I was reading an article the other day on eFinancial News about hedge fund hotels and, while I’ve heard of these, I never fully understood what they were and how they worked. Turns out, a hedge fund hotel is simply just that – a hotel that offers high-end office space where traders can go to set up shop without having to worry about setting up an office. Much like regular hotels, they offer a wide range of services where traders can get everything from basic connectivity and a desk to more sophisticated services like clearing relationships, counterparty management, regulatory & compliance oversight, commercial administration, finance and bookkeeping services, IT/market data support, operations management, preferential centralized procurement, assistance with company and regulatory set up, and so on. Having all these services at traders’ fingertips not only reduces their start-up costs but it enables them to concentrate on more important things — like making money. While hedge fund hotels are a great springboard for start-ups, they do offer room to grow and cater to firms of all sizes.
While there seems to be many perks to setting up shop in a hedge fund hotel, it does not come without controversy. Some banks, prime brokers, and other hedge fund services providers and consultants offer hedge fund hotel services at discounted rates – which can create a conflict of interest with regard to brokerage and execution. UBS Securities, LLC, was fined back in 2009/2010 for offering up less than competitive office space rates and IT services to small hedge funds and prop traders and was fined a whopping $100,000 because the hedge funds they were housing and discounting (including office space, IT services, receptionists, snacks, and catered lunches for less than half of the market rate) should have legally informed their investors that UBS was offering them these services at reduced rates.
With bonuses to prop traders of investment firms still short on cash this year and the Volcker Rule looming (see our previous posts about the Volcker Rule, The Volcker Rule – Seeking Out Systemic Risk and The Volcker Rule – Say What?), hedge fund hotels will likely see an increase in check-ins this year. However, while hedge fund hotels can offer great value to prop traders and start-up funds, they should be sure to discuss discloser issues with their attorneys.