Service providers can make or break a hedge fund and the process by which you select a hedge fund is very important to working with the right service providers. The following video provides hedge fund managers with some strategies for selecting top quality service providers.
Hedge fund startups are often unaware of how important hedge fund service providers are to their fund.
Consider requiring a due diligence questionnaire for your service providers.
A 2-3 page DDQ should allow you to better understand the service provider and how that firm operates.
Be wary of service providers that are not capable of handling a client of your size.
Implement a detailed process for hiring and working with service providers.
Hello, this is Richard Wilson and today we’re going to talk about the importance of service providers which I often refer to as business partners to your hedge fund business. Many people that we interviewed from my recent book, “The Hedge Fund Book” mentioned that they underestimated the importance of service providers when they started their fund. And I know funds that have gone out of business due to having a service provider who either stops offering the service or didn’t offer what was promised, and it could be an area that definitely can make or break your business.
So I just wanted to stress the importance of that and suggest that hedge fund managers should have a service provider Due Diligence Questionnaire that is constantly evolving just like an institutional consultant won’t invest their client’s money in a hedge which doesn’t meet some sort of initial checkbox mentality process. You should have the same system for your service providers to ensure that decision are being made based on industry friends, emotional decisions or based just on who has the best sales ability, so it’s different from who’s going to have the best functional support systems for your business.
So I think that having a — just to start with a 2 to 3-page DDQ, a Due Diligence Questionnaire which ask them for contact details, for 3 or 4 referrals, which ask them about the experience of each of the team members that you will actually be working with not just the people who started the firm but the people who actually be coordinating with and who are actually be doing the work for your fund at that service provider. You should have all of their details up front. You should have numbers on how many current clients and past clients they have served in the investment industry and the hedge fund industry specifically. It would be much different working for mutual funds then suddenly switches their offer or for hedge funds that never done it before, you don’t want to be part of that learning curve. You can work with somebody at the same price who did 200 hedge funds last year for legal formation works.
So you should be very careful about that, what people say their experience is versus how specific is that really to what you need them to do for you. Next, you should also have some sort of process for checking the reputation of the firm, speak with their competitors, speak with other people in the industry, speak with other fund managers that you know. Some service providers are very responsive and provide great service, others are overwhelmed, others do the bait and switch and sell you with the high pedigree person and then you get a junior person who’s never done the work before actually completing the work.
So it’s important to have this DDQ in hand and make sure that you hire service providers consistently. And also make sure that there’s some written documentation of what was promised and that can be written into a contractor or a service later and just add some real transparency and long-term kind of systems planning for your hedge fund as a business. So if you ever step away from the business or the business grows in multiple areas, this process can be used by someone else on your team to consistently hire highly experienced service providers and partners whether you’re there to tell them what to ask or evaluate the situation this allows you to outsource this to someone else on your team.
So this is something that I consider kind of a best practice and this becomes very strong. It could be something you even show your potential investors that before you hire anyone, we take them through this 20-step or this 3-step process which includes the 20 point Due Diligence Questionnaire and that’s just like one of 20 things that you can mention in part of being an institutional quality hedge fun. So I hope this short talk on service providers and the importance of a DDQ for service providers helped. Thank you for joining us in this video and we’ll see you again soon. Thanks.
I hope that this video has been a helpful collection of strategies for working with service providers.