How to Start a Hedge Fund: Learning the Basics

Becoming a hedge fund manager and starting your own fund will give you the opportunity to invest the money of other people for them and make a profit out of it for you and your investors. If you are a professional financial advisor and you feel that you want to take things to the next level, you may want to setup a private hedge fund. Basically, a hedge fund is a pool of funds from different investors, which is then invested using a wide variety of strategies to generate returns while managing risk. If you want to learn how to start a hedge fund, continue reading.

Choosing a Hedge Fund Strategy

So what do you need to start an investment fund? One of the first things that you should do is to establish an overall vision and figure out how your fund will generate returns for the investors who trusted in you.

Hedge fund managers implement different strategies such as the market neutral strategy, hedged equity strategy, and global macro strategy. In general, you should use a strategy with the aim of maximizing the upside potential of your portfolio while minimizing risk.

Register as an Investment Advisor

If you have at least 15 investors associated with your hedge fund, in the US you must register with the Securities and Exchange Commission as an investment advisor. Even if you have less, it is still recommended to register with the SEC because it will boost your credibility. Other countries have different regulation requirements, which your law firm should be familiar with.

Establish a Corporate Partner

As an investment advisor, you can structure the hedge fund and run it as a sole proprietor or establish a corporate partner that will act as the general partner of your fund and limit your liability. Make sure to consult with your lawyers on this process.

Register Your Company

Write your corporate bylaws and register your fund to the different regulatory bodies in your country or state. You will need the help of your legal team during this step. Again, we can provide advice about countries most suitable to setup a private hedge fund and take care of registration and other legal issues.

Prepare the Necessary Documents for Potential Investors

If you want to attract people to invest in your hedge fund, you should have documents which explain the goals of your fund and the different terms of investment ready. This document, which is also called the offering memorandum, will protect both the hedge fund and the investors. It will assign liability for losses to those who invested in the fund, and on the part of the investors, will provide specific information on the strategies that will be implemented by the hedge fund.

Establish Your Online Presence

Just like any other kind of business, it is important to set up an informational website that showcases your experience in the finance industry, background of your hedge fund’s partners, and investment strategies that will be implemented. By setting up a professional-looking website, you will be able to establish your online presence and foster trust in potential investors.

Find Anchor Capital for Your Fund

To get your hedge fund up and running, you would of course need to get the cash. Unless you are extremely wealthy and you can seed the fund independently, you will need investors to have assets to manage. The most effective way to attract investors is by having a proven track record of success. Initially, you may obtain seed money from business acquaintances, as well as friends and family. However, you may also need to approach businesses, affluent investors, and venture capital firms in order to create strategic partnerships that will be beneficial for your hedge fund.

Find a Prime Broker

A prime broker is a bank that will provide your hedge fund with all the necessary financial services for you to operate your fund. Your prime broker will lend you money, execute trades, short sell stocks, and even help you find investors for your fund.

Hire Traders

Once your hedge fund is off the ground and you are comfortable to expand your operations, it may be time for you to hire professional traders so you can handle more transactions.

Final Thoughts

Starting a hedge fund can be complicated, but with the right people on your side, it will be way easier. Once you manage to grow your hedge fund and take on more employees, you will surely find it a rewarding endeavor.