Monday, July 08, 2002
HEDGEWORLD.COM
"Riskon Takes Turnkey Approach to Building Hedge Funds" By Pete Gallo, Editor

TENAFLY, N.J. (HedgeWorld.com) - By some estimates, as many as 1,000 new hedge funds are expected to get off the ground by the end of 2002, with many of them started by émigrés from investment banking trading desks and traditional money management world. And with so many new folks crowding the hedge fund frontier, it's perhaps not surprising to see the rise of intermediaries stepping in to provide consulting support and turnkey solutions for startups. But few consulting shops are going so far as New Jersey-based Riskon Inc., which recently launched a new division called Emerging Hedge Fund Advisory Services. Like others in the consulting business, the new unit at Riskon will help would-be hedge fund giants build technology infrastructure aimed at streamlining operations and keeping costs manageable in the early game and beyond. But what makes Riskon seemingly unique is that the consultant will also help hedge fund managers recruit new staffers as their business grows. "The services we offer are a la carte or the manager can go for the seven-course meal," said firm principal Barry Honig. "On the other hand, the entire suite of our services provides a kind of turnkey solution for starting a hedge fund." As a registered commodity trading adviser who formerly ran a managed futures portfolio for investors, Mr. Honig knows a thing or two about running a business that recent refugees from investment banking trading desks or mutual funds may not. "We think we can help people navigate the maze," he said.

Running a Business

"If you have a group of former Goldman Sachs traders who have started their own fund, then you can be sure they are doing it because of their trading skills and not because they think they know how to run a business per se. When you're out on your own, you don't have a big IT department or HR (human resources) department to call on when you need help," Mr. Honig said. Riskon plans to help funds pre-startup, coaching funds through formation and compliance issues. The group will also work with managers to plan technology and staffing growth that typically comes after assets best the US$100 million mark or when new strategies or funds are being added to the mix. Riskon, in its current form, evolved from a risk-management consulting and software boutique that Mr. Honig started in 1996. Technology-infrastructure support was a natural outgrowth of that business and Riskon later moved into the executive recruitment area. "Momentum plays a big role in what we do, in terms of making contacts. When you have both feet in the business, you know where the talent is and what it takes to motivate them to move," Mr. Honig said. Despite the downturn in global equities and an evaporation of the IPO market that has produced layoffs for throngs of investment bankers, the hedge fund job market has remained remarkably resilient, according to Mr. Honig.

Shortage of Talent

"What we've seen is that there remains a shortage of available talent among people with a quantitative analytical and trading background. The more traditional areas like long-only remain easier, while more specialized skills like shorting are harder to find. Most recently, I think there has been a demand for distressed-debt managers, who remain in short supply relative to demand," Mr. Honig said. "It's hard to talk generally about salaries, but the compensation for top (fund management) talent continues to be on the higher end of the scale with compensation often tied to some sort of fee-sharing or equity arrangement," he said. But fund managers are not likely to be sharing fees with Riskon. That's because Riskon generally won't be seeking an equity stake in fund management businesses in exchange for services. "We want to provide services for hedge funds -- not own them," Mr. Honig said. "I think it's important to keep your business model clean. There are other intermediaries out there who seem to be interested in taking stakes in startups, but that's really not our business as we see it," he said. Some of the types of services overseen by Riskon such as IT support and assistance in fund formation are already offered hedge fund prime brokers. But Mr. Honig says he doesn't foresee having trouble breaking into the market. "You have to ask yourself --does a prime broker really want to be in the IT business? My guess is no. They may offer these things because hedge funds need them, but I don't think they (the brokers) see these as primary businesses where they are going to make profits. We do," says Mr. Honig. As an independent firm, Riskon will also work with seedling hedge funds in making the choice as to which brokerage firm might make the best prime brokerage partner. And whatever their choice, Riskon will work with managers to integrate their trading systems with all counterparties including brokers and third-party administrative support.