If you are in the process of reviewing hedge fund startup services than you already know that there are an overwhelming number of choices to make. Add in the pressure of investor expectations of institutional infrastructure and the need to begin your hedge fund portfolio's track record and things can seem downright intimidating. (Experience and hard work go a long way toward securing a position in this challenging field. For more, see 10 Steps To A Career In Hedge Funds.)
TUTORIAL: Hedge Funds: Introduction
Within this short article we are going to quickly review some options, service providers and processes you can follow while starting up your hedge fund so you will have a better feel for what options are available to you.
Board of Advisors Construction
The common dilemma in the hedge fund industry is that everyone wants you to have a team with deep expertise and experience, often referred to as a high level of "pedigree." The problem is that if you need that great team to raise capital, how are you ever suppose to build that team when you are starting at ground zero with say $2 million in capital or even $200,000 or less in capital? One solution is to build a killer board of advisors. Your board could include investors in your fund, peers in the industry, friends, or those which you pay hourly or compensate in some other way to act as part of your advisory board. While many picky investors will quickly point out that a three-man hedge fund business with a 10-person advisory board is not an institutional quality operation, this is your quickest way of getting great consistent advice for building your hedge fund business without hiring 15 people to your team in your first few years. (For more, see A Brief History Of The Hedge Fund.)
Fund Formation Services
There are two options when it comes to forming your hedge fund. You can either hire an attorney to draft the documents for you or use a fund formation template service. In the first case you will probably be looking at spending around $15,000-$25,000-plus in legal costs, with a fund formation template company you are probably looking at about $5,000-$7,500 in total costs.
You will see many articles and discussions about third-party marketers who can help you raise capital, most ignore this information. Third-party marketers are consultants that help fund managers raise capital and take a percentage of the management and performance fee typically as payment. The problem is that 98% of all third party marketing firms require you to have two-to-three or more years of a track record in place, $10 million-plus in capital or assets under management (AUM) and top quartile performance. Until you have those three things you are better off learning how to raise capital yourself. As soon as possible you must start learning everything you can about hedge fund marketing, hedge fund marketing materials, capital raising strategies and what investors are looking for. (For more, see Trending Toward Asset-Based Management.)
Compliance and Regulation Advisory
Compliance and regulation of hedge funds is changing so it is wise to meet with or have lunch with two-to-three compliance professionals in the space to map out what you should be careful about or consider while starting your hedge fund. Most new hedge funds don't have a full time compliance professional on staff but they do have someone which they can pay hourly for advice as needed. Know upfront that the best way to do business in this industry is to make sure that no marketing messages or materials are sent out, and no strategy is executed without the prior sign-off or approval of that process by your legal counsel. (For more, see Hedge Funds Go Retail.)
Prime Brokerage Services
Prime brokerage itself is a bit of a commodity service so you will quickly find that prime brokerage firms and sales professionals are quick to offer advice on capital raising or legally forming your fund. This is good news, it means they are going to try and deliver value to you before you are a client to prove that they know their stuff and can be a long-term resource to you. The one thing to be careful about is their promises of raising capital for you. Often, prime brokerage firms can over-promise the abilities of their capital introduction teams that raise capital for a few of their clients and fail to mention that most clients never get the attention of these capital introduction teams. To guard yourself against this make sure and ask what tangible capital raising resources they will offer you regardless of your performance or track record. These resources could be in the form of live workshops, video-based training programs, books or investor contacts of some type. (For more, see Activist Hedge Funds: Follow The Trail To Profit.)
Fund Administration Services
Third-party hedge fund administration services are all but required of hedge funds now days. Again, this service has been somewhat commoditized so try to work with the group which you feel most comfortable with, and who has your best interests in mind long-term. If you meet with four-to-five administration firms in person you will find that one or two of them will rise above the rest. Don't be tempted to sign-up quickly with the first which takes you out to happy hour to discuss your new fund.
Annual Fund Auditing Services
Auditing services is yet another service provider area that you will need to do research on. Many auditing firms would like to grow their hedge fund business, but there are only a handful that already specialize in this space. Make sure you are not part of some firm's dream of serving more hedge funds, you don't want to be a bump on their learning curve. Instead, try to identify hedge fund auditors that have been working in the field for years and have a minimum of 30 total hedge fund clients right now, and at least 50 total investment auditing clients. (For more, see Quantitative Analysis Of Hedge Funds.)
Training and Certifications
The whole investment industry is a knowledge-based industry. The way that portfolios are managed, capital is raised and the methods of placing trades are all based on having expert knowledge in those areas. This means that you can gain a competitive advantage over other hedge funds that are starting up right now by learning more about the industry. This can be done by attending full day emerging manager seminars, hedge fund marketing workshops, or through the completion of a hedge fund certification program. While a hedge fund designation may take a bit more time it is adds more authority to your bio and level of industry experience as well.
Associations and Networking Groups
It can help get you connected to join some hedge fund associations and networking groups in the industry. By attending some of their workshops, seminars, or online video-based training resources you can more quickly learn about what investors expect from you as a hedge fund manager.
The Bottom Line
The list above is not exhaustive but it should get you started in the right direction. (For more, see 7 Hedge Fund Startup Tips.)