How to Start a Hedge Fund

How to Start a Hedge Fund

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How to Start a Hedge Fund Business

If you’re looking to start a hedge fund business, you’ve come to the right place. Since we’re going to show you exactly how to do it.

We’ll start with key hedge fund industry fundamentals like how big the market is, what the key segments are, and how revenues and profits are generated.

Then we’ll discuss keys to not only starting a hedge fund business, but succeeding in it!

How Big is the Hedge Fund Industry?

There are 4,519 hedge fund businesses in the U.S. that generated $70.7 billion in revenue last year which represents an annual growth rate of 7.9% over the past five years.

Hedge Fund Defined



What are the Key Segments of the Hedge Fund Industry?

Hedge funds are segmented by its investment strategies. The largest segments for the industry is Equity focus. This is followed by a myriad of other products and services including:Fixed Income Focus, Event-driven, Multi-Strategy, Emerging Markets, Global Macro and Distressed Securities.

What External Factors affect the Hedge Fund Industry?

The external factors that affect the performance of the hedge fund industry include:

  • Demand from retirement and pension plans: When retirement and pension plans increase, the hedge fund industry gains higher assets under management revenue, thus increasing the industry’s potential.
  • S&P 500: S&P 500 measures the stock market’s performance. An increase in S&P 500 causes the assets under management to increase as well as its revenue from flat fee. A faster rate of increase in S&P 500 compared with hedge fund returns threatens investor satisfaction.
  • Investor uncertainty: An increase in investor uncertainty harms the hedge fund industry as it inclines investors to withdraw their investments.
  • Access to credit: Investing with borrowed money multiplies potential gains for hedge funds so an increase in access to credit also improves the hedge fund’s performance.
  • OD – Regulation: As compliance cost for hedge funds increases, the profit margin decreases.


Introduction to Hedge Funds


Who are the Key Competitors in the Hedge Fund Industry?

The four largest hedge funds (Bridgewater, Blackrock, J.P. Morgan and Och-Ziff Capital) are estimated to account for 13.5% of the industry’s total assets under management. The remaining 86% of the industry consists of smaller firms.

What are the Key Customer Segments in the Hedge Fund Industry?

The key customer segments in the hedge fund market are Pension Funds and Wealth Managers. This is followed by Insurance Companies, Fund of Funds, Banks and Endowments & Foundations.

Illuminating the World of Hedge Funds



What are the Key Costs in the Hedge Fund Industry?

Wages – Hedge fund market’s average wage is $347,216. It is anticipated to increase in the next years due to the demand for more skilled employees in the industry.

Compliance costs and other expenses – Compliance costs range from $700,000 to $14.0 million for hedge funds. Other expenses are administrative costs, legal costs, accounting fees, marketing costs, rent expenses, and depreciation.

What are the Keys to Launching a New Hedge Fund?

1. Have a marketing plan.

Determine the type of hedge fund that you want to start. Identify your edge and communicate it with prospect investors through your print ads, websites, social media accounts, or email marketing. Find out how you can best reach your audience and invest in a reliable Customer Relationship Management tool to help you determine the progress of your communication with investors.

2. Choose reliable service providers.

Choose partners that will help you make decisions as you start your hedge fund as you cannot handle all operations at once. Find service providers that you can grow with so that you will not need to change providers from time to time, and make sure to work with providers that are fully equipped in their field to assure your investors that they are in good hands.

3. Develop an IT budget.

Technology plays a significant role in the hedge fund industry since the workflows and systems that are used in this business rely hugely on technology. Have an IT budget that will be able to provide the functionality that your systems need and that will be able to keep up with your business’ growth, so think long-term.

4. Study hedge fund regulations.

Know the agencies and regulatory bodies that you have to comply to and submit all the requirements needed before you start your hedge fund to avoid charges or prosecutions. Make sure to be able to pass the standards required for the registration of your business such as data protection, infrastructure practices, risk assessments, and email archiving.

5. Keep your firm and investor assets safe.

Investors make sure that the hedge funds they invest in are taking good care of their investments, so make your security measures compliant not just to the requirements of the monitoring firms but also to your investors’ standards. Identify risks and fill in the gaps with your technology safeguards. Make security a priority in starting up your business.

6. Document everything.

Make sure to keep a copy of your paper works, security measures, technology safeguards and documents or agreements with your investors. A lot of investors demand full disclosure from their fund managers. Proper documentation will save you from hassle and will also increase investors’ trust and confidence, which positively affects their tendency to invest more.

7. Continually raise capital.

Market your hedge fund consistently. Your marketing efforts should not cease after you launch your business. Work hard to keep your firm different from the others and aim to be known by more investors.

What are the Typical Startup Costs for a New Hedge Fund?

Hedge fund startup costs include investment for website development, tax and annual audit, marketing and fund administration.

Estimates:

  • Tax and audit fee: $25,000 (small hedge funds) and 100,000 (large or complex funds)
  • Operational costs: $150,000 (small hedge funds) and $ 75,000 to $120,000 (offshore)
  • Legal fees: $20,000 to $150,000
  • Annual fund administration: $24,000 (for emerging funds) and $110,000 (for complex funds)


How much do Hedge Fund operators Make?

Hedge fund salaries range from $70,000 plus performance bonuses to over $1 billion dollars in compensation.

Hedge Fund Rich List



Hedge Funds Strategies


Helpful Videos

How Hedge Funds Make Money

What’s a Hedge Fund?

How Much Money Does a Hedge Fund Startup Need?

Additional resources in the Hedge Fund Industry

For additional information on the hedge fund market, consider these industry resources:

 

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