tools will give innovative emerging fund managers access to valuable real-time market data that improves performance. By embracing the technology that already exists, and becoming an early adopter of the technology that is still being developed, small funds have the power to scale quickly and forever change the future of the fund industry.
Platforms like Repool make fund launch and management more simple and allow funds to be launched more easily than ever before, and for capital allocators to focus on what they’re best at – raising funds and investing.