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- How To Start a Hedge Fund
- How To Start a Hedge Fund FAQs
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- Additional Resources in the Hedge Fund Industry
How To Start a Hedge Fund
Starting a hedge fund can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn how to start a hedge fund successfully.
Importantly, a crucial step in starting a software company is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
16 Steps To Start a Software Company
- Choose the Name for Your Hedge Fund
- Develop Your Hedge Fund Business Plan
- Choose the Legal Structure for Your Hedge Fund
- Secure Startup Funding for Your Hedge Fund (If Needed)
- Write Your Investment Agreement
- Secure a Location for Your Business
- Register Your Hedge Fund With the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Hedge Fund
- Buy or Lease the Right Hedge Fund Business Equipment
- Develop Your Hedge Fund Marketing Materials
- Purchase and Setup the Software Needed to Run Your Hedge Fund
- Hire a Team
- Open for Business
1. Choose the Name for Your Hedge Fund
The first step to starting a hedge fund is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your hedge fund:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check
to see if a suitable domain name is available. - Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired brand and/or focus of your hedge fund.
2. Develop Your Hedge Fund Business Plan
One of the most important steps in starting your own hedge fund is to develop your hedge fund business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.
Your business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your hedge fund
- Company Overview – this section tells the reader about the history of your hedge fund and what type of hedge fund you operate. For example, you might explain your specific hedge fund strategy here.
- Industry Analysis – here you will document key information about the hedge fund industry. Conduct market research and document how big the industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, how much money do they have to invest? What do they look for in investment opportunities?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer
- Prices: Document the prices of your products/services
- Place: Where will your business be located and how will that location help you increase sales?
- Promotions: What promotional methods will you use to attract customers to your hedge fund? For example, you might decide to use pay-per-click advertising, public
relations, search engine optimization and/or social media marketing. - Operations Plan – here you will determine the key processes you will need to run your business operations. You will also determine your staffing needs. Finally, in this
section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years. - Management Team – this section details the background of your company’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your hedge fund make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your business?
3. Choose the Legal Structure for Your Hedge Fund
Next you need to choose a legal structure for your hedge fund and register it and your business name with the Secretary of State in each state where you operate your business. When in doubt, it is best to consult with a professional.
Below are the five most common legal structures:
1) Sole Proprietorship
A sole proprietorship is a business entity in which the owner of the hedge fund and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
2) Partnerships
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a hedge fund together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a hedge fund include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a hedge fund is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your hedge fund, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Hedge Fund (If Needed)
In developing your hedge fund plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a hedge fund to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a hedge fund that they believe has high potential for growth.
5. Write Your Investment Agreement
Your investment agreement is a crucial document for your hedge fund and can be shown to prospective investors to persuade them to invest. Your investment agreement should define your fees, the commitment required to join the hedge fund, and how investors can receive distributions. You should plan to work with an attorney to create a solid investment agreement.
6. Secure a Location for Your Business
Having the right space can be important for your new hedge fund, particularly if you’d like to meet with hedge fund investors there.
To find the right space, consider:
If you choose to buy or rent a physical location, consider:
- Driving around to find the right areas while looking for “for lease” signs
- Contacting a commercial real estate agent
- Doing commercial real estate searches online
- Telling others about your needs and seeing if someone in your network has a connection that can help you find the right space
7. Register Your Hedge Fund With the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
8. Open a Business Bank Account
It is important to establish a bank account in your hedge fund’s name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
9. Get a Business Credit Card
You should get a business credit card for your hedge fund to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
10. Get the Required Business Licenses and Permits
Generally speaking, a hedge fund only needs a business license to operate. However, depending on the type of hedge fund you start and the amount of money being managed, you may be required to complete additional registrations. You should also plan to register any type of hedge fund with your state’s Securities and Exchange Commission (SEC) office and may need to pass an exam for investment advisors.
Key licenses and registration to keep in mind include:
- General Business License – Most businesses will need to get a business license from their local government in order to operate. This is usually a one-time fee and is required regardless of they type of business you operate.
- SEC Registration – Hedge funds with more than $ 100 million in assets under management will be required to register with the SEC.
- Series 65 Exam – If your hedge fund will be giving investment advice, you and any other investment advisor on your team may need to pass the Series 65 exam.
Depending on the type of hedge fund you operate, you will need to do more research and obtain the necessary licenses and registrations.
10. Get Business Insurance for Your Hedge Fund
Business insurance policies that you should consider for your hedge fund include:
- General Liability Insurance – This insurance protects the hedge fund from third-party claims arising from bodily injury, property damage, personal injury, and advertising injury.
- Commercial Property Insurance – Commercial property insurance protects your business if something bad happens to the property. This could be a fire, natural disaster, or someone breaking in and stealing things.
- Directors and Officers (D&O) Liability Insurance – D&O liability insurance protects the directors and officers of the hedge fund from third-party claims arising from wrongful acts.
- Professional Indemnity Insurance – PI insurance protects the hedge fund from third-party claims arising from professional negligence.
- Workers’ Compensation Insurance – This insurance protects the hedge fund’s employees from injuries sustained while working.
- Logo – Spend some time developing a good logo for your hedge fund. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
- Website – Likewise, a professional hedge fund website provides potential customers with information about the products and/or services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you.
- Social Media Accounts – Establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your hedge fund.
- Tax and Audit Fee - $25,000 (small hedge funds) and 100,000 (large or complex funds)
- Operational Costs: $150,000 (small hedge funds) and $ 75,000 to $120,000 (offshore)
- Legal Fees: $20,000 to $150,000
- Annual Fund Administration: $24,000 (for emerging funds) and $110,000 (for complex funds)
- Wages – Hedge fund market’s average wage is $347,216. It is anticipated to increase in the next years due to the demand for more skilled employees in the industry.
- Compliance Costs and Other Expenses – Compliance costs range from $700,000 to $14.0 million for hedge funds. Other expenses are administrative costs, legal costs, accounting fees, marketing costs, rent expenses, and depreciation.
- Demand From Retirement and Pension Plans - When retirement and pension plans increase, the hedge fund industry gains higher assets under management revenue, thus increasing the industry’s potential.
- S&P 500 - S&P 500 measures the stock market’s performance. An increase in S&P 500 causes the assets under management to increase as well as its revenue from flat fee. A faster rate of increase in S&P 500 compared with hedge fund returns threatens investor satisfaction.
- Investor Uncertainty - An increase in investor uncertainty harms the hedge fund industry as it inclines investors to withdraw their investments.
- Access to credit: Investing with borrowed money multiplies potential gains for hedge funds so an increase in access to credit also improves the hedge fund’s performance.
- OD – Regulation - As compliance cost for hedge funds increases, the profit margin decreases.
- Preqin: www.preqin.com
- BarclayHedge, LLC: www.barclayhedge.com
- Hedge Fund Research, Inc.: www.hedgefundresearch.com
- Hedge Fund Mavericks: www.hedgefundmavericks.com
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
12. Buy or Lease the Right Hedge Fund Business Equipment
A hedge fund needs computers, printers, and phones. If you have a large team, you will also need to provide basic office supplies and equipment. You might also consider purchasing reception furniture and other office furniture, depending on the size of your physical location.
13. Develop Your Hedge Fund Marketing Materials
Marketing materials will be required to attract and retain customers to your hedge fund.
The key marketing materials you will need are as follows:
14. Purchase and Setup the Software Needed to Run Your Hedge Fund
A hedge fund needs software to track its investments and performance. It also needs software to help with accounting and compliance. There are many different types of software that a hedge fund might need, depending on its size and investment strategy.
Some of the most common software programs used by hedge funds include investment tracking software such as Bloomberg and Reuters, accounting software such as QuickBooks or Sage, and compliance software such as ComplianceGuardian.
15. Hire a Team
A hedge fund typically has four types of employees: traders, analysts, back office staff and managers.
Traders are responsible for buying and selling securities. They need to be able to make quick decisions based on market conditions.
Analysts study financial statements and conduct research to find investment opportunities.
Back office staff handle the fund’s financial operations, such as reconciling accounts and preparing financial reports.
Managers are responsible for the overall operation of the fund. They make strategic decisions about which investments to make and how much risk to take on.
To find or recruit good candidates, look for people who have experience working in the financial industry. You can also look for people who have degrees in finance or economics.
16. Open for Business
You are now ready to open your hedge fund. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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How To Start a Hedge Fund FAQs
Is It Hard To Start a Hedge Fund?
The short answer is no. But the longer answer is that it depends on how you define "hard." If by "hard" you mean "costly," then the answer is yes-starting a hedge fund can be very expensive. If, on the other hand, you define "hard" as "challenging," then the answer is a resounding no.
The fact is, starting a hedge fund is not nearly as difficult as most people think. In fact, it's really not that different from starting any other type of business. The key is to have a clear understanding of the steps involved and to be prepared to execute them in a professional and efficient manner. Following the steps outlined above will help you get started.
How Can I Start a Hedge Fund With No Experience?
The answer is you can't-at least not legally. In order to start a hedge fund, you must have a certain level of experience in the industry. This experience can come in the form of working for another hedge fund, working in investment banking or private equity, or having a background in accounting or financial analysis.
In addition to experience, you'll also need to have a sound investment strategy. This doesn't mean that your strategy needs to be perfect, but it does need to be well-thought-out and defensible. You'll also need to have a good understanding of the markets you intend to trade in and the risks involved.
Last but not least, you'll need to raise capital. This can be the most difficult part of starting a hedge fund, but it's also the most important. Without capital, you won't be able to trade and you won't be able to make money for your investors.
What Type of Hedge Fund Is Most Profitable?
There is no one-size-fits-all answer to this question. The type of hedge fund that is most profitable will depend on your investment strategy, your level of experience, and the markets you trade in.
That said, there are certain types of hedge funds that tend to be more profitable than others. For example, hedge funds that use leverage (borrowed money) to make investments tend to be more profitable than those that don't. Similarly, hedge funds that focus on a specific market or asset class tend to be more profitable than those that invest in a wide range of assets.
How Much Does It Cost To Start a Hedge Fund?
Hedge fund startup costs include investment for website development, tax and annual audit, marketing and fund administration.
Estimates:
What Are the Ongoing Expenses for a Hedge Fund?
How Does a Hedge Fund Make Money?
Hedge funds make money by charging a performance fee, which is typically a percentage of the profits earned on investments. In addition, most hedge funds also charge an annual management fee, which is used to cover the costs of running the fund.
Is Owning a Hedge Fund Profitable?
In general, hedge funds are profitable. However, there is a great deal of variation in the profitability of individual hedge funds. Some hedge funds make very little money, while others make billions of dollars in profits.
Why Do Hedge Funds Fail?
Hedge funds fail for a variety of reasons. Some hedge funds fail because they make bad investments. Others fail because they charge high fees or take on too much risk. And still others fail due to poor decisions from hedge fund managers.
How Big Is the Hedge Fund Industry?
There are 4,519 hedge fund businesses in the U.S. that generated $70.7 billion in revenue last year which represents an annual growth rate of 7.9% over the past five years.
What Are the Key Segments of the Hedge Fund Industry?
Hedge funds are segmented by its investment strategies. The largest segments for the industry is Equity focus. This is followed by a myriad of other products and services including:Fixed Income Focus, Event-driven, Multi-Strategy, Emerging Markets, Global Macro and Distressed Securities.
What External Factors Affect the Hedge Fund Industry?
The external factors that affect the performance of the hedge fund industry include:
Who Are the Key Competitors in the Hedge Fund Industry?
The four largest hedge funds (Bridgewater, Blackrock, J.P. Morgan and Och-Ziff Capital) are estimated to account for 13.5% of the industry’s total assets under management. The remaining 86% of the industry consists of smaller firms.
What Are the Key Customer Segments in the Hedge Fund Industry?
The key customer segments in the hedge fund market are Pension Funds and Wealth Managers. This is followed by Insura
How Can I Make a Hedge Fund Successful?
Have a Marketing Plan
Determine the type of hedge fund that you want to start. Identify your edge and communicate it with prospect investors through your print ads, websites, social media accounts, or email marketing. Find out how you can best reach your audience and invest in a reliable Customer Relationship Management tool to help you determine the progress of your communication with investors.
Choose Reliable Service Providers
Choose partners that will help you make decisions as you start your hedge fund as you cannot handle all operations at once. Find service providers that you can grow with so that you will not need to change providers from time to time, and make sure to work with providers that are fully equipped in their field to assure your investors that they are in good hands.
Develop an IT Budget
Technology plays a significant role in the hedge fund industry since the workflows and systems that are used in this business rely hugely on technology. Have an IT budget that will be able to provide the functionality that your systems need and that will be able to keep up with your business’ growth, so think long-term.
Study Hedge Fund Regulations
Know the agencies and regulatory bodies that you have to comply to and submit all the requirements needed before you start your hedge fund to avoid charges or prosecutions. Make sure to be able to pass the standards required for the registration of your business such as data protection, infrastructure practices, risk assessments, and email archiving.
Keep Your Firm and Investor Assets Safe
Investors make sure that the hedge funds they invest in are taking good care of their investments, so make your security measures compliant not just to the requirements of the monitoring firms but also to your investors’ standards. Identify risks and fill in the gaps with your technology safeguards. Make security a priority in starting up your business.
Document Everything
Make sure to keep a copy of your paper works, security measures, technology safeguards and documents or agreements with your investors. A lot of investors demand full disclosure from their fund managers. Proper documentation will save you from hassle and will also increase investors’ trust and confidence, which positively affects their tendency to invest more.
Continually Raise Capital
Market your hedge fund consistently. Your marketing efforts should not cease after you launch your business. Work hard to keep your firm different from the others and aim to be known by more investors.
How Much Do Hedge Fund Operators Make?
Hedge fund manager salaries range from $70,000 plus performance bonuses to over $1 billion dollars in compensation.
Additional Resources in the Hedge Fund Industry
For additional information on the hedge fund market, consider these industry resources:
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