SETTING UP A HEDGE FUND – PART TWO - BarclayHedge

that I have little to add to what other people have said, but in this case, I have to
admit that a recent presentation by Ron Suber*, of Merlin Securities, on “Merlin’s
Big 12 Hedge Fund Best Practices”, left little to be added. And so, with Ron’s
permission, I republish his comments on what he considers the minimum
requirements, both quantitative and qualitative, necessary to be a successful hedge
fund (manager) in today’s environment. I should point out that, as a non‐U.S.
member of the hedge fund community, I always have a problem when American
commentators, including lawyers and regulators, seem to consider that a HFM is the
hedge fund itself. From my point of view, the 12 Hedge Fund Best Practices below
actually are the 12 Best Practices that should be applied by the HFM and from which
the fund will benefit. To my mind, the hedge fund is an inanimate object, the
functions and operations of which are outsourced to third parties, including, inter
alia, the administrator, the prime broker and, of course, the HFM. Be that as it may,
here are:
Merlin’s Big 12 Hedge Fund Best Practices:
“1. Written compliance and employee trading policies with periodic attestation;
2. Multiple levels of authority on cash movements with a minimum of two people
controlling input, release and approvals;
3. Written and consistent valuation policy by asset class;
4. Sound technology and infrastructure with reliable back‐up, disaster recovery
and business continuity plan;
5. Open architecture to handle multiple prime brokers, multiple custodians and
managed accounts. Understand why you use these firms and the alpha they
generate;
6. Clear risk management methodology;
7. Ability to prove best execution;
8. High‐quality audit, tax and legal representation;
9. Sustainable third party administration with SAS 70 Type II;
10. Dedicated operations manager, COO, CFO and CCO;
11. Significant principal’s money in the fund;
12. Daily position and cash reconciliation.”