The basics of venture capitalism.

Keep in mind that two types of financing exist: equity and debt. The former refers to the investment a company gains in exchange for the investor having part-ownership of the business. Debt financing essentially means payment with interest.

Venture capital or VC comes in at the onset, referring to financial capital given to high-potential startup companies in exchange for equity. Venture capitalists provide the funds, while their firms oversee the sourcing of deals, making investment decisions, and maintaining the resulting portfolio.

There are different sources of capital to choose from, including so-called angels, micro seed funds, and growth equity. But venture capital is unique in that it works by utilizing medium funds that invest large amounts of capital to gain equally large amounts of equity.

The process of gaining venture capital begins with an entrepreneur getting introduced to various VC firms. The entrepreneur then pitches their business to the said firms, provides them with term sheets should they decide to invest, then cultivate the business relationship through time. The final step is the repayment of the venture capitalist(s) through IPO, acquisition, and even bankruptcy, should the business fail.
Venture capital often plays a major role in the stage of a company’s lifecycle wherein the business is beginning to commercialize its innovation, especially as it now builds the needed infrastructure (manufacturing, sales, marketing) to grow the business.

PartnersAdmin LLC’s Chief Operating Officer Scott Tominaga has worked in the hedge fund and financial services industry for over 17 years. His company was established in 2008 with the intent of providing quality, outsourced solutions that meet the dynamic back office needs of the alternative fund industry. For similar posts, check out this blog.

Understanding the fee structure of hedge funds

When investing in a hedge fund, investors place their money and their trust in the hands of fund managers, which can come in the form of a general or limited partnership or a limited liability company. They are compensated for their service with a fee structure that commonly consists of the following:

Management fee
Whether a hedge fund endeavor pans out and performs well or not, the fund managers are paid with a management fee with a value that falls between 1 and 2 percent of the amount of the assets that are managed. There are even cases that this rate goes higher, especially if the fund manager has a proven track record.

Performance fee
Also called incentive fee, hedge fund managers are paid a percentage of the total profits that their endeavors gain. This serves as a reward for excellent performance. Most fund managers collect 2 percent of the net asset value and 20 percent of the profits as part of the “2 and 20” fee structure. However, like management fee, fund managers can collect a higher performance fee rate.

Many fund managers implement the high-water mark clause, which prevents managers that suffered from hedge fund losses in the previous years from charging a performance fee on new profits to offset the said negative gains.

Scott Tominaga is a renowned expert in the hedge fund industry. He has more than 17 years of experience in the field, as well as in financial services. For more articles like this, click here.

Emerging financial services trends shaping the industry.

The financial services industry is one of the first to be directly affected by innovations and disruptions in technology. This is especially true in the internet age, when cybersecurity and investment protection are of prime concern.

A key trend to pay attention to is cybersecurity investment. As the 2020s approaches, many banks are channeling their resources to security infrastructure, especially with rampant cyber-attacks. A recent study by the Cybersecurity Market Reports predicts that one trillion dollars will be allocated to cybersecurity alone between this year and 2021.

Corporate banking is also seen to invest more in client-oriented technologies, as competition for offering the best customer experiences goes up. Digital solutions are being developed in line with the rise of cryptocurrency and blockchain technology. Also, loan expansion strategies will target the middle market more and should lead to significant increases in revenue in the coming years.

As Fintech continues to gain ground, its investment values will rise accordingly. Such numbers are seen to go up to as much as $4.7 billion by the end of 2018. This is coupled with the speedy deployment of automation strategies. The goal of such a move toward robotic processes is increased productivity and overall efficiency internally while delivering optimal customer service.

Scott Tominaga is the Chief Operating Officer of PartnersAdmin, LLC. He has almost two decades of experience in the hedge fund and financial services industry. Read more about the financial services industry here.

Common Misconceptions About Hedge Funds

It is unsurprising when the media and countless people paint hedge funds in a negative light, because they are thought to be incredibly risky, unregulated, and operate in a volatile market. But once people see past misconceptions about hedge funds, they would see the potential of this investment vehicle to optimize and balance one’s portfolio.

                         Image source: hedgethink.com

Some of the myths surrounding hedge funds are the following:

All hedge funds are risky

First of all, it is important to be aware that every investment vehicle inherently carries a unique set of risks. Secondly, there are various ways to define risks. And if riskiness is expressed in terms of standard deviation of performance, then stocks and private equity have actually been riskier than hedge funds the past two decades.

Having said that, there are more than 10 types of hedge funds, and not all of them have the same level of risk. Depending on their correlation to the overall market movement, some hedge funds have low-risk expectancy, while some have high-risk expectancy.

                     Image source: smallcapnation.com

Hedge funds are only accessible to institutional investors or high-net-worth individuals

There are actually many ways to enter hedge fund investments, and one does not even have to shell out hundreds of thousands of dollars to do so. Some hedge funds are traded on exchanges, while some can be accessed through pooling of investor money together. There are even fintech startups that use hedge fund strategies to invest.

Learn more about hedge funds by following this Scott Tominaga Twitter page.

Investment ideas for the high net worth individual

Alternative investments generally have a higher minimum investment requirement compared to traditional investments. They are also less liquid. However, alternative investments can be very lucrative for investors, and may even turn a profit during down markets. 

Image source: entrepreneur.com

Let’s take a look at some of the more popular alternative investments for high net worth individuals in the world today. 

Real estate 

Real estate is probably the most well-known of all the alternative investments. It is also both dependable and profitable. A lot of developers who started out in real estate back in the middle of the 20th century are now multi-millionaires. There are however, a lot of bases to cover and principles to study before going all-in in real estate, but once an investor hits his stride, it can be extremely lucrative. 

Managed futures 

Managed futures are indeed for the high net worth. What happens with managed futures is that funds and assets are handled by managers (sometimes firms for entire families), and are invested in different businesses. Managed futures are sensibly considered because people aren’t confident in their own business acumen. High net worth individuals then rely on and trust fund managers to make the right decisions. As such, becoming a fund manager takes a lot of accreditation, and only the best are trusted. 

Image source: 3dprintingstocks.com

Scott Tominaga is the Chief Operating Officer of PartnersAdmin LLC. He has almost two decades of experience in the hedge fund and financial services industry. His company was established in 2008 with the intent to provide quality, outsourced solution to the dynamic back office needs of alternative fund industry. To know more about Scott and PartnersAdmin LLC, click here.

The role of the back office in private equity

In an investment business such as private equity, there are three parts; the front office, the middle office, and the back office. The front office is in charge of dealing with consumers and clients upfront, like having face-to-face meetings with clients, and other client-facing roles. The middle office is in charge of risk, credit, and strategic management. For employees in this sector, the back office is simply a trap everyone wants to get out of. 

Image source: news.efinancialcareers.com

It’s a talk among employees that those who are working in the back office always dream of having a role in the front office. Front office roles have higher pay as these are revenue-generating, unlike the back office. However, all operations of an investment bank or a finance company will be impossible without the force of the back office. Although it doesn’t directly generate income, it provides crucial support and administration. 

The back office carries out functions like settlement, record maintenance, clearances, regulatory compliance, accounting, and IT services. The operations run by the front office depends highly on the back office. Its staff focus on designing the computer systems, handling the company finances, maintaining the databases, and seeking out new talent.

Jobs in the back office are as important as jobs in the front office and middle office. Its support is needed for two offices to run smoothly. It’s more concerned with internal efforts, unlike the front office, and is more distinct than those of the middle office. 

Image source: endeavor.og

Scott Tominaga is the Chief Operating Officer of PartnersAdmin LLC. He has almost two decades of experience in the hedge fund and financial services industry. His company was established in 2008 with the intent to provide quality, outsourced solution to the dynamic back office needs of alternative fund industry. To know more about Scott and PartnersAdmin LLC, click here.

Best practices for hedge fund performance reporting

When doing a hedge fund report, the most important thing to remember is the current industry standard. And that is that the performance numbers must comply with GIPS and AIMR. AIMR stands for the Association of Investment Management & Research, while GIPS refers to Global Investment Performance Standards. 

Image source: businessinsider.com

GIPS is essentially the internationally acceptable standard of the AIMR PPS (Performance Presentation Standards), and since 2006 has replaced the AIMR-PPS. In short, while AIMR is a talking point in the industry, any best-practice methodology is now based on GIPS. 

In order to be in line with the demands on GIPS, performance reports must allow easy tracking of cash flows from investors for various accounts with different beginning and ending dates and asset sizes. These composite returns must address computation standards, from input data and calculation methodology to disclosures and the actual presentation. 

The key output here is a transparent fund-administration document from the input data and calculation stage. These explain crucial variables like trade date accounting, time-weighted returns, valuation, and accruals of income and expense. Disclosures and reportage sections are mainly for firm-level needs; a good report must be clearest at the fund level. 

Finally, remember that a hedge fund is a single portfolio with individualized fee arrangements; it is not a composite, so there’s no need to aggregate the participants’ returns in performance reports. 

Image source: 3dprintingindustry.com

Scott Tominaga is the COO of PartnersAdmin LLC. He has over 17 years of experience in the hedge fund and financial services industry. For similar updates, follow this Twitter page.