Setting up your own boutique asset management company, hedge fund or independent research house is an increasingly viable and attractive career option for CFA charterholders.
The asset management and broking industry has been party to a plethora of M&A as the big players get bigger, while medium-sized companies’ business models are seen as vulnerable. Hence, there is also an increasing trend for investment professionals to set up their own business and escape the stresses of life in a large corporation. Developments in IT and the ability to outsource many non-core activities has reduced entry costs allowing people to focus on where they can add value and form a business around it.
Jane Coffey, ASIP, Founder of Investor Coaching and lead of the CFA UK Soft Skills working group spoke to an array of successful investment entrepreneurs to find out what attracted them to founding their own business, the problems they encountered and their top tips to others looking to take the plunge.
1) Have an in depth understanding of your vision of the business, its purpose and the business model.
What is your motivation to run your own business? What are your ambitions for it? Is it for a lifestyle business/one man band, a multi-million £/$ fund, or to become a major player in your area? What are you offering your customers and why would they buy it? What is your value-add and what problem do you solve for your clients? How will you get paid? Fixed fee, subscription model, performance fees? What is your exit strategy? Sell the business, list on an exchange, or simply retire?
2) Choose your partners carefully
Many people felt that their choice of partner was a critical factor in the success or otherwise
of the venture. You need to know you will work well together (many had worked together in
the past), have complementary skills and often complementary personalities in order make balanced decisions, but above all you need to share the same vision and be able to communicate effectively particularly when under stress. Make sure responsibilities are clearly defined both on a day-to-day basis and at a strategic level.
3) Have a detailed business plan and budget for the early years but remain flexible in execution.
Make sure you allow for unforeseen delays in revenues and that you can still survive
As with any start-up, cash is ultimately king. Whilst there is a certain scale of expenses you need to incur to get a credible start, the more you can grow from retained earnings rather than debt, the more resilient your business will be.
Success stories - our members share their experience
David Bowers (pictured) founded Absolute Strategy Research with Ian Harnett in 2003. The company specialises in top-down strategic research for asset managers and now employs 14 researchers. David told me “Although Ian and I had not previously worked together, we both shared the same vision of the service and product we wanted to provide for clients and [we] were finding it increasingly hard to get our respective employers to dedicate the necessary resources to deliver strong macro research. With over 20 years of experience each, a clear view of how we could add value to our clients and most importantly an existing network of potential clients, we felt it was time to take the plunge and leave our respective Investment Banks.“ He added, “There has been a massive change already in how clients value and pay for research and with MiFID II due for full implementation at the start of 2018, models are still evolving. Whilst regulatory change is a massive risk in our business, it also gives opportunities ... I believe it has never been more important to understand what the clients want and to adapt as that evolves. You must be able to show how you are making a difference to their fund’s performance and not just giving them something interesting to read!” Whilst David and Ian come from a traditional IB background and have applied that experience in building ASR’s proprietary products and bank of historic data, David sees opportunities for younger CFA charterholders to break in to the market with new radical business models and offerings. Big Data will increase the demand for quantitative analytical skills and coding experience, whilst innovative delivery platforms for both data and analysis could also come from players with diverse backgrounds and skills.
Sean Maher decided to become independent in 2004, setting up London-based economic consultancy called Entext after 14 years working on the buy-side and sell-side. For him, the main attraction was the freedom it gave him to take a holistic view about markets and avoid the silo mentality, which can often be a danger in the bigger houses. “I also feel I am more productive as I have to focus on where I add value and make sure I am using time well” he told me. “I do three roadshows a year to see clients in Asia and the US, but otherwise spend at least 80% of my time thinking and writing about my views drawn from the raw data.”
Andy Mcnally and George Cooper founded Equitile at the start of 2015 with a shared investment philosophy built on the lessons of the Global Financial Crisis. It places financial stability and human behaviour at the centre of their thinking, aiming to identify the most resilient companies and avoid behavioural biases to build portfolios which generate good long-term returns.
Andy’s view is that “We both felt that now was the time to launch something different in asset management. We share the view that in a world that has seen exponential growth in debt, a well- chosen equity portfolio will be a more resilient investment to preserve your wealth over the coming decades. We also wanted to re-examine how investors pay for the service ... One of the key benefits of setting up your own business is that you can challenge the status quo.”
Martin Woodcock started his hedge fund Millgate Capital in 1997, in partnership with James Lyle, who had been his client over many years and was an experienced long/short investor. “Whilst we knew we could talk about stocks together, I think one of the most important things we did well initially was spending time on agreeing our vision and in particular asking and answering the tough questions about how we would act if things went wrong.” Martin told me: “Our investment philosophy was a classic long / short bottom up value based strategy running concentrated portfolios with low turnover. In the 14 years that we ran the fund to 2011, it generated over 10% annualised return with roughly 2/3rds the market volatility, however as you can imagine performance was difficult in the late 1990’s running into the TMT bubble.
Fortunately as the bubble burst in 2000, the market began to notice the attractiveness of the stocks we were holding and our portfolio performed really well. Whilst it still took time to build the assets under management, we knew then that it was worth continuing. ”At their peak, assets under management grew to over $2bn. However, knowing when to continue and when to change your business model is a key part of running a successful business and maintaining good relations between partners. The fund was liquidated in 2011 and Martin and James are still friends but are now pursuing different strategies. Martin’s new fund concentrates on opportunities in Africa.
Gillian Elcock is the Founder and Managing director of Denny Ellison, which provides equity research services to asset management and family offices. In addition, they provide training to make equity analysts more productive and to help people succeed in their interviews to become investment professionals. For Gillian, the upsides of building her own business far outweigh the disadvantages. “You are more motivated and you make the key decisions and choose who you want to work with.” She notes, though, that it is harder to separate your work from your personal life and you have to be careful to make sure you give yourself time off. Gillian’s top tip for people wanting to set up their own business is to focus on how you will win business. Using existing relationships and referrals can produce your first customers; however, it is also wise to invest in training or external expertise to ensure your marketing works. Don’t underestimate how long it will take to establish your business and do seek out support from others in your industry.
“I found being involved with the CFA was particularly helpful in keeping me in touch people and trends in the industry.”
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