If you are great with financial management and looking for ways to expand your investment portfolio, starting a hedge fund could be one of the great many options you can choose. Like many people, you may also not have a clear idea about the concept of a hedge fund. Let us give you a brief intro about the business and essential steps required to start a hedge fund on your own. Note that different countries entail different criteria, permits, and requirements for starting this business. We are here to give you a general overview, which more inclines towards hedge fund in the USA.
What is a Hedge Fund?
A hedge fund is a kind of private investment company and can be defined as a regulated investment fund, typically open to only a limited range of investors. The company usually operates under certain exemptions from registrations under the security and company’s act. The relaxed and flexible terms and exemptions have made the hedge fund industry more promising and easier to start than most highly regulated investment options, such as mutual funds.
In here, the investors pay a performance fee to the fund’s investment manager, whose responsibility is to manage the funds and bring good returns. The investment could be long term or short term. A broader range of assets can be invested, including equity, bonds, commodities, derivatives and more.
Running a hedge fund is far different from investing in stocks and being a player in the stock market. Although hedge funds can short sell, use borrowed cash, and follow riskier deals, the payoffs are humongous, for both hedge fund investors and their managers. Hedge funds managers get a percentage from the asset management and a 10%-20% cut off profit as well, which is unlikely in mutual funds.
How to Start a Hedge Fund Company
Establish a Business Plan
A business plan will help you lead the process smoothly and effectively. Market analysis and research, financial goal, long and short-term objectives, purpose, expectations, and business set up – all of this should be included in your business plan.
How you strategize your investment and how you intend to manage your hedge fund should be part of your business plan as well. A business plan should be well structured and well presented to attract good investors. You must put relevant facts, figures, and statistics while creating your plan.
However, while setting your projections on incomes and plans, you have to think moderate so as to stay in the no-risk zone. Henceforth, you should use lower range figures when calculating your future incomes.
Your business plan should include the following key factors:
- Concept of your business
- Company description
- Company vision and mission statement
- Location of the company
- Your budget
- Management team (including partners)
- Your long, short and even shorter term goals
- Your investment philosophy
- Your services and
- Your key selling points
You should consider the following things while formulating your business plan:
- SWOT analysis
- Market analysis
- Sales strategies
- Financial goals and projections
- Costs and prices
- Expansion strategies
- Marketing and branding plan
- Your start-up capital generation strategy
Establishing Your Business
Once you have defined your business plan and have found your financial investor, your next step should be establishing the business as a legal entity. You have to typically form two business entities, especially if you are trading in the US. The first entity is created for the hedge fund and the second is created for the fund’s investment manager.
The most popular choice for hedge fund operators is a limited liability partnership or LLP. In here, the investment advisor acts as the primary partner and a group of investors will be the secondary partners.
For more details and guidance about your business structure and the permits and licenses to be obtained, contact your local secretary of state. Don’t forget to hire a lawyer and an accountant who will walk you through the pros and cons of establishing a hedge fund business and make you aware of your tax responsibilities.
Name your business and complete the necessary paper works. Your name should easily convey your unique business strategy. It should also be easy to remember, inspiring and relevant to the industry.
Moving on, get your business an insurance coverage. A limited liability insurance will protect you and your business from unforeseen risks and damages. All of this will cost you a few hundred dollars only. So, don’t worry about it.
You will also have to apply for the Federal Employee Identification Number (FEIN), which can be obtained for free. Apply online on your state’s IRS website. The process will take around a week or two maximum to complete.
Register The Company as well as the Hedge Fund Representatives
In order to establish a legal partnership, your company will have to register as an investment advisor. You can process it on your state’s IARD website (Investment Registration Advisor Depository). The registration is free of cost and quite easy.
Once this is done, your representatives may also want to register as investment advisors with Securities Exchange and Commission. This becomes mandatory if your hedge fund is going to have 15 or more investors. The same IARD website can be used to register. In order to register as an investment advisor, you and your representatives will need to take a regulatory examination, known as Financial Investment Regulatory Examination (FINRA) Series 65. The test is taken to see how well you and your representatives have understood the ethics of hedge fund business and the security laws and practices. Once you pass the exam, you will become a licensed investment advisor in your state.
Register Hedge Fund Offering to SEC
Your SEC obligations are still not over yet. Your hedge fund will also need to register the limited liability partnership offerings to the SEC. Where corporations offer stock and LLC offer memberships, you as an LLP will offer interest. You can complete the registration process of a Hedge Fund with SEC on the internet through SEC Form D that each state offers.
Hiring Experts for Your Hedge Fund
You don’t need any special technical skill to run this business. However, as an owner of a Hedge Fund firm, you should gear up to hunt and hire only the best from the industry. It is all about performance, smartness, negotiation skills, team leading, and wittiness. All of these qualities are required for excelling in the business. However, some of the key roles that you will need over a period include:
- Research Analyst
- Portfolio Manager
- Financial Advisor
- Chief Accounting Officer
- Marketing Manager
A minimum of 6 members is definitely required to run a small sized successful hedge fund firm.
How to Start Hedge Fund Firm Online
Marketing is the most important aspect of your hedge fund business. It should be prolonged, continuous and innovative. You have to prove your company’s worth over and over again. This way you will be able to attract a continuous pool of cash.
Your first step should be creating a solid and compelling personal and company profile. Your profile should clearly state what you have achieved in the past with regards to investment policies and strategies and what you can achieve according to the changing scenarios. Some of the ways you can market your services are:
- Send introductory letters along with your company brochure to organizations and investors.
- Conduct talk shows and interactive sessions on live channels using Social Media platforms.
- Advertise your services on relevant business magazines, events, groups etc.
- List your business in Yellow Pages.
- Create a compelling business page on Google business.
- Attend seminars, business expos, business fairs or any other local events that can help promote your business to a large audience.
- Network with similar professionals.
- Join the local chamber of commerce.
Key Strategies to Run Hedge Fund Successfully
If you want to stay competitive and an ace in the race, you need to provide things that other firms don’t. In short, you need to produce consistent results and create unique ways to earn.
An investor will trust you with his money only if you have proven your worth as a hedge fund manager in the past repeatedly. You should have the competence to give your clients good returns on their investment with smart and precise ideas. On an average, hedge fund investors invest in hedge fund on a short-term basis and they only continue to re-invest when they get staggering high returns.
So, your main motive should be finding new, inventive, workable and reliable investment strategies. Your strategies should not only guarantee good returns but should also be appealing enough to attract more and more investors.
Getting members of your team all at the same page at all times is the biggest challenge you will face in your hedge fund business. However, it is one of the keys you need to successfully run the organization.
So, your chief responsibility will be giving direction to the business and your team members. Part of it will involve implementing time management, encouraging group discussions and brainstorming sessions, discussing and solving team issues and deploying new management strategies, carrying out appraisals, motivating employees to pursue new skills and certification courses, and leading any situation upfront.
Starting a hedge fund business is relatively easy. What is difficult is running the business successfully. Keep your doors open for suggestions from clients and employees. You will be needing assistance from hedge fund consultants initially for expert guidance. Go for it; don’t hesitate. It will definitely help you in the long run.
For doubts and clarification regarding start-up business, please post your query in comments. We are also open to discussions.