Starting a hedge fund is involved. It’s important to understand the step-by-step process for legally starting a hedge fund so that you can make the best decisions for your business. In this article, we’ll outline the basics of what you need to know in order to get started.
Here are ten steps you can take to build a hedge fund.
10 Steps to Launching a New Hedge Fund
1. Choose Your Hedge Fund Business Type
The first step in launching a hedge fund is to identify the type of business you want to launch. You might choose from the following types among others:
- Equity Hedge Funds: Equity hedge funds invest in stocks and use various strategies to generate returns.
- Event-Driven Hedge Funds: Event-driven hedge funds invest in companies that are going through major events, such as mergers or bankruptcies.
- Macro Hedge Funds: Macro hedge funds invest in global macroeconomic trends.
- Relative Value Hedge Funds: Relative value hedge funds focus on finding mispriced securities and taking advantage of the spread between them.
- Convertible Arbitrage Hedge Funds: Convertible arbitrage hedge funds invest in convertible securities and exploit pricing discrepancies.
2. Name Your Hedge Fund
Give your hedge fund an identity so people will think of it as a well-known and respected brand. You can take the name of your hedge fund from your industry, focus on a geographical location, or use your own name among other options.
The main goal of naming your hedge fund is to make it sound appealing and trustworthy so that potential investors will want to invest in it.
3. Determine Your Hedge Fund Business Model
There are several possible types of business models for a hedge fund business including:
- Offshore Funds: Offshore funds are based in foreign countries and often have lower taxes.
- Onshore Funds: Onshore hedge funds are based in the United States and are subject to higher taxes.
- Registered Investment Advisors: Registered investment advisors (RIAs) are fiduciaries that must act in the best
No matter which model you choose, make sure that it aligns with your business goals and the services you offer.
4. Choose a Legal Form for Your Business
By incorporating your hedge fund, you will limit your liability. You can incorporate as a Limited Liability Company (LLC), a C Corporation (C-Corp), or an S Corporation (S-Corp). Or you can operate as a sole proprietorship.
The business structure you choose for your hedge fund will determine the amount of taxes you pay and which state or federal tax forms you need to file.
Read our article comparing the most common hedge fund business structures.
5. Write a Hedge Fund Business Plan
All hedge fund business owners should develop a business plan.
A business plan is a document that outlines the goals, strategies, and operations of a business. It can be used to secure funding from investors or lenders, as well as to guide the day-to-day operations of the business. The business plan should include information on the company’s products or services, market analysis, financial projections, and management team among other things.
Learn more about how to write a hedge fund business plan.
6. Apply for the Necessary Permits and Licenses
There may be required licenses and permits you need to obtain before launching your hedge fund.
For example, if you plan to operate as an investment adviser, you will need to register with the Securities and Exchange Commission (SEC).
If your hedge fund business will solicit funds from the public, you will also need to comply with state and federal securities laws.
You must also register your hedge fund as a legal entity with the state where you plan to do business. You can simply file an online form through your Secretary of State’s website.
Registering with the federal government is also essential so you can properly pay taxes for your business. You will also need an Employer Identification Number (EIN), which you can apply for at the IRS website if you plan to hire employees.
7. Determine Your Budget & Apply for Funding as Needed
In developing your hedge fund business plan, you will figure out how much funding you need to start and grow your business.
If you have your own funds to invest in your hedge fund business, you may consider taking advantage of that. In addition to your personal funds, other forms of potential funding for your hedge fund business include traditional bank loans, SBA loans, credit cards, angel investors and family and friends.
8. Get the Technology & Software Needed to Run Your Business Efficiently
When you start your hedge fund, it’s essential to have the right technology in place to maximize efficiency. You definitely need a computer with Internet access and accounting software for tracking expenses and revenues.
You may also want to invest in a customer relationship management (CRM) system to manage investor communications, and a proposal generation tool to streamline the process of creating proposals for potential clients.
In addition, there are many other software programs available that can help you with everything from project management to data analysis.
9. Market Your Hedge Fund to Potential Clients
Before you start selling your services, you have to let the world know you exist. The first step is to create a website so people can learn more about your services and how they benefit them.
After you launch your website, start promoting it through social media channels like Facebook, LinkedIn, and Twitter. Consider networking with other people in your industry through social media and blogs so they can help share your business.
You also need to start gathering the materials needed to execute your promotions strategy, which is your strategy for attracting new customers. Hedge funds should consider the following promotional strategies:
- Create a press kit with an overview of your business, information about your management team, recent press coverage, high-resolution photos, and your company logo
- Develop relationships with key members of the financial media and send them press releases whenever you have newsworthy announcements
- Speak at industry conferences and events to promote your business
- Sponsor industry events to get your company name in front of potential clients
- Create informative blog articles, infographics, and other types of content that potential clients will find useful
10. Get New Clients & Grow Your Business
When you promote your services, you’ll start to get interest from potential clients. Make sure you’re ready to serve these clients. If you let down on guarantees early on, you’ll start to lose trust within the industry.
Establish systems to ensure consistency and reduce costs from the beginning. Document what you do in a day, any training procedures, and projects you solve. When you go to do the same action again, you can refine your process and your documentation accordingly. Each time you’ll be able to improve, and you’ll have a solid foundation to pass on as you begin delegating.
Finally, if you want to scale, you must hire and train the right people to take on different areas of your business, like servicing specific industries. As you expand your client base, you’ll be able to invest back in your business to grow further.
Starting a Hedge Fund FAQs
Why Start a Hedge Fund?
Starting a hedge fund is a great way to become your own boss, achieve financial independence and make a difference in the lives of other people. Hedge funds provide investors with an alternative investment vehicle to traditional stocks and bonds.
What is Needed to Start a Successful Hedge Fund?
If you want to start a successful hedge fund, you need to have a clear understanding of the industry, the investment process, and the regulations that govern the industry. You also need to have a strong business plan, the right technology in place, and a solid marketing strategy.
How Can I Start a Hedge Fund From Home or Online?
Starting a hedge fund from home or online is a possibility. You can use technology to connect with clients and run your business remotely. However, you will need to have a solid understanding of the industry and the investment process, as well as the ability to market your services effectively.
What are Some Tips for Starting a Hedge Fund?
- If you're thinking about starting a hedge fund, here are some tips to help you get started:
- Create a business plan: This will help you map out the steps you need to take to start and grow your business.
- Get the right technology: Invest in the right technology to help you run your business effectively.
- Market your business: Create a marketing strategy to attract new clients and grow your business.
Where Can I Find a Simple Checklist for Starting a Hedge Fund?
A simple checklist to use when starting a hedge fund is as follows:
- Choose Your Type of Hedge Fund Firm: This should be based on what you are best at and how much experience you have. Remember to keep your interests, skills, and experience in mind at all times.
- Name Your Hedge Fund Business: This should be done with care, as your brand is important for attracting the right customers. A simple, memorable name will go a long way.
- Choose a Legal Form for Your Business: Whether you choose to become a sole proprietorship, partnership, LLC, corporation or another option will depend on your business. Ensure that you are aware of all the implications of each type.
- Determine Your Hedge Fund Business Model: Determine how your business will make money. Will you sell products, services, or a combination of both?
- Write a Hedge Fund Business Plan: Your business plan will also help you determine what your start-up costs will be and will provide a roadmap with which you can launch and grow.
- Apply for the Necessary Permits and Licenses: In most locations, you will be required to apply for a business license and/or permits before you can begin operations.
- Determine Your Budget & Apply for Funding as Needed: You will need to know how much money you have to spend on all of your business-related expenses before opening any doors. If needed, apply for a small business loan or other funding options.
- Get the Technology & Software Needed to Run Your Business Efficiently: You need to have the right tools in place to succeed. Implement software that will help you manage your time, contacts, and business operations in general.
- Market Your Hedge Fund Business to Potential Clients: A solid marketing plan will be crucial to your success. It should focus on attracting the right customers so that you can provide them with the services they truly need.
- Get Clients & Grow Your Business: Once you have a solid marketing plan, it's time to actively pursue and secure those who could benefit the most from your services.
Start Your Hedge Fund
Starting a hedge fund is a powerful opportunity to become your own boss. Start by creating a business plan, determine how you’ll market your business effectively, and finally get the right technology in place.
With these steps, you’ll be on your way to starting a successful hedge fund.