How to start a Hedge Fund
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 following areas:
- 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.