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Evaluating Online Hedge Fund Platforms: Not All Are Created Equal

Advice on Online Brokers, CRM Systems, and Hedge Fund Websites

This year, the total value of assets under management (AUM) of hedge funds reached over $5 trillion in the first quarter of 2023, according to BarclayHedge. Over the past decade, the improved performance of hedge funds, especially in the record-making year 2021, has caught the eye of many investors.

Against this backdrop, it’s no wonder that investors have discovered online hedge fund platforms.

The Rise of Online Hedge Fund Platforms

Companies began creating online marketplaces after the 2012 JOBS Act lifted the ban on general solicitation. The new rules allowed hedge funds and other private funds to market and peddle their products more widely as long as they certified that interested parties were accredited investors. Using online platforms became a logical way to connect accredited investors with hedge fund managers, and a new point of access was born.

Several online marketplaces have sprung up in the years, and the pace has quickened. While the basic premise of each is the same, the quality of the sites is not.

Here are some basic guidelines for evaluating platforms.

Research the Management Team Behind the Hedge Fund Platform

There are two critical components behind any reputable site: technology and financial services experience. Both sets of expertise are needed to ensure a positive investor experience.

Technology Expertise

Technology expertise ensures that the site works correctly, has a client-friendly interface, and remains scalable as the site grows and adds new investors and deals.

Look for hedge fund platforms that have in-house technical personnel. Some outsourcing may be necessary, but someone needs to manage this process. Sites with financial personnel directly managing outsourced resources will be less successful than those with in-house teams.

Check the bios of the technical personnel associated with a site. Are they from well-known companies? How many years of experience do they have?

Financial Services Experience

Regarding finance professionals, it’s essential to understand the level of experience associated with the platform. Financial professionals will be evaluating deals and ensuring adequate deal flow.

Review their bios. Do you recognize the companies that they are associated with? Have they reviewed past deals? Perform a thorough Google search to see what comes up. The SEC offers additional tips for conducting research.

Does a Reputable Broker Back the Site?

Brokers/dealers serve many vital roles under the new regulatory regime imposed by the lifted ban on general solicitation. SEC regulations require that hedge fund platforms verify investors’ accredited status. The broker/dealer associated with the platform performs the task of verifying accredited status.

In addition, brokers/dealers vet all deals before they are listed on the site. They look at the management team on every single deal, perform a background check, and carry out other forms of due diligence.

Brokers/dealers are an investor’s first line of defense. Because of this, you must research the broker/dealer associated with every site before investing.

Look into their management team, years of experience, current and past clients, and ensure they have not been fined or cited by regulatory entities. FINRA BrokerCheck is a reputable source of some of this information.

Ensure the Site is Compliant with Regulatory and Legal Requirements

Both the SEC and FINRA have issued regulations and guidance for online platforms. In particular, they have focused on the steps needed to verify accredited investor status. Investors must have a net worth of $1 million or $200,000 in yearly income to be considered accredited and participate in general solicitation offerings of funds.

Evaluate the Duality of the Deals

Not all deals are created equally. It’s crucial to perform due diligence when evaluating deals on hedge fund sites. Here are some questions to ask:

  • Do the people behind the deal have a strong track record?
  • Have they done other deals in the past?
  • What are the returns of the funds?

Next, look at the type of investors that participated in past deals and are participating in the deal you are considering.

What to Look for in Past or Current Investors

Seek out high-quality investors, particularly institutional investors such as pension funds, endowments, foundations, and deals sourced through investment consultants. These parties generally have their own strong due diligence processes, and their presence may suggest something about deal quality.

Endowments and foundations, for example, go through a strenuous process before investing in a hedge fund, which includes evaluating management, portfolio performance, and costs. In addition, they need to get final approval on investments from an independent board of directors.

Take the time to research other investors to ensure that you’re in good company.

Look Beyond the Basics with CRM Systems

One of the advantages of investing online is that, if done properly, it should make investors’ lives easier.

The best sites are powered by a strong CRM, resulting in a streamlined, customer-centric experience with an easy-to-follow process for investing in deals and allowing investors to share deals with friends and manage their investments online.

The Dashboard and Tools Matter

Pay attention to the investor dashboard. The best sites provide investors with access to fund and portfolio information, including up-to-date reporting on fund performance and status, a summary of all your investments, information on portfolio diversification, and new deal alerts.

Sophisticated sites attract good deal flow and marketer interest by providing tools for these communities. They offer fund managers investor relations tools to keep investors informed and offer marketers incentives to place deals on the site and share deals with others on the platform.

Gravitate Towards Hedge Fund Specialization

Be wary of sites that promise to be all things to all people. Look for online hedge fund platforms that excel at a specific niche, whether it be global, specific asset classes, or specific market segments.

Big-box supermarkets may work well in retail but not for hedge funds. You want teams well respected by fund managers and fund marketers for their expertise and knowledge.

We think you’ll also like:

  1. Crash Course: Hedge Fund Investing Basics 
  2. Crash Course: Private Equity Funds, Sponsors, and Investors 
  3. Protection from Investment Fraud: Who’s Got Your Back? 

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

  1. Due Diligence Before Investing 
  2. Crowdfunding from the Investor’s Perspective 
  3. Tech Talk: Current Opportunities for Investing 

This is an updated version of an article originally published on September 11, 2014, and revised on December 9, 2019.]

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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