How to Start a Hedge Fund

Posted on July 23rd, 2009 by aileen

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If you want to earn money through investments and you’re particularly interested in hedge funds, this guide will help you set up your own hedge fund the easy way.

What is a hedge fund?

A hedge fund is a collection of investments that takes advantage of various market strategies. It’s often a private investment partnership, with a minimal number of qualified investors. The purpose of this kind of fund is to counterbalance or lessen market losses while maximizing the return of investments.

What to know about a hedge fund:

The hedge fund itself is only the instrument for keeping and investing your money. The real business is the investment portfolio the fund has.
It’s managed through limited partnership. As the investment manager, you’re also the general partner while your investors are the limited partners. An investment manager establishes the hedge fund and oversees the investment portfolio.
Most of these funds use a master-feeder structure. This system is like a fund-of-fund arrangement. The only difference is that the master fund manager supervises all the other investments. This kind of set up allows the manager to evaluate more assets. The investors invest on feeder funds then these feeder funds will be invested on the master fund.
The strategy you will use depends on different factors like exposure, target market, methods and diversification. The usual strategy used is the long/short equity style. In this method, you basically just trade stocks for short or long periods.
A hedge fund looks very appealing because you are able to short sell your stocks. There is flexibility in terms of how you want to manage your investments.

Steps:

Before starting your own hedge fund, it is wise to search the current market trends so you don’t get caught unaware of the issues and facts that you should know.
Complete the appropriate forms needed.
Acquire a tax identification number.
Register as an investment advisor. No, you’re not registering your hedge fund, you’re just registering yourself as an investment advisor.
Schedule and take the examination for an investment advisor. You have to score at least 69% in order to pass this test.
When you’re licensed already, decide if you want to be a sole proprietor or create an investment advisory business. It is safer to make a corporation so that you can be the general partner in your limited partnership.
You will get your Federal Employer Identification Number (FEIN) right after you have been incorporated.
Have your company listed as a Registered Investment Advisor (RIA) and yourself as the Investment Advisor Representative (IAR).
Register your Limited Partnership (LP) offering with the SEC. The only thing that you’re registering here is your LP offering. You don’t really register the hedge fund, just your company.

Tips:

A Limited Partnership offering states the particular investment strategy that you will be using, the types of investments and levels of leverage you plan to have. An offering gives your investors a description of the fund.
Once you’re done with registering your offering, you might want to set up your company by making a company manual, investment portfolio, by-laws, website and all the other things needed for your business.
Start your hedge fund by preparing a limited partnership agreement, a presentation, leaflets or handouts about your planned investments and of course, a custodian account to place your money.

Starting a hedge fund requires a lot of work but if you have the right information, you will not have a hard time. It is also very risky as trends may change any time but you know, there are no businesses without risks. So go ahead, start a hedge fund and be a wise investor.