Building Infrastructure for the Modern Hedge Fund with Kevin Fu of Repool

Our Guest: Modernizing Hedge Funds with Kevin Fu

Kevin Fu serves as the co-founder and Chief Executive Officer of Repool, a company dedicated to delivering cutting-edge back-office solutions tailored for hedge funds. With a robust background in fintech, Kevin brings a wealth of experience and a fervent commitment to enhancing the accessibility of fund management. At the helm of Repool, he spearheads initiatives to streamline and simplify the intricate processes associated with launching and operating hedge funds.

With a profound understanding of the financial technology landscape, Kevin Fu leads Repool with a vision to revolutionize the traditional approaches to fund management. His commitment extends beyond mere operational efficiency; Kevin’s passion lies in making fund management more accessible to a broader audience. Through innovative solutions and a keen focus on leveraging technology, he endeavours to eliminate barriers and create a more inclusive environment for emerging fund managers and investors alike.

Under Kevin’s leadership, Repool emerged as a catalyst for change in the hedge fund industry. By infusing modern technologies into back-office operations, Kevin Fu and his team strive to reshape the landscape, providing a seamless and user-friendly experience for those navigating the complexities of hedge fund management. With a dedication to simplicity, accessibility, and technological innovation, Kevin Fu’s Repool stands at the forefront of transforming how hedge funds operate in the modern financial ecosystem.

Episode Transcript

Kevin Fu: Every hedge fund right now has spreadsheets upon spreadsheets that are crazy, multiple tabs and crazy formulas built by really, really smart people because they’re trying to manually do this because the traditional admin doesn’t really step into that arena. But also from the investor side, the experience is very archaic. You basically fill out a legal form, and then once a month you get like a PDF that has a bunch of numbers that you don’t really care about, and that’s it. You can really make that a much better experience in terms of the speed at which you give them data, the robustness of the data you supply them, and then also facilitating more frequent communications between LPs and managers. One of the tough things about being a fund manager is every investor is a stakeholder, and it’s kind of like a one-to-many relationship. So anywhere you point in the back-office stack of a hedge fund, there’s area that software can be interesting, either on a very small operational level or from a fundamental workflow level.

Jacob Hollabaugh: Welcome to PayPod. The payments industry podcast. Each week, we’ll bring you in-depth conversations with leaders who are shaping the payments and fintech world, from payment processing to risk management, and from new technology to entirely new payment types. If you want to know what’s happening in the world of fintech and payments, you’re in the right place. Hello everyone, and welcome to Pay Pod. I’m your host, Jacob Hollabaugh, and today on the show, we are talking about the state of the modern hedge fund as an on-again, off again retail trader myself, I’m pretty excited to chat a bit about the world of investing and fund management and all the new things coming to the infrastructure of that world.

Jacob Hollabaugh: Joining me to break down some topics surrounding this world and this industry is Kevin Fu, co-founder and CEO at Repool, the modern hedge fund launch and back office solution. Kevin, welcome to the show. Thank you so much for joining me today. Hey, Jacob.

Kevin Fu: Thanks for having me.

Jacob Hollabaugh: Pleasure is all mine. Let’s start off where the company itself started off when and how did Repool come about? When was the original idea conceived and what led you to that idea in the first place?

Kevin Fu: Yeah. So we’re about a two-year-old company, and actually your lead in about being an enthusiastic retail investor of sorts is actually the origin story for the business. So the way I would talk about Repool is pretty close to what you said. We are more or less building modern back office infrastructure tools for fund managers, often first time in emerging fund managers. Originally, though, in how we ended up here was my co-founder and I have a background in fintech from the startup side, and we were really interested in helping retail traders actually behave more efficiently. In short, we kind of saw the rise of retail trading and infrastructure said, hey, you know what a lot of this behaviour actually looks like? Worse investors looking towards better investors, hoping they like interesting ideas and then replicate them. And when you think about it, that’s kind of like money management with extra steps. You don’t know if that person’s any good and you don’t really get a strategy.And it’s time-consuming and it’s not really actually the behavior itself. That’s interesting. People just want to make money, don’t think they’re in it because they like the actual act of trading for the most part. So we said, hey, what if you could actually connect the directly talented traders with the actual listenership and audience and drive more efficient market behavior? That’d be better for everyone, because you could also monetize that, the giver of ideas and advice. And it turns out that long story short, that’s basically impossible from a regulatory perspective unless you have a hedge fund. So as tech people, that led us to ask the next question, which was what does it actually take to bring down the barriers to entry and simplify the act of launching and operating a hedge fund? And that’s how we essentially got started today. I wouldn’t say we’re a necessarily retail-oriented in any sense, per se. We certainly still have people who have a non-traditional background that are talented traders with interested investors, who have used us to get a fund up and off the ground and running. But we also are just as equally, if not more focused on just people who would otherwise operate hedge funds. That could be investment advisors looking to launch a new fund vehicle that could be a trader out from an existing firm, and so on.

Jacob Hollabaugh: Gotcha. Interesting. So that clarifies a little bit of something. I assume that the market overall for like the market for your product may not have been there five, ten years ago, but that the world of trading, the world of hedge funds, the opportunity for, like you said, more folks who weirdly ended up in that position but didn’t have couldn’t get over the wall of actually being a hedge fund to do it the best way or the most appropriate way for people to view them.

Jacob Hollabaugh: That this market has expanded in recent years, has there been any other changes, or is it basically been driven by this big influx of a bunch of retail traders, especially during the pandemic, when we saw the robinhoods of the world and whatnot take off and everyone became a trader, everyone became an investor for good and sometimes oftentimes for poor.

Kevin Fu: Yeah. You know, I wouldn’t necessarily say that the market has expanded in a big way. Most of the hedge fund industry, which is very large, has been pretty stable for a long time. I think, to your point, what’s changed is technology has made it such that more people can enter. So there’s like some modest democratization effect. I don’t think the end state here is anyone, and everyone who has been trading for any amount of time should be able to capital together, right? There’s a reason this is a highly regulated space full of sophisticated operators. But I do think to your point, through modern tools and better software engineering, the landscape looks very different 15 years ago versus now in terms of what’s possible, how you can drive operational leverage. You can operate a hedge fund with less staff. You can operate a hedge fund with less money. And that just means that smaller funds are possible. And that’s kind of increased the bottom end of the market for sure.

Jacob Hollabaugh: Yeah. And you referenced you’ve moved a little over to much more often for the emerging manager, which I think to me makes the most sense of the play of like those folks that are already within a fund that might be always have want to do it on their own. But the barrier to entry has previously been so abnormally big that they’re going to stay where they’re. At forever, and they’re not going to go try to out on their own and build a new one. And you’re offering to be able to help them do that. So for that emerging manager, what would be some common misconceptions that they might have about the ability to launch a hedge fund on their own?

Kevin Fu: Yeah, I mean, I think it’s twofold. One is the cost, right? So in the vein of what you’re just talking about, you certainly can spend a ton of money on operating and launching it if you’re institutional. I mean, you usually spend hundreds of thousands or millions, but that’s because there’s a ton of complexity, both in terms of like the terms and also the structure onshore and offshore vehicles and tax blockers and all sorts of things that even I don’t particularly understand to a great degree. But on the emerging manager side, you can actually get the fund cost down to be in the 20, 30, 40 K range per year. And it’s basically just a math equation. Right? So I think a lot of people think, oh, a hedge fund needs to be X minimum size 50,000,100 million. But for an individual manager or a pod of 2 or 3 people, it’s basically just okay. If the ongoing per year cost is X dollars, let’s say 40 K all in, then as a percentage of the fund, what’s the minimum fund size where I can actually still make some money and still generate good returns? You’re talking about single-digit millions and actually think even in the past, a lot of notable hedge funds started with just single-digit millions, got a great track record, and over the course of five, ten years really blew up and got large.

Kevin Fu: So I think that the actual cost is not as big of a barrier for emerging managers. People think, and the costs kind of scale with the complexity, just like a company, right? If you’re starting a startup, you wouldn’t model it on the economics of Amazon and assume that you need hundreds of millions to get off the ground because you’re just playing a different game and you don’t have to worry about some of those problems till later. The other is regulatory. I think people here launching hedge fund, and they hear SEC and they start looking at the laws, and there’s a combination of both like fear and also like eyes glazing over, looking at esoteric codes and laws and think the good news is actually pretty straightforward in most cases to launch a hedge fund, there is not a ton of hoops that you have to jump through. It’s basically once the path is revealed to you, you just walk along it. There’s not like sudden challenges that arise along the way. In fact, most people don’t even need to be licensed to be a hedge fund manager. There’s something called being an exempt advisor.

Kevin Fu: That’s how most advisors start. So you don’t have a Finra license. You basically, in some states, could just start the process of launching a hedge fund tomorrow. You and could start working on that right now together with no change. As long as we know what those barriers are and we can fit within them. And that’s where Repool comes into play. Right? Is more than any other player. We’re trying to parameterize and make very clear what the boundaries are. So it’s not even that you come to us and we give you this kind of crash course on launching a fund, although we can, and that’s part of it. But it’s more that using technology and our platform, we say, okay, like if you launch a fund with us, I promise you you’ll do it the right way and we’ll prevent you from doing things the wrong way. And you’ll just kind of get through a launch. And then there’s way less that you have to think about. So I think that’s the sum total, right? It’s the cost and complexity. If I could actually imbue upon you to the knowledge that I have right now, I think you could just do launching a hedge fund. It would be a very not scary process.

Jacob Hollabaugh: Yeah. And you referenced that the path isn’t all as scary or changing as they might think in what you’re doing is basically showing them that path and giving them the ability to like it’s pretty straightforward, and we can walk you right down it. Now, with all that you mentioned at the beginning of that, the size doesn’t need to be nearly as big as some folks may think. And I saw it mentioned both on your site and then in some of the blog posts from your site that I was reading, that small funds do have a lot of advantages over traditional larger funds. Can you break down some of what those advantages that a smaller fund might have, that might be make it more, somewhat more inclined to venture out, even if they are starting in the single-digit millions.

Kevin Fu: Yeah. Mean one of them ties to what we said, which would just be administrative and regulatory complexity. And the other would be basically the availability of certain strategies and the possibility of generating interesting returns or alpha. It basically becomes harder the more money you have. So on the first point, if you’re talking about a person who’s trying to get the minimum viable economics to make this a full-time job or close to a full-time job, you basically just need the economics of the bun to be at replacement level for their job salary. And as we kind of talked about before, that doesn’t need to be very large when you can be exempt in terms of cost, when you’re exempt, as the term implies, you are specifically exempt from a lot of administrative and compliance burden. That’s ballooning the cost for larger managers. So one of the advantages just you just don’t have that much to deal with. In fact, I think you would be surprised at how little a fund manager has to do on a day-to-day, week to week or month-to-month basis, with only a couple of intermittent pauses through the year to continue running their hedge fund in good standing with regulators. On the other hand, if you’re a big fund and you employees and you have multiple managers, you have all sorts of different licensure regimes, you have investors in foreign countries, you have really complicated relationships and legal agreements, you know, and you’re registered with the SEC and possibly other regulatory entities.

Kevin Fu: You’re going to have a ton of complexity. So that’s one. You can be lean and mean. And it’s kind of like being a startup or a small business in general. The other is definitely the strategy. There are plenty of strategies that you can make interesting returns off of in 50 million, 100, $200 million funds, but it becomes extremely hard, if not impossible to scale that to half a billion, a billion plus. And the same thing happens, I think broadly in venture as well, where the best-performing venture funds are 50, 100, $200 million funds and none of these multi-billion dollar funds are delivering outsized 30, 40, 50% returns. So I think there’s just more strategy availability. It’s easier to find some small edge because the edge doesn’t need to scale into hundreds of millions of dollars. And when you look at the biggest in the world with very, very, very few exceptions, there’s kind of an inverse correlation between the size of the assets under management and the amount of alpha that those funds generate, because it becomes harder and harder and harder as you acquire more and more assets.

Jacob Hollabaugh: Yeah, certainly. So with your tools specifically at Repool, you’ve touched on it a bit throughout. But I want to ask directly here, what is it about your platform that you’re able to do differently or better than incumbents in this space? Or is it possibly that there isn’t really incumbents in this space doing what you do? What makes stands you out from the competition?

Kevin Fu: Certainly there’s a lot of incumbents, right? It’s just that the biggest difference there are principally services, businesses that are human-driven. And there are advantages to that model. And there are reasons why that model has persisted. But whenever you have a structurally human services-oriented business, what you basically never get is interesting operational or technological leverage or workflow for the actual end user. Right? Because everything is being done in spreadsheets and email and with offshore teams and running through lots of different people. And so I think it’s less that we’re doing something radically different at the core. At the end of the day, a compliance firm does your compliance, an accounting firm does the accounting, but it’s how can we abstract away more and more of that from the actual fund manager? And how can we make the times when they do have to touch it easier, faster and more delightful? So I’ll give a simple example. One is that hedge funds have a lot of paperwork. There is a very complex set of documents that have to be created when you form the fund. Those have to be distributed to prospective investors. Ongoing notices and disclosures have to be delivered to those investors and then those investors themselves. When they come into the fund, they need to provide a ton of information. They need to fill out a bunch of esoteric forms, and then they’re going to start receiving, like Excel spreadsheets and financial statements.

Kevin Fu: It’s all very archaic, and you can take a lot of that data and really simplify it so that instead of taking, you know, weeks to fill out a 50-page legal document that looks scary and is kind of hard to understand, it’s more like modern consumer-grade experiences we have come to expect in other areas. Right? So you digitize it, you simplify it, but you still achieve the same outcome. In a similar vein, I mean, 20 years ago, if you were opening a brokerage account as a retail trader, you would literally fill out like stacks of paperwork and you would attach like scans of your ID and proofs of address. And it was a whole ordeal. And nowadays, largely thanks to Robinhood, which a lot of people don’t know, that’s kind of the area they are most innovative on aggressively digitizing the onboarding and verification processes. Now signing up for a brokerage. On most brokerages, the retail trader is something that you can do in ten minutes sitting at a computer with no help. And that’s a very parallel story to, I think, a lot of the surface area that hedge funds can have. You can make it easier to interact with every part of the plumbing so that. You ideally forget that it’s there. And then when you do touch it, you have, you know, it’s just it’s just much simpler.

Jacob Hollabaugh: Yeah. And that’s certainly a common theme that comes up on this show and is one of the many overarching themes of this show is throughout the financial world and definitely in the investment world being one of them, just the things that wouldn’t have been accessible to the common person. The mass market is slowly but surely all of the technology and the digitization of everything breaking down, all these barriers to let more people in. And as more people are able to access all these tools and all the parts of the financial world, there’s new companies like yourself that are able to come in. And how can we make this transition easier? How can we help them out and not just serve the super big company that’s been around for a long time, and is the reason we’re still filling out the 50-page paper in person? Because they want to keep that barrier to entry. They don’t want the company to come in and change how that’s done. The other, the main thing referencing kind of the themes of this podcast, the main at the end of the day, if I boiled this whole show down to one thing, it is the movement of money and just financial infrastructure in total. So you are, as you mentioned, touching a bunch of points, or that fund manager is touching a bunch of different partners through that, you’re trying to help them facilitate how efficiently that happens. A little more so for my banking partners that might be listening, my payments folks that might be listening, I’ve got to ask, does anything you’re doing, it’s bringing all these benefits to the fund manager themselves. Does it bring any benefits to any of those other partner organizations, those other touch points on the other side? Do they get anything out of this? Any benefits derived from the hedge funds operating in a better way thanks to your software?

Kevin Fu: Yeah, I mean, I think indirectly and I think there are interesting things we do on the money movement and banking side. I think the benefit to our banking partners and we do have embedded banking in our app, which is not typical. Usually, you would go and get your own third-party bank. And for regulated entities like hedge funds, especially this year, but with all the turmoil on the regional banking and the venture blowups, it’s time-consuming and hard. But the benefit for our partners is more clients and access to an interesting base of related possible clients. Right. The interesting thing about a hedge fund and its network of investors is essentially you’re dealing with a relatively high net-worth cohort of people, not just the manager. As a typical banking client that parks money from time to time, often in high amounts. But all of the hedge fund investors who, by definition, have to be some of the wealthier individuals in the country. And so I think for partners like banks, the incentive is the faster we can set up a hedge fund, the easier we can make it for the hedge fund to be successful and raise more money. And the more hedge funds that we can allow to thrive and exist, those are all just more clients generally that participate in that orthogonal financial plumbing such as banking.

Jacob Hollabaugh: Yeah. Makes sense. As you look forward with the company, are there any other big software opportunities you see for the hedge fund back office infrastructure space that maybe you haven’t tapped into yet, or are hoping to be able to tap into the further this company goes?

Kevin Fu: Yeah, absolutely. I mean, I think the reality is, is we’re very early in our journey and there’s mostly things that we haven’t done rather than things we have. I think one way to look at the journey for Repool, which is probably not all too different, other financial institutions is or challengers is, once you get parity to the incumbents, ideally faster than it took them to get there, then you have a really interesting foundation that you can build on top of, and that’s when things get exciting and we’re doing a bit of that, but we’re still also very much in the foundation mode. Think two, three, four years from now, we want to primarily just be building software. So if we’re 100% sure that Repool can do the things you would get from a traditional services business, but we also have all this interesting data. We want to make it easier for fund managers to fundraise. We want to make it easier for them to get set up and get access to analytics and tooling. You know, as an example, one of the things we do is called fund admin. It’s one of the most important back office services. We basically are the source of truth for all the transaction data of a fund manager across all of their brokerages and their cash, basically anything they do with the money, we are actually the source of truth on. And so an obvious extension of that is you actually can provide really interesting data to the hedge fund manager. Where are you making money? Where are you losing money? How are your trades actually kind of comparing to each other, compared not only to your own historical performance but to indices to other traders? Every hedge fund right now has spreadsheets upon spreadsheets that are crazy, multiple tabs and crazy formulas built by really, really smart people because they’re trying to manually do this because the traditional admin doesn’t really step into that arena.

Kevin Fu: And so that’s like an example of something that we think we’re in a particularly good position to provide people with, but also from the investor side, think as an investor in a private fund, generally the experience is very archaic. You basically fill out a legal form and then once a month you get like a PDF that has a bunch of numbers that you don’t really care about, and that’s it. That’s like the whole totality of how you interact with the fund. And you can really make that a much better experience in terms of the speed at which you give them data, the robustness of the data you support. By the and then also facilitating more frequent communications between LPs and managers. One of the tough things about being a fund manager is every investor is a stakeholder, and it’s kind of like a one-to-many relationship. So it can be frustrating both ways for the manager. It’s a lot of communication burden, and for the investor, it can be hard to get in touch with the manager and get the information you seek because it’s just one, two, three guys or gals that are responsible for not just trading and operating the fund, but also handling inquiries and stuff. So my point here is, anywhere you point in the back office stack of a hedge fund, there’s area that software can be interesting either on a very small operational level or from a fundamental workflow level. So in short, think kind of everywhere is where we’re looking to improve.

Jacob Hollabaugh: Well, opportunity everywhere is a good place to be. And it seems like you’ve built a really great foundation to continue building on top of Kevin. This has been a real pleasure for those listening who may want to follow you and your story may want to learn more about Repool. Where would be the best place for them to go to find you?

Kevin Fu: We obviously have a Twitter, and then I think our site has essentially the ability to sign up and follow our updates. We try to be a company that is very thoughtful about the information we push out because we know that a lot of companies just push out random stuff for the sake of it. So if anyone is interested in considering their own fund or learning about one for their future reference, we’re always happy to chat.

Jacob Hollabaugh: Wonderful! We will link to those in more in the show notes below. I appreciate the time and knowledge. Kevin. Hope to talk again sometime soon.

Kevin Fu: Jacob. It’s been a pleasure.

Jacob Hollabaugh: If you enjoyed this episode and want to hear more, head on over to store.com/podcast to subscribe on your podcast listening platform of choice. That’s .soarpay.com/podcast.