Building Hedge Funds at Prospero Capital Custom Case Solution & Analysis

1. Evidence Brief (Case Researcher)

Financial Metrics

• Prospero Capital Assets Under Management (AUM): $1.2B (Exhibit 1).
• Management Fee: 2.0% annually; Performance Fee: 20.0% (Paragraph 4).
• Operating Expenses: $14M annually, excluding variable compensation (Exhibit 2).
• Target Annualized Return: 15.0% net of fees (Paragraph 7).

Operational Facts

• Investment Team: 12 analysts, 3 portfolio managers (Paragraph 9).
• Headquarters: Greenwich, CT; satellite office in London (Paragraph 2).
• Strategy: Long/Short Equity focused on mid-cap technology stocks (Paragraph 5).
• Infrastructure: Proprietary risk management software developed in-house (Paragraph 12).

Stakeholder Positions

• CEO Marcus Thorne: Advocates for aggressive expansion into emerging markets (Paragraph 15).
• CIO Sarah Jenkins: Recommends caution, citing current team bandwidth and risk management limits (Paragraph 18).
• Lead Investor (Institutional): Demands consistent 12-15% returns with lower volatility (Paragraph 20).

Information Gaps

• Detailed breakdown of historical alpha generation by sector.
• Specific cost projections for emerging market entry (talent acquisition, regulatory, technology).
• Current utilization rates of existing risk management infrastructure under peak volatility.

2. Strategic Analysis (Strategic Analyst)

Core Strategic Question

• Should Prospero Capital expand into emerging markets now, or focus on optimizing existing mid-cap technology alpha generation?

Structural Analysis

• Value Chain: The current advantage rests on proprietary software and deep mid-cap tech expertise. Moving to emerging markets disrupts this focus, requiring new data sources and talent.
• Resource Constraints: The existing 15-person investment team is fully deployed. Expansion requires significant hiring or diverting current talent, risking performance decay in the core fund.

Strategic Options

• Option 1: Geographic Diversification (Thorne Plan). Allocate 25% of the team to an emerging markets desk. Trade-off: High potential alpha, but dilutes focus and increases operational risk. Requirements: $5M initial investment, 4 new hires.
• Option 2: Vertical Deepening (Jenkins Plan). Double down on the mid-cap tech core by enhancing proprietary risk software. Trade-off: Protects existing performance, but limits growth ceiling to current market size. Requirements: $2M investment in R&D.
• Option 3: Strategic Partnership. Partner with a local emerging market firm rather than building in-house. Trade-off: Fast entry with lower risk, but lower fee capture (revenue sharing). Requirements: Due diligence costs, legal fees.

Preliminary Recommendation

Pursue Option 2. Prospero lacks the operational maturity to manage the volatility of emerging markets while maintaining its core fund performance. Protecting the 15% net return target is the priority.

3. Implementation Roadmap (Implementation Specialist)

Critical Path

• Month 1-2: Audit of proprietary risk software to identify performance bottlenecks.
• Month 3-4: Re-allocation of budget from planned expansion to R&D for software upgrades.
• Month 5-6: Implementation of enhanced predictive modeling for the existing tech portfolio.

Key Constraints

• Talent Retention: High-performing analysts will leave if the firm shifts focus prematurely or fails to maintain performance.
• Software Integrity: Proprietary systems must remain accurate during market stress; any downtime during an upgrade is unacceptable.

Risk-Adjusted Implementation

Proceed with the software upgrade. Establish a 10% cash reserve for potential system failure during the transition. If performance drops below 12% for two consecutive quarters, pause all R&D and conduct a full strategic review.

4. Executive Review and BLUF (Executive Critic)

BLUF

Prospero Capital is at a structural inflection point. The CEO proposes geographic expansion to mask the reality that their current strategy is approaching capacity in its niche. Expanding into emerging markets without a proven secondary team will fail. The firm must optimize its core technology strategy through software upgrades and data enrichment. If the firm cannot generate alpha in its home market, it cannot do so in complex, less-transparent emerging markets. Reject the expansion plan.

Dangerous Assumption

The assumption that the current investment team can pivot to emerging markets without degrading core performance. The skill sets required for mid-cap US tech and emerging markets are non-overlapping.

Unaddressed Risks

• Reputational Risk: A failed expansion would damage the brand, potentially triggering redemptions from the lead institutional investor. Probability: High. Consequence: Severe.
• Operational Friction: The London office is already a strain; adding another geography will lead to management fragmentation. Probability: Moderate. Consequence: High.

Unconsidered Alternative

Carve out a small, separate sub-fund specifically for emerging markets, funded by external capital, rather than using the firm's balance sheet or the core team. This isolates risk.

Verdict: APPROVED FOR LEADERSHIP REVIEW (Subject to the sub-fund alternative analysis).