Following last week’s discussion by WikiJobbers about potentially starting our own WikiJob ‘’‘hedge fund’’’, I thought I’d write a post detailing exactly what is necessary to make this a reality. Following some investigation it turns out it is actually relatively straight-forward to set up your own hedge fund, and research shows it’s apparently getting easier every year.
The key things needed to start a hedge fund are the following:
- a lawyer,
- a prime (or introducing) broker,
- office space (or a home office), and
- an accountant.
The first thing you need to do to start a hedge fund is to find a source of funds - ‘’‘cash’’’. Most frequently the first people hedge fund managers tap for seed capital money are friends and/or family members. It is hard to attract institutional investors to a new fund, although not impossible, especially if you have the right connections.
Essentially it’s all about trust. The first investors in a new fund are usually the fund manager’s close associates and family members because they already know and trust the fund manager. Almost all hedge funds have some, if not most, of their manager’s wealth invested in them.
The legal development process for a hedge fund normally begins with a planning consultation. This is when important issues (e.g. investment adviser registration, location of the hedge fund and its management, reliance on safe harbors and exemptions, etc.) are addressed and resolved.
A good legal consultation will expose areas (outside the legal process) that need further planning. Once the course is charted, the legal development process begins. The fund and management company entities are first formed in their appropriate jurisdictions. This enables the fund manager to begin the process of opening bank and brokerage accounts and preparing for the administrative needs of the hedge fund.
After the entities are formed, the legal team gathers the necessary information to form the operating agreements for the entities and then the offering documents, first in draft stage and then finalised for distribution to prospective investors.
==Prime Broker Services==
Once a lawyer is engaged, the hedge fund is organised, and the offering documents are drafted, the next thing you need to do is to build a relationship with a prime (or introducing) broker. An introducing broker is a registered broker/dealer that has an agreement with a prime broker to use that firm’s custody and clearing services.
A good prime broker or introducing broker will provide marketing and capital introduction services. Conventional advertising and marketing of hedge funds is not allowed but workarounds have been developed by brokers so that good fund managers get the right kind of investor attention. When setting up a hedge fund, it is best to stay away from the retail brokerage firms since they are not geared toward hedge funds and the needs of hedge fund managers.
Advances in technology and the proliferation of information have made investment research and trading convenient as well as efficient. One can work from any location where there is high-speed Internet service. As everyone knows someone starting a hedge fund these days, the industry cannot not keep track of all the hedge fund managers and their business operations, whether based at home or elsewhere. There is no stigma to running a hedge fund from home. Hedge fund managers — the best in the business — can and do work from home.
There is lots more information available on-line for further research but this essence of this post is that if you want to start a hedge fund yourself, you really can. Go for it!
Running your own hedge fund could, of course, all go terribly wrong. Although 1,152 new funds opened for business last year, Hedge Fund Research reckons that 563 funds shut down.