The most significant aspect of setting up a hedge fund is raising capital for it. If the manager is unable to raise the capital required to match the cost of setting up and making the fund functional, then they will soon have to let go of the business. This is because raising capital can be a difficult process and it is not possible for hedge fund managers to advertise publicly in accordance with the rules of Regulation D, and it is the third party marketers that are often the preferred service provider.
3PMs are those firms that are registered with the SEC as broker-dealers and are listed by the securities commission in the resident state of the respective firm. These firms maintain contacts within the industry of hedge firms and work towards raising capital for the hedge funds. Brokers are all those people who are listed to raise money for the third marketing firms and this means that they possess the Series 7 license and the Series 63 license.
The fee for every third party marketing firm differs. Mostly, the firms charge for the placement of assets. This is calculated as a percentage of the fee of the hedge fund manager and is considered out of both the allocation fee or performance and the management fee. For example, a fee structure can be such that the manager gives the 3PM 20 percent of the entire management performance fee that is produced on the assets that were raised by the third party marketer. This percentage will be more (up to 50 percent) for smaller funds as it is relatively simple and also more profitable for the third party marketer to raise capital for funds that are larger. These 3PMs may also necessitate a monthly deposit. Typically, this monthly deposit fee will be paid by the management company and not by the hedge fund. However, in special circumstances, such as when the fund is meager or when it is just rising, the third party marketing firm may hold discussions for an equity stake in the hedge fund manager.
The Third Party Marketing Agreement
The main factor that strengthens the relationship between a third party marketer and the manager of a hedge fund is because of a third party marketing agreement. The main initiator of these agreements is the third party marketing firm and they are ought to be studied by the hedge fund manager and the attorney of the manager before the agreement is signed. There is a possibility of a few back and forth repetitions of the agreement and the manager can take help from the lawyer of the hedge fund to draft various parts of the agreement that are all laid on the business points previously agreed upon with the third party marketer. One crucial mistake to avoid is entering into a third party marketing agreement without having a lawyer first critically examine and evaluate the agreement.
Various other considerations regarding raising assets
Every type of fund is different and also the capital requirements of each manager differ based on a number of different factors; however, what all managers are concerned about is the addition of assets. It is the preference of many emerging and start-up managers of hedge funds to firstly converse about their specific strategy with a hedge fund seeder, who are typically similar to a third party manager and will possibly require an equity stake in the management company. Other groups that propose capital introduction services are mini prime brokers and prime brokers. However, groups like these will never pledge to raise any amount or a certain amount or any asset for the fund, hence it would be beneficial for the hedge fund manager to discuss all the relevant point beforehand with the broker of the fund. In addition to this, a hedge fund manager is likely to give in the results of their performance to a hedge fund database.
Therefore, this naturally implies that the manager of a start-up hedge fund should not lose focus when they are trying to raise assets; the only way to make substantial money over the passage of time in the long run is by making attractive returns.