Stockholm (HedgeNordic) – Finland has historically had the lowest number of active hedge funds among the Nordic countries. High barriers to entry, ranging from high start-up costs, complex idea-to-launch processes to regulatory hurdles, can be the all-encompassing answer to the question of what has suffocated growth within the Finnish hedge fund industry.

Finnish fund solution provider GRIT Governance, with its roots at the oldest hedge fund manager in the Nordic region – Estlander & Partners, has set out on the mission to “help the daring build legendary investment businesses” in Finland and beyond by lowering barriers to entry. “Typically, new managers have great, at times unique ideas when it comes to investment strategy,” observes Mathias Österberg, the CEO of GRIT Governance. “They have asset-raising capabilities in their core team, and possibly potential seed investors lined up,” he continues. “But the “now what?” question that comprises the next step of the build-your-investment-business process is at times overwhelming.”

“Aspiring managers that value opportunity cost and want to hit the ground running, find it most efficient to bypass the hurdle of building everything from scratch.”

By partnering up with trusted and experienced fund solution providers, investment managers can speed up the idea-to-launch process and hit the ground running. “Having the ability to tap into the experience and connections of someone who has started dozens of funds over the years is a great way to get a picture of the road ahead,” explains Österberg, who has been at the helm of GRIT Governance since its spin-off from Estlander & Partners’ hedge fund business in 2019. “Aspiring managers that value opportunity cost and want to hit the ground running, find it most efficient to bypass the hurdle of building everything from scratch.”

REGULATION AS AN OBSTACLE

While emerging managers may be well-placed to start a new fund based on their career and experience, setting up a fund or a hedge fund can be a long and arduous task. Regulatory hurdles – or lack of understanding of regulations – have often been cited as one of the biggest deterrents for emerging managers thinking about launching a new fund. “It would be easy to sweepingly conclude that increased regulations represent a barrier to entry,” reckons Österberg. “However, the regulations themselves are fairly straightforward to understand for people that have been within the industry for a number of years.”

“The true murderer is the psychological barrier that these regulations create.”

“The true murderer is the psychological barrier that these regulations create,” emphasizes Österberg. Where do I start, which regulations are relevant to me, and what happens if I get something wrong are just some of the questions popping up in the heads of emerging managers. “This series of questions kill a lot of the enthusiasm before you even get to evaluating the economic viability of your idea,” considers Österberg.

The main appeal of partnering with an experienced fund hotel or fund solution provider is that investment managers can focus on their main areas of expertise by letting someone else handle the groundwork. Already-established fund managers are increasingly starting to see the benefits of partnering up with fund solutions providers as well, observes Österberg. “Not so much for cost-saving reasons,” he argues, as many managers run their operations very streamlined to their needs. However, “they see the need to clear the table from distractions” to avoid the headache and constant need to stay on top of upcoming regulations that may or may not impact them.

GRIT’S DNA AND EVOLUTION

“Staying atop of existing and upcoming regulations is a challenge for both established and emerging managers,” points out Österberg. In addition to the primary duties of maintaining and growing clients’ investments, fund managers face an extensive laundry list of administrative tasks and duties when running an asset management business. “There are a bunch of other issues that are or can be challenging depending on your background and existing systems,” points out Österberg. He refers to everything from creating compliant processes for investor onboarding, transfer agency, reporting to investors and authorities, connection to platforms, to the more mundane but just as important to get right; striking NAVs and handling investor practicalities. Fund hotels, however, can help fund managers get their affairs in order.

“Staying atop of existing and upcoming regulations is a challenge for both established and emerging managers.”

GRIT Governance’s fund services platform has been born and developed under the umbrella of Estlander & Partners, and has, therefore, been involved in running and servicing the systematic quant-driven hedge funds within Estlander & Partners. “We come from a CTA, market-making and hedge fund background with a history of building and maintaining in-house systems all the way from the 90s, and own funds since the early 2000s, so we’re somewhat of natives within the derivatives and high trading intensity world,” asserts Österberg. GRIT Governance has gradually broadened its scope to serve cash equities and similar plain-vanilla investment strategies.

“Our current funds are split quite evenly between hedge funds and equity funds or fund-of-funds, where the hedge fund side has a clear tilt towards systematic derivatives-based investment strategies,” summarizes Österberg. Having built a comprehensive infrastructure for both AIF and UCITS funds, GRIT Governance can service a wide range of investment approaches, much less so fixed-income-focused strategies. “If I have to look for a weak spot, I’d put my finger on bond strategies,” acknowledges Österberg. “Our systems can handle them, but our thinking hasn’t quite adopted the world of bonds,” he explains. “Proper high-frequency trading (HFT) with tens of thousands of lines per day would also need a bit of extra consideration before onboarding.”

MINIMUM VIABLE SIZE AND NEW COMPETITION

One of the most important reasons for engaging in a fund hotel outsourcing, besides streamlining the day-to-day complexity to focus on core competencies, is to reduce fund administration costs. “Businesses are different, some start with a larger AUM with little view to raise additional assets, whereas some start with ‘founders&friends’ capital only but with a very detailed marketing and asset raising plan,” says Österberg.

“There are a lot of factors that affect your costs, but as a rule of thumb: as long as your AUM is below €10 million, someone in the chain is working for free,” considers  Österberg. “We review setups on a case-by-case basis rather than having a fixed minimum AUM as basis for qualification, and in the cases where we’ve come to the conclusion that honest feedback on the viability of your investment business idea is in order, we’ve given such feedback.”

Hedge fund start-ups face an uphill battle to gain a foothold in the sizable and mature hedge fund industry and differentiate themselves from an already-diverse crowd. Therefore, GRIT Governance observe a trend of new managers being more innovative in the face of stiff competition. “Due to our background and network, we’ve always had a predisposition for managers with a more innovative approach. Or maybe the predisposition goes the other way around,” says Österberg. “One thing that has popped up quite prominently lately is a new generation of managers that want to differentiate themselves from the old-school 3-piece-suit kind of wealth management,” he emphasizes.

New managers know how to individualize their offering, know how to market on social media, have high expectations on end-user experience throughout the process, and demand the same from their providers,” according to Österberg. “They are clearly on to something, and if the stuffy older managers don’t watch their backs, the new generation of managers are going to attract a big piece of the flow over the next few years.”

This article features in HedgeNordic’s “Powering Hedge Funds” publication.