start up hedge fund

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So You Think You Can Start a Hedge Fund? How to Become the Next Ken Griffin: Getting Up and Running

First, the bad news: you haven’t picked the best time to start a hedge fund (assuming that you are reading this anywhere in between 2011 and the present day).

It was much better to get into the game early – i.e. the late &0’s or early 2000’s – before everyone else also wanted to start their own funds.

But if you have your heart set on becoming the next Ken Griffin, Ray Dalio, or John Paulson, I can’t talk you out of doing it.

I can point out, however, that hedge funds require start-up capital in the millions or tens of millions, eye-popping legal bills, and entail constant scrutiny by current and potential investors. It’s a tough business that’s only getting tougher as the government piles on more and more regulation.

So if you want any chance of success at all, you’d better have a novel, workable idea and the ability to raise tons of money.

Starting a hedge fund because it sounds like an easy ticket to models and bottles, because you can’t find another buy-side job, or because you think you have a brilliant investment idea but haven’t tried it yet are all surefire ways to lose money.

You also need to be entrepreneurial – as the founder of your own hedge fund, not only are you a portfolio manager, you’re also a small business owner. Thankless tasks like managing overhead, IT, HR, and marketing will fall on your shoulders. Even if you hire people to do this for you, expect to spend 20 – 30% of your time on administrative matters.

If you still have your heart set on starting your own fund, though, here’s what you need first:

Your investors will want to know exactly how you plan on making them money. Just saying you’re a global macro fund or a value investor won’t cut it – you need to show that you have a different way of executing those strategies with a repeatable process.

You also have to prove that your strategy has worked in the past under a variety of different market conditions. This is harder than it looks because you may be prohibited (by your firm and/or the law) from using your past performance record in marketing materials for your new fund.

Institutional investors (endowments, pensions, etc.) usually look for a 3 year-long track record. Funds-of-funds, family offices, and high-net worth individuals are comfortable with a 12 to 18-month long track record.

If you can use your old numbers, they’ll need to reflect your investment decisions and show that the strategy used was similar to what you’re using in your new fund.

If you were a research associate at a long-only dividend fund, don’t pretend that your performance there means that you can be the portfolio manager of a long/short international growth strategy fund.

And if you can’t use your old numbers or you’re not coming from the buy-side, invest your personal account with your strategy and have the performance audited by a top firm – expect to pay around $10,000 USD for a Big 4 firm to do it.

As one hedge fund manager told me, “If you can’t afford to audit your performance, you aren’t that good.”

You’ll need initial investors to get going. These initial funds could come from:

  • Your own money
  • Friends and family
  • Family offices
  • University endowments, pension funds, and foundations
  • Hedge Fund seeders
  • Funds-of-Funds

Investors like to see that the managers’ own money is a significant portion of the fund: having skin in the game increases your incentive to perform well.

You investors will probably have to meet the SEC definition of an ‘accredited investor’, although this varies a bit from state to state; international requirements may also be different.

There’s no minimum amount that you have to raise, but you should consider the startup and ongoing costs of the fund, your fee structure, and work backward to a level of assets under management (AUM) that can support that.

As a starting point, most prime brokers won’t work with funds under $5 million in AUM.

The optimal situation is to be a superstar at a traditional firm and get money from them to start your new fund. Hedge fund seeder firms operate the same way: they give you capital in exchange for a portion of your fee income.

And don’t think that your fundraising efforts end when the fund launches: marketing, fundraising, and yes, networking, are crucial to growing your fund.

Even the biggest hedge fund managers with dedicated marketing departments can’t escape it – they’re still brought it at the end of the pitch to close the deal.

Some creative ideas for office space:

  • Your house. Ken Griffin started Citadel this way, and Michael Burry of TheBig Short ran his fund from home.
  • A hedge fund hotel. Usually set up by prime brokers, managers get office space at below-market rates in exchange for steering brokerage business to the hotel’s host firm.
  • Sharing space with other managers. Make sure you get along and aren’t directly competing with each other.

Renting an office can be a huge expense, especially in financial centers like New York and London, so you’re much better off going with cheaper options when you first start out.

When you get to $100 million in AUM and you have $2 million per year in management fees to cover your office, consider upgrading – but until then, frugality is the name of the game.

Even a single-person hedge fund must rely on a team of external partners to make the fund run. Be prepared to pay for quality – institutional investors will consider the reputation of your service providers a reflection of your credibility.

So if you don’t spend enough on the right providers, you’ll have trouble growing your fund and getting better-known investors on-board. Here’s who you’ll need:

A good attorney should be your first call when you decide to start your own fund. Your fund lawyer will guide you through the whole startup process and provide referrals to other service providers.

Though the best-known hedge fund law firms are in New York, any city with a bulge bracket bank presence will have a local firm or two known for hedge fund law.

The actual hedge fund structure depends on whether your investors are taxable or tax-exempt, whether or not they’re US citizens, and the investment terms. Some points to consider:

  • Fee Structure. The standard fee structure used to be “2 and 20”, meaning a quarterly management fee of 2% and annual performance fee of 20% on the gains. The trend now is for lower management fees and higher performance fees. And some funds are even more aggressive – SAC Capital famously charges “3 and 50,” the highest fees in the industry.
  • Lockup Term. This is the length of time that investors’ money has to remain in the fund before it can be withdrawn. It should match your strategy – a global macro fund trading ETFs all day will have the liquidity to support a short lockup term, whereas an activist fund needs a longer lockup term to reflect the longer time it takes to realize the strategy.
  • Redemption Terms. How much notice do investors need to give when they want to take their money out? Usually funds only allow redemptions at the beginning of an accounting period (quarterly or annually).
  • Performance Targets. Are you trying to outperform a particular index? Is there a rate of return you have to beat before collecting performance fees?

You may have to register as an investment advisor with your state or the SEC if your fund meets certain criteria.

For example, all hedge funds have to register as investment advisors in Louisiana, but funds in Massachusetts are exempt if all of their investors are accredited investors. Outside the US, registration requirements vary wildly so you’ll have to do your own research there.

For a simple hedge fund setup, expect to pay between $10,000 and $50,000. More complicated setups can go into hundreds of thousands of dollars.

Outside auditors will also have to verify your performance on a regular basis, and institutional investors will demand to see that performance before investing money.

An administrator handles the majority of your back office operations, like trade reconciliation and allocation. Again, institutional investors will be looking for a quality, reputable administrator – you can’t ignore this just because it’s “the back office.”

Third-party marketing firms find potential investors and pitch on your behalf. They either work on retainer for a specified time period or get paid a cut of the funds they raise for you.

Prime Brokers provide leverage, let you borrow securities to short, and custody your assets. They also manage the brokers and dealers you trade through.

Smaller funds (under a billion dollars) may prefer to use an introducing broker, who’s partnered with a major prime broker but who customizes the services for smaller funds.

IT and Technology Providers

You’ll also need Bloomberg terminals (around $1,500 USD per month, each) and possibly other technologies to support all the trades you make.

The good news here is that IT expenses tend to be much lower for fundamentally-oriented funds with little active trading; if you’re a quant fund or you’re doing any kind of automated trading, though, you’ll need serious computing power and serious cash to pay for it.

Don’t expect millions to come rolling in after you flip the switch on for your fund – most managers don’t even pay themselves a salary until their AUM gets big enough for management fees to cover overhead with plenty of room to spare.

And even if they get amazing returns in their first few years, they’ll re-invest most of those performance fees back into growing the fund itself.

In the meantime, you still need a place to live and food to eat. So make sure that you have enough savings or another income source to cover your daily living expenses – and remember that it may take years to establish the AUM you need for long-term success.

Raising capital, setting up everything above, and figuring out your strategy are just the first steps of a long and grueling process when starting a successful hedge fund.

You’ll also need to plan your day-to-day strategy, hire investment professionals, and figure out your own exit strategy if things don’t quite work out – all of that and more is coming up in parts 2 and 3 of this series.

Complete Series – How to Start Your Own Hedge Fund:

НАУРАН приглашает на Moscow Hedge Fund Week 2018

Национальная Ассоциация участников рынка альтернативных инвестиций (НАУРАН) и Moscow Hedge Fund Managers Club при поддержке компании Bloomberg рады пригласить вас на ключевое мероприятие нашей индустрии – Moscow Hedge Hedge Fund Week 2018

Дата проведения: 4 и 5 апреля 2018 года.

Место проведения: Арт-центр Exposed, ул. Шаболовка, 31г, Москва

Investors Morning | 4 апреля, с 9:30 до 14:00

В рамках сессии – презентация результатов индустрии в 2017 году, семинар KPMG по организационным, юридическим и налоговым особенностям заведения средств инвесторов в хедж-фонды, а также закрытая презентация хедж-фондов для инвесторов.

Hedge Fund Managers Evening | 4 апреля, с 16:30 до 20:30

В рамках сессии – семинар Harneys по MIFID II для хедж-фондов, встреча с представителями институционального департамента Interactive Brokers, панели управляющих по стратегиям Algo, Russian Equity, Crypto и Fixed Income с участием экспертов из компаний UFG , Verno Capital, Movchan Advisors, Matrix Capital и др.

Hedge Fund Startups Day | 5 апреля, с 9:30 до 16:00

Сессия для тех, кто изучает возможности инвестиционного бизнеса в формате хедж-фонда. От азов индустрии, особенностей тех или иных юрисдикций и сервис-провайдеров до принципов запуска структур и маркетинга хедж-фондов. При участии экспертов APEX , Harneys, KPMG , PWC , EPFC Group.

Russian Hedge Fund Industry Awards 2018 | 5 апреля , c 18:30 до 22:00

Четвертая церемония награждения лучших хедж-фондов и сервис провайдеров.

Hedge fund laws, starting a hedge fund, news and events…

Start-up hedge fund timeline | How to Start a Hedge Fund

Starting a Hedge Fund Timeline

Many prospective hedge fund managers know that they would like to start a hedge fund but have not gone through the process necessary to understand what the process is like or how long it will take. For some managers the process is painless, for others the process is more time consuming and frustrating than they would like. Unfortunately, the timing of an actual fund launch cannot usually be determined with absolute certainty and will depend upon, in large part, your program and your service providers.

A good rule of thumb (for managers who do not need to register as investment advisers with their states) is that the fund formation process should take about 2 months. Often a fund can be up in running in a month or less, but to be on the safe side, I recommend 2 months.* If you need to register with a state, you are going to want to add anywhere from 3 – 6 weeks to the process.**

* It is not unheard of to have funds up and running in a couple of weeks. I’ve had a fund up and running in 4 days. If I need to work with a manager on an extremely tight deadline, this can probably be done in 2 to 3 days, depending on the availability of outside service providers.

** States like California will be closer to 3 weeks (UPDATE: CA is now taking two months to register investment advisers 08-18-0&); states like Texas are going to be closer to 6 weeks.

In general the timeline might look like this:

Day 1 – Discussion with legal counsel regarding the structure of your fund (fees, contribution provisions, withdrawal provisions, other items to be included in the legal documents). During this time you will also discuss your investment program and your background.

Day 7-10 – Delivery of offering documents. During this time your legal team should respond to you with your legal documents. Your hedge fund’s legal documents will include the following:

  • Private placement memorandum
  • Limited partnership agreement (or limited liability company operating agreement)
  • Subscription documents

Don’t be scared when you first review these offering documents – they will usually be around 100 pages. Some very large fund offering documents might be up to 200 page or more in length.

Day 10-14 – Review of your offering documents. During this time you should be reviewing the offering documents and familiarizing yourself with their provisions. You will need to understand what all of the legal provisions in your documents mean. If you don’t understand a concept or phrase – mark it down and be sure to ask your attorney. Remember, these are your legal documents and you paid very good money for them – you should know what they say.

Day 17 – Discussion with legal counsel regarding offering documents. You should take about an hour (sometimes it is more or less) to discuss the key points of your offering documents with your legal counsel. You should bring up items which you have questions on and your lawyer should run down the key points of the offering documents with you.

Day 24 – Delivery of revised offering documents. Your legal team should be able to deliver you revised offering documents within about a week. At this time the offering documents are very close to being complete. You should review the documents to make sure that all your questions have been addressed and your changes incorporated. If the revised wording does not make sense, let your attorney know as soon as possible.

At this point these offering documents are in good enough shape to send to your administrator and your auditor (if you decide to name an auditor in the offering documents). In addition, you should begin the account application process with your broker or prime broker.

Day 24-30 – Begin finalizing service provider contracts and make sure all service providers are on the same page. The brokerage account application can potentially be a stumbling block in the process. Certain brokers have certain due diligence requirements which must be met before the account will be ready for live trading. You might not know of these requirements beforehand or the broker’s compliance department may come back with extra requirements – you never know what might be required. For example: one fund was not allowed to have the word “Fund” in their name if they started with less than $2 million in AUM. Another fund was not allowed to clear through a certain prime broker because the managing member of the management company did not have enough experience in the eyes of the clearing broker. While stories like this are the exception rather than the rule, the brokerage account opening process is the most uncertain in terms of time.

Day 30-45 – Last minute prep work with lawyers and service providers. The auditors or administrators may have some minor comments for the lawyers on the offering documents. Some of these service providers may require certain disclaiming language regarding the services which will be provided. It is not uncommon for these requested modifications to be passed on directly to the attorney, sometimes these requests will go through you. Your lawyer will send you finalized offering documents during this time.

Day 46-60 – Begin getting ready for trading. You should make sure that everything is in place for a smooth first day – make sure you know when and how you will be doing your trading. Make sure you will have assets in the brokerage account on Day 1. Make sure your computers will be working.

Keys to remember during the process

  1. Start early. Give yourself too much time.
  2. Be responsive to all emails and phone calls.
  3. Keep the lines of communication open with your service providers. This is your fund and you are paying your service providers good money. They should be responsive to you and should answer all of your questions. If you do not get the response you would like it is your responsibility to discuss this with your service providers.
  4. Be patient.

Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. has written most all of the articles which appear on the Hedge Fund Law Blog. Mr. Mallon’s legal practice, Cole-Frieman & Mallon LLP, is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about investment adviser registration with the SEC or state securities commission, please call Mr. Mallon directly at 415-296-8510.

7 Hedge Fund Manager Startup Tips

Hedge funds can be mentioned over 1,000 times a day in blogs, newspapers, magazines and on radio stations. At the end of 2011, there were over 9,000 hedge funds in existence with 1,113 starting that year, according to Hedge Fund Research. In this article, we'll explore the reasons why these funds continue to be popular and what you should take into consideration before starting up your own hedge fund.

Why Start a Hedge Fund?

  • Almost everyone has read the news stories about the few hedge fund managers who have earned over $1 billion a year running their funds.
  • Hedge funds grace the cover of mainstream media newspapers and magazines on an almost-daily basis.
  • The secretive and exclusive nature of hedge funds has a draw, compared to many other areas of finance and investing, which can at times seem mundane.

With a little bit of capital it is relatively easy to start a hedge fund. However, implementing risk controls, growing assets, hiring staff and running the organization as a profitable business, while producing positive performance, is very challenging.

Between 4 and 10% of all hedge funds fail or close down each year, and countless others are half-started, abandoned or re-shaped into private investment pools for friends and family. This is not to say that starting a hedge fund is a bad idea, but it is important to realize that it is a very challenging endeavor - one that must be approached with the same long-term perspective required for running a business.

Tips for Hedge Fund Startups

1. Competitive Advantage

2. Strategy Definition

  • What is your strategy, and how will you define and explain your investment process to your own team and initial investors? Developing a repeatable, defendable, profitable investment process after taking the costs of running a hedge fund into consideration can be difficult.
  • Ideas which have not been tested (or have been only backtested) in the real markets don't hold very much water with investors and consultants, who see hundreds of wannabe hedge fund managers a year.
  • It will help to do some hedge fund performance research if you haven't already and know which strategies are currently doing well, which are not and why this may be the case.
  • Are you launching your fund at a time when your strategy is in very high demand, or has the pendulum swung the other way for the time being?

Start building a list of the other hedge funds that run the same strategy as your firm and conduct as much competitive intelligence on them as you are able to, ethically and legally.

3. Capitalization and Seed Capital

Some hedge fund managers claim profitability with less than $10 million in assets under management, while others claim that you must manage $110 million to $125 million in assets to be considered a serious business venture with some long-term prospects for survival. The number is probably somewhere in the middle, but everyone's business is unique and due to performance fees, you can sometimes see large profits with relatively low asset levels.

4. Marketing and Sales Plan

Small hedge fund startups typically try to develop long-term relationships with seed capital providers, family and friends and high net worth individuals (directly or through their financial advisors). Working with institutional-quality investors who might eventually invest $25 million to $100 million at a time can be difficult until you have a two-to-three year track record and well over $100 million in total assets under management.

Some simple marketing and sales activities to complete and create before launching your fund include:

  • Newsletters
  • Website
  • Two-page marketing piece
  • 20-page PowerPoint presentation
  • Professional logo
  • Letterhead
  • Business cards
  • Folders with logos for presentations

Many of these are Business 101-type details, but they are often overlooked or poorly executed. Anyone who can really help your business grow sees hundreds, if not thousands, of hedge fund managers a year, and it is easy for them to see which managers have invested their time and effort and which have thrown something together at the last minute. All marketing and sales materials should be produced under the direction of your chief compliance officer or compliance consultant, as there are many limitations and details that need to be approved and reviewed.

6. Compliance and Legal Assistance

7. Deciding on Prime Brokerage

It is usually wise to choose a prime brokerage team that is very motivated to serve your needs, but not so small that they physically cannot meet all of your trading and prime brokerage requirements. While capital-introduction services can be a great thing for your prime broker to offer, know that they often require a nine- to 12-month track record at a minimum before they can do much for you beyond helping explore seed capital sources. Once your team has proven itself, a good prime broker will help make introductions if you have great performance and a solid team behind the portfolio.

ARE YOU READY TO START UP A HEDGE FUND?

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We offer full arrange of services onshore to start up a hedge fund and registration. Our professional team, including a securities attorney, will work with you step-by-step to during the fund formation process.

A professional imagine begins with a professional fund website. Investors usually make their decision based on their first impression, so a website with password protection and investor qualification is imperative.

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