Hedge Fund Startup Tips
I had a 45 minute conversation with a hedge fund startup Friday related to capital raising, seed capital, prime brokerage and building a team around your hedge fund during the first few years of operation. After hanging up the phone with this professional I thought it may help to publish a list of tips for those starting hedge funds:
Top 5 Tips for Starting a Hedge Fund
1. Starting a hedge fund is not a get rich scheme, in 99.9% of all cases it takes 2-4 years before the hedge fund becomes profitable and stable as a business. I’ve worked with a client in the past which had been running a fund for 7 years and still had not raised enough capital to be self-sustaining
2. Complete due diligence on your service providers. I heard of a hedge fund last month who was quoted at over $80,000 for their legal formation costs, which is at least $35k above what most other firms charge for this same service. If you don’t shop around you could end up paying twice as much to service providers as you need to. No, you should not select service providers based on price but you should always sit down or have conference calls at least with three prime brokerage firms, three auditors, and three administration firms before deciding who to work with.
3. Always be growing relationships. This is different than always be selling. Selling can be spotted from 5 suits away and a networking event, and felt by how someone asks what company you work. It is always best to take the high road, the long-term approach yet always be looking out for those individuals who you should invest a significant portion of your time getting to know. The benefits of doing so could be valuable advice, leads or an allocation. If you are always looking to close than no professionals along the way will want to give you feedback on your marketing materials or suggest an alternative path to raising assets.
4. Focus on risk management and your investment process more than high performance returns. Yes, investors want to see strong returns but a top 5 sign of a green hedge fund manager is someone who constantly pushes their extremely high returns found within back-testing or their first 4 months of operating. Doing so ruins much chance of serious consideration as it gives off the impression that your fund will reach for those returns at any cost or risk. Speaking about returns too much takes away from confidence within your fund’s investment process and risk management controls.
5. Invest in yourself. Choose high quality service providers, build a team, break down your investment process into concrete steps, and spend 50 hours creating a solid PowerPoint presentation/pitch book for your fund and don’t show it to a single investor until you have completed 5 drafts of it. Too many times I see hedge funds looking to raise capital who have not yet taken the time to organize their own thoughts, plans or marketing materials. If your hedge fund is not worth your own investment of time, why should any invest their time and possibly capital into it? Investors look for signs of a manager having skin in the game in multiple ways.
