Five Biggest Obstacles Scaling a Hedge Fund and How Fund Managers Overcome Them
Scaling a hedge fund from a fledgling three-man operation to a multi-billion-dollar firm is no small feat—one that very few manage to accomplish. The hedge fund industry remains highly competitive, and Alpha is scarce with thousands of hedge funds working diligently to identify and monetize any opportunities that may arise. While performance is crucial for growth, operational efficiency, fundraising, and access to institutional-grade infrastructure play equally important roles. Unfortunately, the largest funds and multi-manager platforms have reshaped the competitive landscape – making it significantly harder for smaller and emerging fund managers to scale.
In recent years, data has shown that the largest hedge funds capture the vast majority of capital inflows, leaving smaller funds struggling to break out. Of the 15,000 active funds today, 750 are expected to attract 90% of net capital flows, and these are typically larger funds.
Why? Institutional investors often prefer funds with established brands and are more comfortable backing a new strategy under an institutional wrapper. Furthermore, institutional allocators now expect robust risk, compliance, and operations frameworks, as well as a track record, scalable infrastructure, and a robust trading process. Meanwhile, internal inefficiencies—from talent acquisition to technology and infrastructure limitations—often prevent smaller funds from growing.
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Here, we explore the five biggest challenges hedge fund managers face when trying to scale and how an outsourced trading (OT) solution, such as Meraki Global Advisors (Meraki), can help fund managers clear some of these hurdles.
1. Fund Raising: Attracting Investors is Hard
One of the greatest barriers to scaling a hedge fund is a “Catch-22” of sorts: Institutional investors want funds with significant assets under management (AUM) before committing capital, yet smaller funds need initial capital from investors to reach those AUM levels.
Pension funds, endowments, and other institutional investors conduct complex, prolonged due diligence on all funds before committing any capital, especially when it comes to larger allocations. They evaluate not only historical performance but also risk management, compliance, and operational infrastructure including the process and technology that supports them. This is where many fund managers can struggle. Without a scalable and robust operational foundation, even strong-performing funds can struggle to get those large investors over the finish line.
The reason is simple but not impossible to overcome. Many smaller and emerging hedge funds are structured like boutique operations rather than institutional-grade businesses. Lack of automation, overreliance on manual processes, and inefficient reporting and risk systems can be red flags for allocators who expect “institutionalized” processes they have seen from larger established funds.
And in this industry, optics matter. A hedge fund’s perceived sophistication plays a key role in attracting and converting institutional investors. Everything from the appearance of the offices to the formatting and reporting of a fund’s marketing documents can affect investor confidence.
Beyond enhancing their marketing documents, funds looking to attract large investors should consider outsourcing non-core aspects of their investor process while retaining all control of what truly differentiates them. At the top of this list is trading. Outsourced trading can be an efficient way to institutionalize trading and operational infrastructure without overburdening cost structures. An outsourced trading partner like Meraki can help hedge funds build a scalable institutional-grade trading function while keeping costs low, or at the very least, variable, depending on their trading needs.
2. Scaling Tech: Technology Infrastructure — a Hidden Bottleneck to Growth
Many hedge funds start with lean business operations, relying on spreadsheets, barebones systems, and manual trade reconciliation and reporting. These processes may work on a small scale but become overwhelmed as the fund grows, while trading volumes and complexity increases. Managers must have robust infrastructures to support operational needs to be in the running for investor allocations.
It’s 2025, institutional investors expect far more than Excel sheets. They expect infrastructure to be built on modern tech stacks. To meet baseline expectations, funds must have robust systems for risk management, compliance and operations. They are also expected to have best-in-class trading and risk management infrastructure, tools that provide transparency into exposures and trading, and sophisticated post-trade analytics. Without a robust order management system (OMS) and Portfolio Management System (PMS), hedge funds struggle to meet these basic requirements.
And yet, building in-house technology stacks is costly and time-consuming. On top of that, success is never guaranteed, as many internal technology projects fail or stall out.
Here, again outsourced trading can be a viable alternative to building in-house. Outsourced providers often offer tools and tech stacks that are more robust than what a startup or mid-sized manager could build alone. A hedge fund that partners with an OT firm can leverage institutional-grade trading and plug-and-play sophistication via an OT’s order management and trading technology, and trade analytics and reporting tools—without the upfront capital investment.
Meraki provides a sophisticated full-service trading desk while allowing clients to maintain control. This enables our clients to right size their operational expenditures to be free to invest more capital into the core aspects of the investment process like research, data and analytics, investment personnel, and fund marketing. Over time, this is as real an asset as any investment. Meraki’s platform has the ability to give more focus to these non-core functions, allowing CIOs to focus on what truly differentiates them while enhancing efficiency, scalability, and institutional credibility to meet investors DD demands.
3. Attracting and Retaining the Right Talent
Top hedge funds compete fiercely for talent, often paying millions in guaranteed payouts. This makes it harder for small and mid-sized firms to attract or retain skilled portfolio managers (PMs), analysts and tech talent. The rise of mega-platforms has also increased the difficulty of building out a world-class trading team.
Even when a fund hires top talent, integrating new traders into the firm’s workflows and ensuring they align with the fund’s culture can be time-consuming and challenging. The wrong hire can disrupt the established team’s collaborative culture and inhibit growth.
The role of the high-touch trader continues to be imperative in liquidity dynamics and enhancing execution quality & capacity. Managing substantial volumes of increasingly complex orders across various asset classes is becoming the norm for traders. The truth is, if a fund only has one trader, at best they have concentrated risk in too few individuals and at worst are being negligent, while also leaving performance on the table. Relying on sell side trading desks is a sub-optimal option, as they consistently reduce headcounts and “juniorize” personnel. An inexperienced trader internally or externally handling your core money makers (trades) is an enormous risk CIOs can ill afford.
Rather than hiring an expensive in-house trading team, hedge funds can outsource their trading to a partner with deep market expertise. Meraki’s model provides clients with senior, regionally focused dedicated traders with buy-side backgrounds who understand nuance, liquidity, and their portfolio strategy—without the overhead of hiring and managing full-time traders.
With a 3:1 client-to-trader ratio, Meraki offers a high-touch experience that replicates the benefits of an internal trading desk—providing institutional-level trading and expertise while reducing the risks and costs associated with in-house hiring. If savvy traders and sophisticated technology are leveraged and combined properly, a trading desk will be a source of competitive advantage to aid better returns.
4. Operational Inefficiencies Can Stifle Growth
Cost is another major consideration. Running a hedge fund is notoriously expensive and the smallest managers are impacted the most. Management fees, already small for an emerging manager, are under pressure globally and a significant portion of revenue goes toward covering core business functions like compliance, technology, data, infrastructure, and legal costs. Smaller funds have fewer assets over which to spread these fixed costs, making it difficult to reach profitability.
This dynamic can lead to overstretched teams. Hedge funds operating with lean teams often overburdentheir internal staff, leading to friction and inefficiencies in operations. As a result, they lack the bandwidth to scale effectively as the team is unable to take the initiative needed to build more scalable processes.
With trading, Meraki helps hedge funds become more flexible by replacing high fixed costs with a variable cost structure. Instead of hiring an expensive in-house trading team, hedge funds can pay only for trading services when and where they need them—freeing up resources to reinvest in research, portfolio management, or investor relations. In addition, OT can help managers expand into new geographies and asset classes, a concept we will cover next. Effective managers continuously evaluate their firm’s strengths and address its weaknesses. To build a scalable infrastructure, funds must make practical decisions not only for the firm they have today, but for the firm they want tomorrow.
5. Limited Investable Universe Restricts Growth
Lack of the right trading team and infrastructure can limit a fund’s growth. Customized product offerings that align with the demands of the target investor segment while communicating a succinct marketing message is often the key to survival. Many hedge funds specialize in a particular asset class—such as equities or credit—but lack the trading expertise to immediately expand into new markets or products even if there are clear opportunities. This can hinder performance and indirectly limit AUM growth as lucrative markets and asset classes remain out of reach. Differentiation & customization wins mandates.
Proper expansion into new markets requires a deep knowledge of local trading regulations and market structures, and liquidity dynamics that differ drastically by region and asset class. Without this expertise, funds may hesitate to participate in less liquid markets and asset classes such as emerging markets, derivatives, or commodities —leaving Alpha opportunities untapped.
Here again OT can be the solution. Outsourcing trading enables hedge funds to leverage an OT’s global footprint, and capabilities in new asset classes and specialized instruments as a turn-key solution. The outsourced trading firm’s enhanced agility and scale enables faster entry compared to building fixed in-house trading teams and adjusts more nimbly.
Meraki provides expertise in multi-asset global trading, providing funds with the ability to participate in more Alpha-rich investments across geographies and asset classes with confidence. This means hedge funds can expand their investment universe without adding internal infrastructure that often increases risk by relying on too few systems or individuals.
Scaling a Hedge Fund Requires Holistic Thinking
While investment performance is crucial, hedge funds looking to grow must also prioritize fundraising, operational scalability, and trading infrastructure.
By partnering with an outsourced trading provider like Meraki, hedge funds can:
- Scale operations and trading infrastructure without massive upfront costs
- Leverage world-class trading talent without hiring an in-house team
- Access best-in-class capabilities on demand, reduce inefficiencies, and optimize cost structures
- Expand their trading universe into new asset classes and geographies faster
Outsourced trading isn’t just about cost savings and efficiency; it’s about achieving scale while breaking through the proverbial ceiling holding back competitor funds. Outsourcing non-core aspects of a fund’s investment process allows hedge fund managers to retain focus on what truly differentiates them, while enhancing institutional credibility.
For hedge fund managers looking to scale, the choice is build vs. buy: Build it all in-house, or leverage a faster, smarter, more flexible trading model that accelerates growth efficiently. At Meraki, we enable companies to break through growth barriers with flexible, scalable trading solutions.
“The future depends on what you do today.” – Mahatma Gandhi
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About Meraki Global Advisors
Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.
For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development
(646) 666-7041
mm@mga-us.com
Meraki Global Advisors LLC is a FINRA registered broker-dealer and member of SIPC headquartered in Park City, UT. The content provided herein is not an offer, solicitation or recommendation of any securities. Meraki and its representatives make no investment recommendations whatsoever. Past performance is not an indication of future results. This document may not be duplicated or copied, is protected by copyright law and may contain privileged or confidential information. Information contained herein does not constitute tax, legal or other professional advice. Content is for informational and educational purposes only. All rights reserved 2025.
