is much different than setting up a few trades with a broker and tracking them in an online portal. Profes- sional funds require extensive services, including account administration, legal organizational fund structure, legal management company setup, prime brokerage account, insurance, trading authorization, security borrowing/ lending availability, auditors, office setup, internal staff, and working capital funding. There are numerous service providers in the field, but many will not assist emerging managers with low AUM. Extensive due diligence procedures compound the difficulty for emerging managers. Most service pro- viders place high hurdles or minimum requirements for engaging in business, and fees vary widely throughout the industry. As the perceived prestige of a service provider rises, the minimum fees or hurdles associated with the provider increase accordingly. Lawyers require upfront cash retainers, and other service providers demand a minimum level of AUM or guaranteed fee income. If the fund generates insufficient fee income to cover expenses, then the emerging manager has to personally cover the shortfall. Sufficient personal assets need to be set aside to handle potential shortages. The latter scenario often becomes the pivotal issue in a fund launch. If, for example, a prime broker, account administrator, and fund accountant collectively demand fee income of $20,000 or more per month (with a personal guarantee), then emerging managers need to decide if they will generate sufficient fees to break even. Otherwise, the minimum requirements can become crippling charges that defeat an already fragile existence. Note, these fund expenses are in addition to the internal costs of personnel and office charges. If emerging managers decide that their fund cannot sup- port the minimum threshold of costs, then they will be forced to either seek other service providers, pay out of pocket for the cost differential, or delay fund setup until the necessary requirements can be met. The “emerging manager” definition itself ignores the harsh realities for firms in the under $1 billion cate- gory. Although those emerging managers who are above $100 million are likely at break-even or above, those with numbers below $100 million, and certainly below $20 million, are very likely struggling for survival. Day-to-day costs associated with an office and staff can be eye-popping—especially in major cities with high rent expenses. Professionally run money management businesses must comply with stiff regulations; meaning
a manager must hire expensive lawyers, certified public accounts, distributors, account administrators, transfer agents, etc. These costs can be extremely high and are charged regardless of AUM levels. An estimate for annual- ized fund operation costs are displayed in Exhibit 5. In addition to fund operation costs, the emerging manager also has to hire and motivate staff. Costs asso- ciated with setting up a basic corporate staff including an analyst, trader, operations manager, chief compliance officer (CCO), CFO, administrator, and salesman can be staggering. Consequently, in the early days of opera- tion, the emerging manager will likely work extremely hard and perform multiple duties. After completing the legal infrastructure, man- agers must consider their needs for prime brokerage, fund accounting, account administration, trading, and auditing. High monthly fee requirements, fixed annual
E X H I B I T 5 Estimated Annualized Fund Operation Costs
6 T HE E PHEMERAL L IFE OF AN E MERGING F UND M ANAGER
W INTER 2015
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