A hedge fund, which is also called a private investment partnership, is an investment fund wherein a number of investors put in money for a wide range of investments. When you open your own hedge fund, the primary objective is to raise capital for your hedge fund or expand your investment pool such that you can participate in more transactions in the equity markets and other types of investments.
Startup hedge funds raise their capital from various sources such as wealthy individuals, corporations, pension funds, foundations, and endowments. Hedge funds may also look for investors who have massive amounts of capital with whom they can establish a limited partnership with, instead of focusing on small individual investors.
When you setup a private hedge fund, you will start as the general or managing partner of the limited partnership. The general partner is the one who makes the investment decisions for the hedge fund and is usually an investment advisor who has a solid investment strategy and a successful track record in terms of managing investments. This person, sometimes with the help of the first investors, try to find other potential investors for the hedge fund and entice them into putting in their money in the fund.
One of the biggest challenges that hedge funds have to face is the regulations that prevent them from publicly advertising their hedge fund. this is so, because in many jurisdictions hedge funds are considered investment vehicles suitable for qualified professional investors only. Yet, it is legal to set up an informational website that talks about the hedge fund, its strategies, the background of the hedge fund manager and investors, as well as the investment advisors. Normally, hedge fund managers become known by offering trading ideas and approaches on websites related to investing, which indirectly helps them find financing for the hedge fund.
Opening a hedge fund and running it initially involves marketing it to your network of business acquaintances, friends, and family. It may also be marketed through firms or individuals that serve as intermediaries for fund managers such as investment managers for an endowment or pension fund managers.
In some cases, the hedge fund manager offers seed investment arrangements to the first investors of the fund. The initial investors will enjoy a discount on fund management charges or even obtain partial ownership interest in the fund in exchange for a sizable investment in the hedge fund.
Usually, these initial investors help the fund manager in marketing the fund to attract other investors. Just like any other business, hedge funds may also have basic marketing collaterals for potential investors. Also called pitch book or tear sheet, these marketing materials have information about the hedge fund manager, the strategy implemented by the hedge fund, and the terms for investing.
In a nutshell, if you want to raise huge capital for your hedge fund, you or your fund manager need to have a proven track record of successful investing. Also, if you want to establish trust, you must invest a significant amount of your own money into your hedge fund.
Once you’ve shown exceptional performance in investing and exhibited solid returns on investment, your hedge fund will start to attract the attention of high-net worth individuals and huge institutional investors with massive amounts of capital to invest. Indeed, your strong performance is a key factor to convince more investors to entrust you with their money.
If opening a hedge fund involves a lot of paperwork and can be challenging, so is running your fund and raising capital for it. To summarize, you will need to invest your own money so people will trust you and also be enticed to invest in your fund.
You can also expand your hedge fund financing by inviting your friends, family, and acquaintances. As your fund grows, you should also network with other investors, both individual and institutional, to be able to raise capital for a hedge fund.
As a hedge fund manager, you will be faced with tremendous responsibility as you will need to show exceptional past and present performance, as well as make big winning investment decisions. The other investors of your hedge fund will only rely on you to invest in good opportunities, so it will also help if you have a team of advisors and legal counsel on your side, which Fund+ offers.