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You need an efficient operating model. Here's how to build it.

A solid, carefully considered operating model is the foundation for a successful fund management business. Rather than flying blind, new fund managers need a set of guiding principles by which they will make decisions and judge success. Working that model out is the number one priority for a new venture.

So how?

First, you need to ask yourself the most fundamental question: Why? What is it that you are trying to achieve here?

This might initially seem obvious. You're running a hedge fund, so the purpose is profit, right? That's certainly one metric by which you could judge success, but it is by no means the only one. Client satisfaction, alpha, performance fees - these are all other potential answers to the 'why'.

Once you've established your objectives, you can plot a path towards achieving them. This is your operating model. No two hedge funds are the same, nor are any two hedge fund managers. There are many ways to skin a cat, and similarly there are plenty of different approaches to the business of hedge funds. Your operating model describes the means by which you intend to achieve your objectives.

There are plenty of options here. In each case, the material circumstances of your fund should dictate the choice. For example:

- Bootstrapping. If you're starting up without external funding and you’re running your own money, you're likely to focus on minimising costs and maximising returns. Operations will be lean, and with that will come a higher degree of operational risk.

- Bells and whistles. If you're trying to attract premium institutional seed money from your first day of business, you're likely to choose a very different model. In this case, given that you are running other people's money, you will need to focus carefully on all operational and counterparty risk factors. You may also need a full 'bells and whistles' front-office operation in order to attract 'serious' clients.

- Individual investors. Alternatively, you might focus on HNW individuals and smaller start-up allocators. In this case you might adopt a model that sits somewhere between the previous two: one that is sufficiently focused on operational and counterparty risk while also minimising extraneous costs and maximising fund returns and management fees.

The choice of operating model is of course not binary. Your model will evolve as the fund does. But by making the right decision about your trajectory from the outset, based on the  material circumstances of the fund, you can set yourself up for the greatest chance of success.

OSMO's raison d'etre is to help funds realise their potential. To do this we work with new and established funds to build and implement an operating model that addresses their specific business goals, and provide ongoing support through 'fractional', 'augmented', or 'outsourced' personnel.

Read more about the support OSMO can offer your fund, and get in touch today.

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