At the HFM US Emerging Managers COO Summit, I hosted a roundtable discussion titled “Scaling Smart: Future-Proofing Your Tech Operations.” The conversation brought together senior operational executives from some of the most innovative and dynamic hedge funds, sparking a rich exchange of insights and experiences.
As the host of this roundtable, it was valuable to hear the operational complexities that firms are addressing in their daily workflows. More than ever, firms are forced to make strategic decisions about when and how to invest in talent, technology, and infrastructure that can meet their current needs while enabling future growth.
Here’s a look at the top three difficulties confronting emerging hedge funds as they scale and the creative solutions they employ to overcome them.
Top Challenges Facing Hedge Funds as They Scale
Challenge #1: Balancing Resources for Today’s Immediate Needs and Long-term Strategic Growth
Hedge fund operators at the roundtable highlighted a familiar operational risk: how to balance costs today with those that will “future-proof” their firm.
One of the biggest considerations for hedge funds is human capital.
“It’s a balance,” said one fund manager. “We don’t want the expense of employing too many people at the start, but it’s difficult to grow without the human capital needed to make it happen.”
Managed Services can be an effective way for funds to fill gaps and support growth. A survey by Hedgeweek found that around 70% of funds outsource a “meaningful proportion” of their middle office, 80% do so for their back office, and over a third outsource a significant portion of their front office1.
However, successful outsourcing requires a strategic approach, therefore fund managers should:
- Selectively decide which functions to outsource
- Carefully choose the right partners
- Understand when to bring certain operations back in-house
Challenge #2: Meeting Investor Expectations - How to Afford Growing Demands
Investor expectations have consistently run high for hedge funds, but today, funds report that investor requirements have grown increasingly more aggressive. The managers I spoke with are learning how to accommodate these increased expectations.
Investors expect hedge funds to build robust infrastructure as a way to minimize risk and operational disruptions. As a result, they require funds to invest in skilled personnel, advanced systems, and reliable service providers to strengthen operations, enhance processes, and improve risk controls.
However, finding the resources to fund these requirements remains a challenge.
“To attract investors, we need to meet more aggressive investor requirements,” said one fund manager. “But our startup fund won’t have the resources to meet these requirements until we have investors on the books. How can we cover the costs without investors?”
This dilemma means many funds are taking a more creative approach to the way they work with vendors.
For example, some investors require funds to use specific systems that may seem too expensive for an emerging hedge fund. Instead of dismissing these options outright, savvy managers are negotiating alternative pricing structures, such as pricing tied to growth, or opting for a phased implementation, paying for only a fraction of the solution until their needs expand.
One fund manager shared how this approach worked for them: “We wanted to work with a tier-one technology vendor that could support our long-term growth. So, we asked them, ‘Can you give us lighter capacity at the start until we need to expand?’”
While not every request will be feasible, a vendor that listens and adapts is more likely to be a valuable partner as the hedge fund grows.
Challenge #3: Evolving Investment Technology – What Hedge Funds Need Today vs. an Unknown Future
When it comes to technology, the conversation at the roundtable focused on the question: Are you buying what you need today or what you might need as you grow?
To manage today’s operations, startup hedge funds want technology that is intuitive and easy to onboard – especially if they don’t have the people or bandwidth.
However, these managers know that the technology they initially choose won’t serve them forever.
“When we evaluate technology, we’re looking at what we need today to get by and what we might need as we grow into the future, said one manager. It’s aspirational, but we believe the fund will grow, and we need technology to grow along with it.”
To keep pace with their growth, funds must select technology that allows for seamless integration with other tools, ensuring scalability without excessive cost or operational disruption.
That means whatever technology you are implementing must be interoperable with other tools, empowering you to add functionality without a lot of headaches, resources, and expenses.
Finally, whether you're an emerging or established hedge fund, managers recommend staying informed about technological developments. Keeping up with evolving technology ensures that no matter how your fund grows, you’ll be equipped to leverage the latest tools to drive that growth.
Creativity and Strategic Planning: The Keys to Futureproofing Your Hedge Fund
The challenges hedge funds face today are driving managers to rethink their approach—blending strategic vision with creative problem-solving to build a foundation for long-term success.
To scale effectively, hedge funds must be intentional about their growth strategy. This means not only defining who they are today but also charting a clear path for future evolution. Equally important is understanding the resources – technology, talent, and infrastructure – needed to ensure they are positioned for sustainable growth.
This well-defined strategy fosters innovation, allowing funds to approach problem-solving with greater flexibility. Many are rethinking how they collaborate with vendors, forming strategic partnerships to access the technology and services that best support their needs.
The key takeaway: Ask for what you need. The best vendors act as long-term partners, working collaboratively with funds to develop solutions that create mutual value.
By embracing innovation, forging strong partnerships, and maintaining operational discipline, today’s emerging hedge funds are positioning themselves for lasting success in an increasingly complex investment landscape.
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