- July 11, 2017
- Posted by: Vincent Sarullo
- Category: Hedge Funds
How to Start a Hedge Fund
This guide on how to start a hedge fund will help emerging hedge fund managers with their launch.
1. Prepare for the realities of capital raising.
It’s important to be realistic when starting a fund. The reality is that unless you have an incredible pedigree and have strong financial backers, you will not be able to raise capital in the hundreds of millions of dollars.
After the 2008 financial crisis, new fund launches of $25 million are major, newsworthy events and they are far and few between. Prior to the recession, managers really wouldn’t even consider it worthwhile to launch with less than $50 million. Also, new funds of that magnitude were rolling out on a monthly basis. There seemed to be no end in sight when trying to raise capital.
2. Is there a need for your expertise? Strategy?
Do you think you can be a hedge fund manager? Do you want to work for yourself and do you think that you have a great strategy to offer investors?
If you truly enjoy doing this type of work, that goes a long way toward having the best shot at creating a sustainable business and attracting investors. Believe it or not, most allocators and seeders will ask a hedge fund manager this question to see if your heart is truly in the business. A hedge fund manager who is motivated by money alone will not survive the tough times and may make riskier investment decisions in order to generate performance fees and then ultimately self-destruct.
3. Understand Start-up Costs
The cost for a fund manager to start their business makes the barriers to entry nonexistent.
Compared to other businesses, the cost of starting a hedge fund, private equity fund, or other alternative fund structure is significantly less than you would expect. The chef who starts his culinary quest with a food truck has costs a lot more than creating a fund. Food truck industry reports show costs for a food truck setup to run upwards of $250,000 to get your wheels rolling.
4. Check Your Credentials
What licenses does a hedge fund manager need to have?
A Universal License Requirement
In some states, hedge fund managers require only an ordinary business license as their universal license requirement. They do not usually need to have the Series 7 license. The Series 7 license is required for brokers to trade stock for customers, but hedge fund managers are not regulated as brokers. Check with your state to learn their specific requirements.
5. Hire a Lawyer for Legal Formation
What will a lawyer help with when starting a hedge fund?
- Help determine the name of the fund and management companies based on industry standards.
- Determine appropriate domicile for the fund and management entities and entity types (limited liability company, limited partners, onshore or offshore structure, etc.)
6. Write a Business Plan
If you want life to be organized and run as smooth as possible, it is a known fact that planning is essential. Any type of structure requires a solid plan and an end goal. The same applies to your fund. Although you may not see it this way, your fund is your business. Having a solid hedge fund business plan helps to better decide short and long term goals.
When you’re starting a financial services firm, as with any other type of business, it’s necessary to develop a business plan before you go headlong into a venture. Update your plan on a regular basis as your business develops. It’s vital to sit down and put pencil to paper to document your goals and how you plan to get there. All the related corporate documents, including the mission statement as well as your motto, brand, and company culture, need to stand as representations of who you are and what you stand for as an individual and a firm.
7. Develop a Budget
Budgeting is an ongoing process that will be reviewed on a continual basis. Technology has made it easy for managers to set up shop and run their strategy from wherever and whenever.
The primary cost to open up shop is the creation of the “product” that you are selling: the fund structure. The Start-up manager will eventually recover even this cost, as these legal formation costs are ultimately borne by the fund and its investors. The fund manager will be reimbursed by the fund.
8. Hire Service Providers
What hedge fund service providers will you need?
The main providers you will require are as follows:
9. Develop Branding and Your Message
You may not think that you are selling a product that needs brand recognition, but you are. Even the simplest things, like selecting a color scheme or text font that represents you, are important to hedge fund marketing.
Make sure that all your marketing materials – including your pitch book – match your business card and website, as this builds client and prospect recognition. I’ve seen thousands of fund names, websites and marketing materials that affirm my belief that imaginative and creative fund managers are few and far between. Many seem to have given more thought to their tattoos than they have to their business identity.
10. Start Capital Raising
Here we present an outline and links to all our posts on how to raise capital for a hedge fund or other alternative investment strategy.
We have several posts about capital raising. See all our posts here.