Starting a hedge fund is more complicated than forming a corporation or
LLC for a private business and involves compliance with different regulations.
These can be quite cumbersome if you do not have reliable professional
advice early on.
Your first step in creating a hedge fund is hiring a hedge fund attorney
who has the necessary experience to protect you. Most hedge fund managers
begin with between $15,000 and $50,000. You could be looking at high legal
costs and constant scrutiny from current and potential investors which
means your best chance is with having an innovative and viable idea with
the ability to raise substantial amounts of capital.
Beginning a hedge fund means being entrepreneurial since you are in some
ways a small business owner who will need to manage more menial tasks
such as managing overhead. Roughly a quarter of your time will be spent
on administrative matters with a hedge fund.
Finding a Strategy that Works
You will first need a clear strategy on how you plan to make money which
your investors will want to see. You should be able to demonstrate that
you are unique in how you can execute these strategies with a repeatable process.
You need to show your strategy has worked before in a variety of different
market conditions. Institutional investors such as endowments, pensions,
etc. typically look for a 3 year-long track record. Funds-of-funds, family
offices, and high-net worth individuals will usually look for a 12 to
18-month track record.
Be honest with investors—if you were only a research associate at
a loan-only dividend fund, don’t pretend this automatically qualifies
you to be the portfolio manager of an international growth strategy fund.
To obtain sufficient start-up capital, you could look for funds in the
- Your own funds
- Family and friends
- Funds-of Funds
- Family offices
- Hedge fund seeders
- University endowments, pension funds, and foundations
You will also need something in the way of office space. Renting can be
expensive, but until you get to $100 million in AUM you should be as frugal
as possible with your living arrangement.
Finding capital, establishing everything else, and determining your strategy
are only the first steps in starting a hedge fund. You will need to plan
for your day-to-day strategy, hire investment professionals, and determine
an exit strategy if things go south.
Speaking with a
business attorney during the early planning stages can help you immensely as you plan your
first steps in setting up a hedge fund.