How to Start a Hedge Fund – A Double-Edged Weapon
We have all heard stories of a hedge fund manager who has bought a new yacht or a new $100 million penthouse. We have also heard of a hedgie who has just donated millions of dollars to his alma mater or who has just made a sold-out presentation at the World Economic Forum (WEF). Stories of hedge fund managers are all around us. This has made so many people (including me) have ambitions of running their own hedge funds. However, what the media rarely tells you is on the number of hedge funds that are closed every year. In 2015, more than 900 hedge funds were shut down. Thousands of hedge funds lost money too.
I have always argued that many small traders are happier than hedge fund managers who have billions of dollars in assets under management. This is because when you have a $10,000 account, you are answerable to no one. However, most of these hedge fund managers invest money for other people and institutions such as pension firms. They are usually under intense pressure to generate alpha for their investors. Value walk recently listed a 71-person list of top hedge fund managers and finance experts who committed suicide in 2015. Therefore, if you are making good money with your small account, I recommend that you continue doing that. Having outside money could cost your life and unwanted stress.
1# – Have a Team
A team is very important when running a hedge fund. You want to have a good team of analysts who will help you make decisions on what to buy or sell. However, you should remain the senior investment manager. The buck should always stop with you. You should also avoid having another co-founder because this will bring tussles when making investment decisions. The team should be good at the strategy that you want your firm want to run. There are many investment strategies that you can chose such as: arbitrage, activist investing, long/short, pure long, and event-driven strategies.
2# – Register the Hedge Fund
After having a good team that matches your strategy, you should now register the hedge fund with the required agencies. These agencies will defer from country to country. In the United States, some of the agencies you must register with include the Securities Exchange Commission (SEC) and Internal Revenue Authority (IRA). For tax purposes, you can register your hedge fund in tax haven countries such as the Guernsey Island or the Cayman Island.
3# – Getting the Bankers
For you to start and run a hedge fund, it is very important to have a big investment bank. The investment bank will be your official banker and will implement trades for you. Also, as a new hedge fund, the investment bank will provide important links to major funders of hedge funds. In his book, Money Mavericks: Confessions of a hedge fund manager Lars Kroijer talks how he was referred to pension firms and investors by JP Morgan investment bankers.
4# – Roadshow
After doing the three steps above, you should now start to fund your new hedge fund. This will involve doing a roadshow where you approach the investors who might be interested in doing business with you. To make efficient presentations you need to be clear about a number of things such as:
– You and your team past experience.
– Your strategy.
– How different your strategy is with large hedge funds.
– Your own funds in the fund.
You can avoid this road if you have family and friends who have the finances to support you. However, most of them will require you to make a presentation to showcase your strategy.
5# – Start Trading
After getting enough capital to start the hedge fund, you should now get in business. You and your team should work hard to ensure that you remain grounded to the strategy that you have explained to your investors. This will help you improve your reputation which will lead to more money inflows. You should also ensure that you send monthly or weekly status report about the performance of the fund to your investors.