The demise of hedge fund hotels never happened.
Years after UBS got caught by Massachusetts regulators steering its tenants none-too-subtly toward its trading operations, dozens if not hundreds of business centers around the world continue catering to managers engaged in starting a hedge fund.
The hoteliers have learned their lessons, none more so than Mark W. McGoldrick, managing director at Alaris Trading Partners of Jersey City, N.J., who was running an ABN Amro hedge fund hotel in 2003 when UBS bought the Dutch bank’s prime brokerage business.
“It was really a great hook to discuss their prime brokerage business,” McGoldrick concedes. His former employer is no longer in the hotel business, but other brokerages might be. If they are, they have to ensure disclosure of the extent of their relationships with their guests to the buyside investors.
Based on McGoldrick’s experience, five bits of advice can be proffered to those starting a hedge fund and considering a move into one of these incubators.
1. Don’t eat where you sweat. “If it’s being run by a real estate group, that’s one thing,” McGoldrick says.
If the hedge fund hotel is operated by a broker, though, then you can launch yourself into the same issues that cost UBS a $100,000 fine in 2010, three-plus years of legal fees and quite a bit of unwelcome attention. And as a manager operating and marketing a hedge fund, the disclosure burden is as more on you as on your service provider.
There are other options anywhere you go. One blind spot had been Canada, where a British-born entrepreneur set up shop five years ago.
“There are hedge fund hotels in Singapore, the Caymans, Boston, New York, everywhere we’ve been,” says Sarah Barham, founder of a Toronto-based business with the straightforward name of The Hedge Fund Hotel. She notes that the regulatory scrutiny which co-location with prime brokers generates “caused some people who were in the business to get out of the business.”
Thus, she runs an operation independent from the traditional service providers to the hedge fund industry. Barham says her business model gets a pass from the watchdogs because, outside of a series of executive seminars and reading matter from a related publication business, “we have no conflicts of interest as we are not service providers to the funds.”
It is entirely proper, though, for a hedge fund hotel to rent space to others in the hedge fund industry besides managers and let them make their own connections. A case in point is Apex Fund Services (Canada), a fund administrator which leases facilities from Barham at The Hedge Fund Hotel.
“We have inquiries from hedge fund start-up managers, and we’re here to help them in early stages with [issues of] structure and jurisdiction,” says Alex Chapman, managing director of the Canadian affiliate of Apex Group, which was founded in Bermuda. Only one of The Hedge Fund Hotel’s other lessees — 16, according to Barham’s web site — is a current Apex client, he says.
Another practical reason for separating the real estate and brokerage ends of the business is that very few people can put their whole effort into both.
“It became a difficulty to me.” McGoldrick says. A prime broker rather than a landlord by profession, “I had to respond to complaints like, ‘The light bulb is out’ or ‘There aren’t enough Diet Cokes in the fridge.’”
2. Keep the “real” in real estate. The downside of not sharing space with your prime broker is that your lessor is not necessarily a money-center bank. It doesn’t need to be, of course, but you need to do your due diligence before making that first-last-security payment. Run a credit check. Make sure the landlord is capitalized well enough not to pose an imminent risk of disrupting your business by going belly-up during the term of your lease.
3. A long lease is a short leash. What’s you’re fund going to look like in 2016? It’s probably going to be either much bigger than it is today or it’ll be defunct. Odds are, though, that it’s not going to be the same size it is today. So don’t lock yourself into a lease that you don’t know is going to fit you.
4. Power, pipe and ping. One key difference between a true hedge fund hotel and a desk for rent is information technology. Network connectivity and the sort of processing or storage that can’t be shoehorned into a desktop computer isn’t just a major expense of starting a hedge fund, it’s also a potential competitive advantage. Make sure IT infrastructure and support is included in the rent.
5. Think of it as face-timeshare. Sure, you could run your hedge fund out of your own home. You could probably save a lot of money that way. But there’s value in the camaraderie of people who can become your personal friends as well. Hedge fund hotels are places where connections are made, potentially value-adding vendors walk in to speak with multiple hedge fund managers at once, annd ideas are shared are soon as they’re hatched. There are distinct advantages to working at such a hive of activity. It helps if your landlord is dialed into the hedge fund community, knows brokers, administrators, attorneys and consultants as well as many of your fellow hedge fund managers, and can help you network with people whom you would benefit by knowing.
The Hedge Fund Hotel owned by Barham is a case in point. She does have 18 years’ experience in the hedge fund industry and her husband, William Woods, is a consultant who sits on the board of directors of several offshore hedge funds — none, Barham is quick to point out, that are presently tenants. Still, Barham and Woods both have extensive contacts, and having an office within the 11,000-square-foot confines of The Hedge Fund Hotel means having an increased chance of being introduced to some of them.
“It’s a good place for an office,” Apex’s Chapman says about the property. “It’s low cost. You have like-minded people alongside you. It’s a good place for the smaller guys to start off.”