How to Set Up a Hedge Fund
Hedge funds have been a huge success for the most part ever since their conception. A large number of people have been drawn towards the industry over the years and not just as investors, but also as those who have wanted to set up their own hedge funds. If it works out then this one of the fastest ways to rake in an inconceivable amount of profit but of course this is not something that can be accomplished easily which is why there are only very few people who are actually heading the business.
This section aims to introduce you to all the preliminary aspects that pertain to hedge funds. The first thing you should know is that it is not going to be an easy task and will involve intense commitment and strategic planning so be prepared to dedicate yourselves to it. It is always good to be driven and focused but just having high hopes is not going to be enough to cut it in this field of work.
Launching or starting a hedge fund is an extremely expensive endeavor that sometimes requires more than a year to complete. The operational costs for creating a hedge fund can go up to a six-digit figure. Before the process, the hedge fund manager, the portfolio manager or the head trader, is responsible for trading and managing the hedge fund’s proprietary strategy.
According to a traditional approach, the hedge fund manager is solely responsible for creating and starting the hedge fund by implementing the hedge fund’s proprietary strategy. In addition, the fund manager also oversees the various other activities of the hedge fund launching process. To run things smoothly, hedge fund managers can recruit support staffs that would help them with the office location, lease negotiations and operations management.
The support staff can include service providers such as consultants, prime brokers, attorneys, tax auditors, administrators, advisory firms, marketing companies and, web designers, compliance firms and software companies. Additionally, myriad questions must be answered regarding the detailed structural components of the hedge fund.
Creating a Hedge Fund Business Plan
Creating a hedge fund is no different than creating a new business. However, writing a business plan for hedge fund business is slightly different than writing a traditional business plan.Unlike the conventional business, the hedge fund business consists of two distinct parts: the fund and the fund management. The hedge fund business plan consists of the following parts: Company overview, mission, vision and product strategy and market analysis.
The mission statement should clearly depict the mission of the company. For example, the company mission is to serve the investors through substantial capital appreciation and dividend returns and to create portfolios with high risk/return profiles.
The vision determines the long-term goals that the business will pursue. The vision of the company answers the questions like how many funds the management will administer. Or what is the plan for noninvestment-related products and how will they be administered. This vision also specifies the investment strategies that can significantly impact the fund management. Consider the following points while developing a vision statement for your hedge fund:
- Benchmarks for the funds
- Investment strategies for each fund
- Expected leverage
- Fund characteristics
- Turnover rate
- Fund management decisions
As the name suggests, this portion of the hedge fund business plan contains the description of company’s management structure (for example, how the managers will be managed?), owners, fee structure, incentives, expenses, investment process and strategic alliances (if the company has any.)
The product strategy defines the company’s investment management products and services, risks and returns, investment strategies for each fund and analytical tools.
This section of the plan discusses the current market trends, market demand for the investment services offered by the company, potential size of each fund and market factors that might impact the performance of the funds