Hedge funds offer light regulatory oversight and exponential profits for an investment manager with the right strategy. Because these funds are limited to investors who meet strict qualifications (accredited investors) the government spends less time regulating them. The management will take greater risks with their client’s money in pursuit of larger profits. To learn how to start a hedge fund and reap the potential rewards, read on.
Learning how to start a hedge fund requires a dedicated team of experienced professionals with specific specialties in the industry. Today, many of these people can be found under the same roof, gathered as one of many firms specializing in starting new hedge funds. Junior level officers for the positions of financial analyst, trader and chief financial officer are key positions to fill on the team. In addition to these positions, the fund will need good legal representation; but not just any big name will do. It is important find a law firm which specializes in hedge funds.
Legal development will begin well in advance of the opening. A careful planning process must be set up and correct documentation followed throughout every step of the process. Attorneys handle issues such as adviser registration, legal address of the fund and its managers, exemptions and countless other issues. A good firm will expose and resolve discrepancies before documents are delivered to prospective investors.
Once the team is assembled and a strong but subtle name for their fund has been chosen, finding good sources of investment capital is next. Many hedge fund managers have the majority of their own assets tied up in the business, but this is usually not enough. One way of finding additional capital is to tap friends, business acquaintances and family. Another is to look for a company specializing in providing seed capital in return for partial ownership.
Prime broker services are essential for clearing trades and introducing the funds potential to investors and managers. This is important since typical marketing methods are illegal for hedge funds. As with the rest of the team, the prime broker must be a company specializing in the particular needs of hedge fund managers.
With the fund’s team in place, the legal process can often be finalized within 2-3 months. At this point offerings can be made to accredited investors, the only type of investor allowed join the fund. These offering are not subject to rule 506 disclosure, but the individual’s accreditation must be put to an income or net worth test before providing an offer.
An individual who has an annual income of $200,000 or a married couple with earning a minimum of $300,000 per year will pass the income test; if they have assets of $1 million or more they pass the net worth test. Funds soliciting a commercial institution need to confirm the company has a net worth of at least $5 million. When the funds management takes the time to gather experts in the industry, ample anchor capital and expert legal advice, their chances of attracting success are increased exponentially.
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