How to Start a Hedge Fund
Date: 18 August 2016 Share on Twitter Share on Facebook
Hedge funds were created to lower the risk of an investment, but more so to increase the possibility of a healthy return. A hedge fund encompasses a wide assortment of techniques that render a hefty, steady stream of revenue that’s independent of the marketplace.
What is a hedge fund?
Well, if you’re wondering what is a hedge fund or how to start a hedge fund, you’ve come to the right place. You can find those answers here and more. Let’s take for granted that you don’t know what a hedge fund is and allow me to explain. A hedge fund is a partnership between two or more people that isn’t chained by the regulations of the US Securities and Exchange Commission or the SEC.
There are two categories listed under hedge funds… absolute and directional funds. An absolute-return fund is independent of the market so likely it will appeal to the investor who wants to invest in something without a lot of risk. The return is higher than the rate on bonds.
Directional funds are simply funds that do not hedge. This strategy is not stable, however the returns could be more than a return using an absolute-return fund. The only downfall is that these funds are volatile. It can be peaches and cream one day, and the next, it could be horrifying. Now that you understand what a hedge fund is, let’s look at how to start a hedge fund.
Starting a Hedge Fund
Congratulations! This is a big step, hopefully, in the right direction. Being your own boss has tremendous opportunities, but what is better job than to use other people’s money to trade with? First, you’ll need to develop and register your first fund and start-up an investment firm as the “general” partner.
Know the difference
Mutual funds and hedge funds are a lot alike, but they are not the same. They are both managed, generally by a fund manager. Makes sense, right? Nonetheless, you should know the difference and treat each accordingly.
Hedge fund strategies
As a manager, you’ve probably had years of experience in the business, bringing some of your contacts on board with you. This is a great start, but you still need to manicure your techniques and render impressive returns to keep them.
Developing a hedge fund entity
Hiring an attorney or legal firm will be one of the smartest decisions you’ll make in your career as a business owner. You may not need one starting out, but having one on stand by could save you a lot of headaches later.
What type of entity
Check the state’s laws on hedge funding regarding partnerships, trusts and limited liability companies while you’re deciding what kind of entity you want to create.
Form a trusted circle
Your investment group should be people you trust wholeheartedly. Perhaps a few of your co-workers will join your team. It wouldn’t hurt to gather a few individuals from the competitors. A winning team is critical to the success of the company.
Give it a name
Before you can go public, you will need an official name. You must have this prior to starting any of the proceedings. The name should be something that people are not likely to forget, easy to pronounce and it should be resonating with reliability.
What’s your number?
Mostly everyone in business have a FEIN or a Federal Employer Identification Number. You get this from the IRS easily by just calling them or physically going in an office. There’s no charge and it doesn’t take long to complete the application. If you want to do it online, check the IRS website.
Log in with the SEC
Additionally, as an investment counselor, you must register with the SEC, particularly if you have more than 15 people wanting to invest in your fund.
The Corporate Partnership
As an investment counselor or advisor, you have two choices in developing a fund – you can act as sole proprietor or you can opt to become a corporation. Becoming a corporation means that you are the general partner or your general investment advisory company.
The Corporate Playbook
Every company needs one – Standard Operating Process or a guidebook known as corporate bylaws. This will need to be registered with the SEC and the proper authorities in the state in which you reside.
Register with the Registered Investment Advisor by going to its website. Look under the Investment Advisor Registration Depository and fill out those forms to make this legal. This is also free of charge, however, it can take a few hours to process. After you register the company, you should do the same for yourself as the investment advisor. You will then need to connect with the SEC and register the initial “offering” of the partnership to the investors.
Raising the capital
Attracting the right investors to your hedge fund is the ultimate goal. Create documents explaining the goals and terms for presentation. Normally, this is called an offering memorandum.
Make it visible
Let people know you exist! A website that’s easy to navigate and has exceptional content will let people know you are ready to do business.
Generating startup funding can be a nightmare. Nevertheless, you are going to need independent investors unless you intend on using your own money.
The campaign tail
Once you have the website built, you must promote, promote and promote some more. This task will require your utmost salesmanship.
Do you have a broker?
You will most certainly need a bank or a prime broker to help you with funding. The bank will help you with all of your financial concerns relating to your fund.
Interview shrewd brokers… and hire them
After a while, you decide to hire help. The business is doing fairly well and you are ready to take it to the next level. You know where the talented ones are, so go get them! The sooner you bring in sharp brokers, the sooner you will grow and expand.
Need more room?
As you grow, you will need more room, so that’s something to think about when you start looking at prospects for an office. Purchase or lease something that has room for you and your staff to branch out.