Fresh from winning ‘Best Prime Broker – Credit Strategies’ at the 2017 Alt Credit Intelligence European Services Awards we talk to Jerry Lees, Chairman of Linear Investments on becoming the one stop shop and incubator for start-up and small to medium size hedge funds.
• Why did you found Linear as a prime broker?
That’s quite a loaded question so forgive me for taking some time to address it.
I set up Linear Investments in 2010 in response to two driving structural changes to the marketplace that I believed would make a significant and fundamental difference to the way global prime brokers will look on hedge funds as clients, and how hedge funds will need to deal with these changes.
In my view the impact of the 2008 financial crisis and roll out of Basel III would have a lasting and permanent impact on start-up and emerging hedge funds’ ability to launch, survive and raise capital within a market that would become increasingly problematic on all fronts.
First – Regarding 2008 – I wasn’t looking at the initial knee jerk impact of redemptions and losses (we have seen that before), but to the likelihood that governments and regulators worldwide were extremely likely to implement wide ranging and sweeping new regulations to govern the marketplace in the future. We had come out of the era of Reganomics and Thatcherism – with the mantra of laissez faire – ‘deregulate everything, and let the markets police themselves’.
Now the mood changed and this recession was going to be deep and impact everyone. Governments worldwide had to bail out the banks – apparently at the cost of taxpayers. Voters wanted someone to blame and governments responded accordingly.
We have since seen a raft of regulation across all sectors, which is pushing a huge economic and reporting burden down the line to at all levels of the market. This burden of operational cost coupled with intense need for continuous investment in infrastructure and IT will force many emerging hedge funds to have to find structures such as those offered by Linear in order to survive and operate.
Add to that downward pressure on fees from investors and the fact that they were likely to be, and in fact are now far more cautious, about investing in early stage Hedge funds and you have a very significant impact on all but the very large backed start-up.
Second – Basel III. This is becoming even more significant in terms of the potential to damage hedge funds and restrict growth. Under Basel III banks have to nearly double core capital, and in addition credit extended to anything but Tier 1 counterparties has additional capital impact. Add to that restrictions on margin offsets to only closely related correlated assets and just under 1% of capital tied up against any counterparty balances and there is a real problem.
The global primes just won’t be able to service and support smaller funds; funds with low volumes will fare even worse as there is relatively no trading income for the banks to cover the use of capital. In my view – there was going to be a significant vacuum – and markets, like nature, abhors a vacuum.
• What did you do before starting Linear Investments?
I was head of execution and synthetic prime at Credit Agricole Cheuvreux and on the main operational board.
• What does your typical hedge fund customer look like?
We have many customers, including other brokers internationally, private banks, funds and other specialist institutional investors. As we cover all asset classes and most international markets with execution in Europe, USA and Asia covered form various trading desks – we attract many types of client.
From the perspective of Hedge funds – once more we have a wide range of clients – from very large funds who use us for our specialist execution expertise, anonymity and outsourced trading – through to smaller and medium sized funds who may use our regulatory umbrella structure, outsourced compliance or back and middle office as well as prime brokerage, execution, capital introduction and hedge fund hotel.
So, to answer your question we have a wide range of hedge clients from high frequency to substantial long-established organisations looking for best execution and customer care.
• How should new or existing funds approach Linear to get started?
We will respond within the hour normally and will quickly be able to assess which services will suit the client, potential solutions, and whether we are the right people to be talking to.
• What funds under management have you got at the moment and how is growth?
We are a prime broker servicing many medium and large hedge funds.
As such we are not managing funds ourselves but handle considerable assets on behalf of our clients in prime brokerage and custody accounts. In the case of larger clients, we can provide segregated accounts with underlying prime brokers especially in large custody situations.
• Why should a hedge fund come to you rather than other prime brokerage services?
Linear is the only prime broker providing the full comprehensive range of services across the entire spectrum in a one stop shop. Clients can pick out what services they need on a flexible basis. No other prime broker covers the range of services Linear covers in a single solution.
Accordingly, we are able to provide a very cost-effective solution to emerging hedge funds where costs and operational overheads are a significant challenge. Linear also has the ability to set up cost effective structures with partners, legal, administrators, outsourced compliance etc. in most jurisdictions with an experienced team to make this as painless as possible.
If the situation is a start-up, Linear can offer managed accounts with no overhead cost and provide a full audit trail of the fund performance to build track record at low cost whilst capital is being raised.
We cover services from office facilities and technology to meet MiFID/AIFMD standards for security and data through to operational services, back office, online access to positions through our client portal, trading and execution in all markets and asset classes and prime broker facilities such as leverage, stock loan, and swap.
In addition to custodial services and access to our experienced international capital introduction specialists and participation in international capital raising events.
In essence, we are experts in this business – with the largest team of specialists in any boutique prime broker and operations in the UK, Europe and the Middle East and now extending services into Asia.
• Part of the appeal of Linear is capital introduction for start-up hedge funds. How do you go about that?
Capital introduction for emerging hedge funds is a highly specialist area. Linear has been building up a network of investors, family offices, funds of private banks and venture capitalists. Working with a team over the past seven years building our knowledge base and contacts.
We attend several international family office investor conferences and forums a year as speakers and exhibitors, on behalf of clients as well as attending many more as delegates.
We work closely with investors to understand their needs and what type of funds they are interested in and at what stage – so it becomes a matching process – something an emerging fund will find it hard to do without help. In addition, we have a multi-level investment committee working with investors looking for our discretionary advice.
The committee will evaluate and manage first stage due diligence on any funds we work with – giving investors confidence that they are looking at funds that have had experienced professionals evaluate their strategy and team.
All funds we take on provide us with audited returns which Linear runs through its financial modelling systems to produce a detailed analysis of results based on a standard analytical model. For those funds just starting out, the managed account structure is a very cost effective and simple structure to set up.
• Will MIFID2 have a positive or negative impact on your business?
MiFID II will put huge pressure on small and medium sized funds – and even some larger entities. Reporting requirements, proof of execution value, IT infrastructure, tracking and recording transactions and all client data, calls, client conversations and interviews and administrative/management overheads in compliance and reporting, plus GDPR constraints on client data management will force many to look at outsourcing their operation, mid/back office, IT compliance and trading. This is what we do.
• There is a fair amount on of consolidation in the industry, is Linear an acquisitive business?
Linear is expanding its services to cover all aspects of the business. In the past we have acquired our operation in Hamburg which has been very successful and will grow over coming years – in addition to giving us a potential hedge in case of problems related to Brexit.
• You offer a regulatory umbrella as well. What’s the main advantage of that versus a hedge fund getting standalone regulation?
It’s fast, efficient, much less expensive than doing it yourself, flexible (short term variable contract), uses Linear capital, Linear documentation and Linear compliance, reporting and management. A client can get started in a few weeks and can get on with focusing on their core business whilst we look after the rest.
We provide a full migration support to a client’s own regulatory licence if they wish to set this up and the cost is no more to run under the umbrella and migrate to the client’s own licence that just applying for a licence directly.
The client basically has the option to adopt all of linear documentation, processes and procedures and a support team who has supported many application conversions over the past seven years.
• What’s been the most important element of building Linear up to where it is today?
Keeping focus on the core strategy of providing the highest quality service to the clients we support with a range of products that supply their needs in a simple delivery.
• What’s been the best moment of running Linear so far?
It has been great to watch the business build every year and see a great team of people who enjoy working together in a very friendly and positive business environment.
• What are your future plans for Linear Investments?
We are working on expanding the business internationally in significant growth markets where we can replicate the product and services already invested.
For more information on Linear Investments visit the website here