How To Legally Form A Hedge Fund

By Richard Wilson AAA

Legally forming a hedge fund if is a bit more difficult than forming a corporation or LLC for a private business. It involves a lot of navigation of various investment compliance laws, and you could get in trouble if you don't seek professional help along the way. The laws surrounding and governing your business change entirely based on what country and state you are in. They also may be drastically different based on where geographically you are seeking investors, how you are contacting new investor leads, what you are investing in and how many investors you are working with in total. (Find out how this U.S.-born investment innovation became a $1-trillion industry that's both praised and vilified by the media. See A Brief History Of The Hedge Fund.)

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Getting the Law On Your Side
The first step would be to hire an experienced hedge fund attorney. This would be the most expensive option, and for many hedge funds it means that they have less capital available to recruit experienced team members or invest in software. Don't be mistaken by those who say you only need a small amount of money to get everything in place and start a hedge fund, as many funds spend over $1 million in their early stages. Others may start a fund with only $10,000, but the point is that there is always another team member to recruit, resource to obtain or capital raising expert who can help you get to the next level to hire. As a reference point, most hedge fund managers start their businesses with $15,000-50,000. Of course, there are plenty of exceptions who spend up to $350,000 in startup costs.

When working with a well-known hedge fund attorney, you are going to be looking at $20,000-80,000 just for the legal formation of your fund, and nothing else. Naturally, experienced attorneys come with a long list of client recommendations and good reputations. The bad thing about working with a leading law firm is that you will be paying top dollar for work that is mostly completed using legal document templates and junior level staff, in many cases. Yes, a senior partner will probably review and sign off on everything, but large law firms with prestigious partners are very busy, and they will not be working on your startup paperwork, in most cases.

Alternative Methods
Another option would be to not fully form your hedge fund, and instead try to find a hedge fund incubation or emerging manager platform solution. These platforms seem to always be coming and going in the industry, but the business model here is that the emerging manager platform allows you to start trading in your hedge fund and seeking investors while building an audited track record within their larger legal structure.

This method significantly cuts down your startup expenses, and allows you to spend more money on talent, systems and other service providers, such as fund administrators, prime brokers, auditors and third-party marketers. (Learn to profit by following the lead of some of Wall Street's most ruthless investors. Check out Activist Hedge Funds: Follow The Trail To Profit.)

Hedge Funds by the Numbers
The final option is to use a hedge fund formation template service, to cut costs and reduce your startup expenses by 60-90%. A hedge fund formation template service allows you to start your hedge fund using the same legal templates that high-end $20,000 formation attorneys use, while not taking up the attorneys valuable time. Hedge fund formation templates can be purchased for $5,000-7,000, and give you the freedom (and responsibility) to approach this step in a hands-on fashion. Though you will be saving a large amount of money, there still may be a chance that you will require further legal representation down the road. This obviously gives you more freedom in your choice of legal representation, and gives you the option of going to a full-blown, high-end attorney as your ongoing compliance and legal counsel, after you have saved this money in forming your fund. This option is growing in popularity, as there are a large number of demands on the startup capital of a hedge fund, and at the end of the day as long as the fund is formed correctly there is often a better payback by investing in operations, advisors, hedge fund training etc.

Conclusion
It is wise to have a complete plan for starting up your hedge fund before you take any action. Know who you will work with, what will be charged and what you are getting for your money in each case. You have to act like an investor in starting your own hedge fund business, in order to make sure you are getting the best return on investment possible while setting up your hedge fund and re-investing in it after launch. (Starting a hedge fund is the new American dream. Find out how you can pull it off. Refer to 7 Hedge Fund Manager Startup Tips.)

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