Starting up a fund is a battle, regardless of which jurisdiction the manager chooses. For those with a trading background embarking on their inaugural launch, one location that is perfectly predisposed yet sometimes overlooked is the Netherlands; a mere one hour from London City airport.
Having established the first stock exchange in 1611, (referred to as Beurs van Hendrick de Keyser), and created the first ever asset bubble, produced on the back of fervent speculation on the future value of tulips, Amsterdam has long been the epicentre of trading and innovation.
As a jurisdiction, it leads the way in trading heritage and culture and is, on face value, the one jurisdiction that most closely mirrors the entrepreneurial spirit of financial trading and, by extension, managing hedge funds.
"It is unique to any other pure funds jurisdiction," says Gildas le Treut (pictured), Global Director Prime, ABN AMRO Clearing. "The Dutch market has been built around expertise in different fields. There are a number of service providers here that are definitely suited to supporting a wide range of fund strategies, and are able to adapt to the needs of new funds. If you look at all the depositaries, administrators and platforms, they are very specialised in servicing the specific requirements of fund managers."
To those thinking of setting up a Dutch AIF, appointing the best service providers can go a long way towards assuring the manager's long-term success. Arguably the most important relationship is with the appointed prime broker.
In this regard, ABN AMRO Clearing inhabits a unique position in the marketplace. Unlike many tier one primes, it is a specialised prime broker and embodies the Dutch trading culture. The word specialised is important. ABN AMRO Clearing does not aim to support every type of hedge fund strategy.
As le Treut explains: "We specialise in supporting managers whose strategies are very much trading-focused across asset classes i.e. relative value, CTAs, quants, long/short equity. We are one of the few tier one prime brokers that continues to finance and support emerging managers and start-up hedge funds. And I say tier one because it's not just about name recognition. We are amongst the largest prime brokers in terms of cleared volumes and market share. Operational efficiency and capacity to finance is paramount for these managers."
ABN AMRO Clearing's primary goal is to be selective and grow with each and every client it works with and to help each hone its competitive edge by accessing new markets.
"We have always supported early stage managers, starting with proprietary trading firms, about 30 years ago. This is how we developed and specifically tailored our risk management system, which offsets risks across asset classes. There are very few tier one Prime Brokers now in the industry that have such level of risk management and that are willing to support emerging managers," says le Treut.
Over the years, ABN AMRO Clearing has invested a lot of time and energy connecting to all the different third parties across the hedge fund value chain within the Netherlands, such as depositaries, platforms and fund administrators. This allows to support hedge funds that decide to use different fund platforms like Privium or Circle Partners, which are very specialised parties to Dutch hedge funds and require expertise in trade execution and clearing, portfolio reporting, reconciliation, etc.
"We have an open architecture model and believe that ensures the best of breed for each manager's specific needs. We made sure we had proper connections to those third parties so that the investment manager is free to choose his preferred counterparties. This might sound obvious but it requires a lot of hard work," comments Delphine Amzallag, European Head of Relationship Management Prime, ABN AMRO Clearing.
Amzallag points out that under AIFMD, where there are more parties involved than those running traditional offshore funds, the cooperation between ABN AMRO Clearing and various depositaries and fund administrators is relatively straightforward "because we are one entity and we have all of the client's assets in one system. The information exchange, which is crucial under AIFMD, is therefore a lot easier. The depositary does not have to wait to receive information at different times from multiple legal entities within the prime brokerage and I think that is an important advantage."
This point about operating as a single legal entity, within a prime brokerage context, should not be underestimated.
Oftentimes, bank-owned prime brokers are organised in siloes. They have futures in one legal entity, synthetic equities in another legal entity, and so on. This means it is difficult for the broker to generate offsets between the equities and futures positions, alongside an FX position that might also be used as a currency hedge, as it could conceivably involve three different legal entities.
"That is the benefit of being nimble and organised under the same legal entity," says le Treut.
"We clear and risk manage all products on all markets under the same umbrella and in our own systems. We are thus able to generate offsets across asset classes and explains why we can effectively support high volume trading strategies, such as arbitrage, market making or HFT strategies."
If a manager generates alpha on price inefficiencies between a derivative and an equity, for instance, ABN AMRO Clearing's risk model allows it to offset the risks between the two underlying positions.
What that means to the manager is that they don't need to fund their margins per asset, on different exchanges.
"If they trade two different assets on two different markets, the markets request initial margin for each of those assets individually. We look at the portfolio holistically. In our role as the prime broker, we finance the margin at the two exchanges and provide leverage to the manager based on the real risk of the portfolio, as opposed to the gross directional risk from the different exchanges.
"It is a way for the manager to enjoy a more effective allocation of their capital in the trading strategy and not having to become over collateralised at different exchanges," outlines le Treut.
The clearing and custody of clients' assets is another benefit that ABN AMRO Clearing can offer and one that has obvious appeal. Indeed, the segregation of assets is enshrined in Dutch law.
"As part of its DNA, ABN AMRO Clearing is a Clearer and Custodian. Assets are de facto segregated to protect them from bankruptcy risk at the prime broker," says Amzallag.
Under AIFMD, the depositary bank of an EU AIF needs to appoint a prime broker as its sub-custodian; it is a small, but important, part of the regulation because as the appointed prime broker, it must be extremely efficient at the sub-custody level. This means having all the right asset segregation in place, as Amzallag mentions above, and having direct links to securities settlement systems.
"We have a fully fledged sub-custody network connection into ABN AMRO Clearing," adds le Treut.
"The depositary has its own distinct role, as does the fund administrator. We do not compete with these entities. We are independent and we do not try to force hedge funds into using a single integrated model. By focusing on our expertise as a specialised prime broker, we let managers choose their preferred depositary and fund administrator."
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