How to Start a Hedge Fund Company
The popularity of hedge funds in recent years has been struck a sharp blow by the failures and closing of many funds, the misrepresentation and fraud of others, and the general decline of volatility and market opportunities in bonds and equities.
Starting a hedge fund takes years of planning, including the establishment of a credible track record, management expertise, and customer trust and recognition of your integrity.
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Things You'll Need
- Experienced legal and accounting team
- Start-up fees and expenses
- Early investors
- An experienced and profitable trading team
Instructions
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The Hurdles to Entry
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1
Have a credible, lengthy investment history, showing both trading and portfolio management expertise. Have results audited and demonstrate an ability to have traded at least $500 million in bonds, equities or derivatives. Do criminal and background checks on all principals and officers. Prepare for lengthy regulatory approval delays and expect a constantly changing environment that challenges the foundation of hedge fund trading.
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2
Demonstrate the high competency of your team by hiring compliance, accounting, legal and trading professionals with highly regarded work backgrounds, educational backgrounds, experience, and work habits and ethics. Acknowledge that in the end, you will take full blame and credit for the results of your fund. Have all financial reports prepared by acknowledged legal and accounting experts. Strategic decision making will determine how the fund will charge investors, allow claw-backs (no fees are charged for positive returns until all previous losses are made whole), and define the terms of hedge fund liquidation and how due diligence will be practiced.
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3
Have substantial and important angel investors prepared to follow you to your new hedge fund. The costs of registration and ongoing overhead require management of at least $250 million in assets to buoy a difficult first year. Stress the strong returns and customer feedback you are willing to provide people to manage their monies. The hedge fund must be approved under the Investment Company Act to begin operation. In addition, all investors have to be given a PPM or private placement memorandum that they will rely on to evaluate your qualifications and business plan. All investors must be accredited, meaning they certify that they are sophisticated investors with high cash flow or net worth statements.
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4
Decide whether the hedge fund is to be domiciled in the United States or elsewhere. Geographic location in the United States will affect the participation of many tax-exempt entities and institutions because of arcane tax law. The strategic strategy of the fund, laid out in the PPM, will visibly affect the ability of institutions to invest, particularly if leverage is involved.
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5
Choose recognized custodians and back-office clearing agents, and notify all performance tracking agents of your intended start dates. Determine if you will manage money for "fund of funds" hedge funds and if you will employ an ongoing sales effort or wait until early performance figures are available.
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Tips & Warnings
Consider carefully the risk appetite and availability of investors going forward before starting a fund.
Carefully consider and understand legal and accounting procedures that may affect your trading style and performance. Be certain of your ability to borrow under adverse conditions that may arise through no fault of your own.
Resources
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