Do you want to start a hedge fund business online? If YES, here is a detailed guide on how to start a hedge fund company with no money and no experience plus a sample hedge fund business plan template. If you are a big time investor looking for ways to expand your investment portfolio, then you should consider starting a hedge fund firm.
You just may want to ask; ‘what is a hedge fund?’ Well, Hedge fund can be simply defined as is a regulated investment fund, (a much wider range of investment and trading activities) that is typically open to a limited range of investors who pay a performance fee to the fund’s investment manager who invest the funds and bring returns.
The investment could either be a long term investment or a short term investment. Hedge funds manager are known to invest in a broader range of assets, which includes long term and short term investment in equity, bonds, commodities, and derivatives et al.
14 Steps to Starting a Hedge Fund Company
Table of Content
- 2. Conduct Market Research and Feasibility Studies
- 3. Decide Which Niche to Concentrate On
- 4. Know Your Major Competitors in the Industry
- 5. Decide Whether to Buy a Franchise or Start from Scratch
- 7. Write a Business Plan
- 8. Choose a Suitable Location for your Business
- 9. Hire Employees for your Technical and Manpower Needs
- 10. Write a Marketing Plan Packed with ideas & Strategies
- 11. Develop Iron-clad Competitive Strategies to Help You Win
- 12. Brainstorm Possible Ways to Retain Clients & Customers
- 13. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
1. Understand the Industry
How did the Hedge Fund originate? The concept and term ‘Hedge Fund’ was created by Alfred Jones in 1949. He founded A.W. Jones, which is a partnership with four friends, and through this investment vehicle, they were able to invest one hundred thousand U.S. dollars ($100,000) in the stock market. They employ both long and short positions. The bottom line is that, they were able to generate 17.3 percent returns during the first year of investment and that was enough to set the ball rolling for hedge fund investment et al.
Interesting Statistics About the Industry
In the united states of America, the hedge fund industry is estimated to be a $1.2 trillion industry with approximately 9,000 active hedge funds and funds of funds. Statistics has it that in December 2009, the largest – top 25 hedge fund managers had an estimate of $520 billion in assets under management. Amongst the list are Bridgewater Associates, Paulson & Co., and Soros Fund Management.
History has it that hedging out unwanted risk has been a common business activity in the financial markets for centuries; which is why as far back as the 18th centuries, commodity manufacturers and merchants have started using forward contracts to protect themselves against futures changes in commodity prices— they do it in order to hedge out the risk of adverse market fluctuations beyond their control. Forward contracts are still pretty much traded to this day in the futures / commodities market.
2. Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
Hedge funds is simply an investment medium that enables big time accredited investors or well established institutions pool cash or capital together to be able to invest in securities and any other form of investment opportunity that requires large initial capital to invest in.
The fact that hedge funds requires large capital makes it easier for only the rich and accredited investors to cash in on it. Hedge funds are only open to limited partners with the required cash for investing in capital intensive business portfolios.
It is for this reason that if you have the required cash and the right investment philosophy, then you should source for like minds who are already into hedge funds.
3. Decide Which Niche to Concentrate On
Categorically, there are no niches in the hedge fund industry, but that does not in any way stop hedge funds manager from adopting strategies that will help them perform excellently well in the market. The truth is that if you fail to perform as a hedge fund manager with a short period of time, you will be out of the market; you just have to keep performing year in and year out if you want to be relevant as a hedge fund manager.
Be that as it may, here are some of the areas a hedge fund manager can focus his or her strength and investment strategies on;
- Global Macro/CTA
- Seeder/Accelerator Funds
- Emerging and Mid-Sized Manager Focus
- Aggressive Growth
- Distressed Securities
- Emerging Markets
- Funds of Hedge Funds
- Market Neutral – Arbitrage
- Market Neutral – Securities Hedging
- Market Timing
- Multi Strategy
- Short Selling
- Special Situations
The Level of Competition in the Industry
Despite the fact that hedge funds give huge returns on investment, it is indeed risky venture. If you drive through the street of New York City, you will come across several hedge fund firms; and that goes to show you that there is competition in the industry.
For you to survive as a hedge fund firm, you should be able to come up with workable investment strategies; strategies that will help you attract the required cash / capital and above all you should be a good risks manager.
4. Know Your Major Competitors in the Industry
Just like in other trades, there are very big brands in the hedge fund industry in the United States of America. These are the largest and well – known hedge fund firms in the world by assets under management (AUM). The data is made available by Bloomberg Markets Magazine;
- Bridgewater Associates (United States, Westport, CT) – $77.6
- Man Group (united kingdom, London) – $64.5 Billion
- P. Morgan Asset Management (United States, New York) – $46.6 Billion
- Brevan Howard Asset Management (United Kingdom, London) – $36.6 Billion
- Och-Ziff Capital Management Group (United States, New York) – $28.5 Billion
- Paulson & Co. (United States, New York) – $28.0 Billion
- BlackRock Advisors (United States, New York) – $27.7 Billion
- Winton Capital Management (United Kingdom, London) – $27.0 Billion
- Highbridge Capital Management (United States, New York) – $26.1 Billion
- BlueCrest Capital Management (United Kingdom, London) – $25.0 Billion
- Baupost Group (United States, Boston) – $23.0 Billion
- Cerberus Capital Management (United States, New York) – $23.0 Billion
- E. Shaw & Co. (United States, New York) – $23.0 Billion
- Angelo Gordon Co. (United States, New York) – $22.0 Billion
- AQR Capital Management (United States, Greenwich, CT) – $20.5 Billion
- Two Sigma Investments (United States, New York) – $20.0 Billion
- Farallon Capital Management (United States, San Francisco) – $20.0 Billion
- Goldman Sachs Assets Management (United States, New York) – $19.5 Billion
- Elliott Management (United States, New York) – $19.0 Billion
- King Street Capital Management (United States, New York) – $18.5 Billion
- Canyon Partners (United States, Los Angeles) – $18.1 Billion
On the average, hedge fund firms employ strategies that can help them reduce market risks, specifically by shorting equities or through the use of derivatives. This is exactly why many hedge fund strategies -mostly arbitrage strategies, are limited as to how much capital they can successfully employ before returns starts diminishing. Little wonder most successful hedge fund managers place limit on the amount of capital they will accept per time.
5. Decide Whether to Buy a Franchise or Start from Scratch
One of the questions that one must ask when seeking to buy a franchise is; why do I want to buy a franchise over starting from the scratch? Truth is that it might pay to start from the scratch. If you are looking towards starting a hedge fund firm, then you have just one option; to start from the scratch.
Investors invest in a hedge fund firm because they are comfortable with the hedge fund manager and not just the brand. So, even if you operate under the top hedge brand, you must be able to prove that you are a good manager before you can attract investors who will be willing to deposit their cash with you.
In essence, you will go through the processes of incorporating your hedge fund firm, acquiring the relevant certifications and business license before you can be allowed to operate a hedge fund firm anywhere in the world and not just in the United States of America.
6. Know the Possible Threats and Challenges You Will Face
Hedge fund involves large amount of cash and it is known to be a very high risk venture. Hence, whoever chooses to manage it must not just have solid investment background, but must also know how to handle risks. The truth is that if you are not grounded in risks management as a hedge fund manager, you may likely throw away peoples’ monies and investment.
That is why it’s often said that you don’t learn the ropes with hedge funds; rookies hardly survive managing hedging funds without first cutting their teeth elsewhere. Just as in any other business and investment vehicles; economic downturn, unstable financial market and unfavorable government economic policies can hamper the growth and profitability of hedge funds.
7. Write a Business Plan
Hedge fund is not for rookie investors, and for you to convince accredited investors to give you their hard earned money to manage for them, you should be able to come up with good investment strategies. Your investment strategies and how you intend managing your hedge fund firm should be contained in your business plan; that is perhaps one of the most important document that you can use to attract investors.
A Business plan is the blue print of your business; it is a business document that can aid you to successfully set up a business and also administer / manage the business. It is not enough to just write a business plan for the sake of writing one, your business plan should be able to pass reality check; you must put relevant facts, figures and statistics into consideration when writing your business plan.
The truth is that, the main aim of writing a business plan is not just for the sake of having a business document in place; but to have a detail guide on how to effectively set – up, run and manage your business. Your business plan should outline and cover strategies on how you intend to operate your hedge fund firm.
When writing your business plan, ensure that you are moderate when it comes to setting projections on income generation et al. It is better to be on the safer side – which is why when you are calculating your future income you should make use of the lower range figures as against the upper range. These are some key factors that you should also consider when drafting your business plan;
- Executive summary and Company’s descriptions: you are expected to write about the concept of your business, descriptions of your company, your company’s vision statement, and mission statement, where your company will be located, your management team, your investment philosophy and perhaps why people should patronize your services.
- Other key components that should not be missing in your hedge fund business plan are your service offering, SWOT analysis, marketing and sales analysis / strategies, pricing, costing and financial projection, management techniques, expansion strategies, publicity and advertising strategy, budget and start – up capital generation et al.
8. Choose a Suitable Location for your Business
If you look through some of the top hedge fund firms, you will realize that most of them have their headquarters in New York City. This is so because New York is one of the world’s business headquarters; key business decisions that shape the world of business are taken in New York.
In view of that if you can afford an office facility in New York City, then by all means go ahead. Vibrant business activities and access to highly qualified professionals are some of the key factors that you need to look out for before choosing a location for your hedge fund firm.
9. Hire Employees for your Technical and Manpower Needs
On the average, there is no special technology or equipment needed to run this type of business except for customized software et al. And when it comes to choosing between renting and leasing an office space, the size of the organization you want to build, and your entire budget for the business should influence your choice. If you look towards running a standard hedge fund firm, then you should consider the option of leasing a facility for your office; when you lease, you will be able to work with long – term planning.
If you are looking towards starting your hedge fund firm, you should be ready to hire only the best hands that you can find in the industry. One thing about hedge fund is that, it is your performance that will determine the pool of cash that will be under your management.
On the average, you are expected to have some key roles occupied by experienced professionals. Hedge fund career paths generally consist of the following roles: Research Analyst, Trader, Portfolio Manager, Risk Manager, Marketing or Investor Relations, Chief Financial Officer (CFO) & Chief Accounting Officer (CAO). Over and above, you will need a minimum of 6 staff to successfully run a hedge fund firm.
10. Write a Marketing Plan Packed with ideas & Strategies
As a hedge fund manager, you would have to prove your worth over and over again, so as to continue to attract pool of cash for investment. So when you are drafting your marketing ideas and strategies for your hedge fund firm, make sure that you create a compelling personal and company’s profile.
Aside from your qualifications and experience, it is important to clearly state in practical terms what you have been able to achieve in time past and your investment policies and strategies. Here are some of the platforms you can utilize to market your consulting services;
- Introduce your business by sending introductory letters alongside your brochure to investors and corporate organizations
- Advertise your business in relevant business magazines and make yourself available for investment talk shows and interactive sessions on TV and Radios)
- List our business on yellow pages
- Attend expos, seminars, and business fairs et al
- Leverage on the internet to promote our business
- Join local chambers of commerce around you with the main aim of networking and marketing your services.
- Engage the services of marketing executives and business developers to carry out direct marketing
11. Develop Iron-clad Competitive Strategies to Help You Win
One of the key strategies that you need to employ if you want to stay competitive in the hedge fund industry is to consistently produce results. Investors can only handover their monies to you to invest on their behalf if you have proven your worth as a competent hedge fund manager. Your ability to give your clients good returns on their investment is all you need to stay competitive and to win over clients in the industry.
It is important to state that successful hedge fund managers selects their clients, their doors are not open to all and sundry. This is so because hedge fund is a regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the hedge fund’s investment manager.
12. Brainstorm Possible Ways to Retain Clients & Customers
The hedge fund industry is a volatile industry and you can lose the whole of your investment within a short period of time. The major techniques that you need to increase customer retention are to continue to give them good returns on their investments. The truth is that if you trade at a loss consistently, you will steadily lose your clients.
On the average, those who invest in hedge fund do so on a short term basis and the only reason why they will continue to re – invest is when they continue to get returns on their investment. As a hedge fund manager, you need to continuously invent new and workable investment strategies; strategies that will guarantee that you get good returns on your investment. If you can be successful in doing that, you will not struggle to keep your clients.
13. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
The uniqueness of hedge fund firms is such that it is the result they produce that helps boost their brand awareness. Hedge fund firms do not go out there to source for investors that they can come across but they are strategic when it comes to inviting investors to invest in their hedge funds.
It will be out of place to boost your hedge fund brand if you have not proven your worth in the industry. If you have successfully proven that you have what it takes to operate a hedge fund firm, then you next port of call is to strategically engage the media to help you promote your brand and also to create a positive corporate identity.
You can leverage on business magazines, and any other business related TV or radio show to boost your brand awareness and to also create a corporate identity for your firm. Your official website and the internet is another potent tool that you can employ to boost your brand awareness and to create a corporate identity for your hedge fund firm.
14. Tips for Running a Hedge Fund Company Successfully
The truth is that, irrespective of the kind of business you run, your ability to get all the members of your team on same page at all times, is one of the keys you need to successfully run the organization. As the chief executive officer or president of a hedge fund firm, it is you responsibility to give direction to the business.
Part of what you need to do is to ensure that you create time for office meetings; a time where challenges, feedback, projections and relevant issues are discussed. The meetings could be daily, once in a week, twice a week or once in a month. The bottom line is that there should be consistent meetings in your organization.
Carrying out appraisals on a regular basis and training your employees will help you run your organization effectively. Encourage your employees to pursue certifications in their various area of specializations; it will help your organization’s profile and of course it will help the individuals.
You can choose to fully or partially sponsor some of the certifications. Lastly, you should keep your doors open for suggestions from members of your team and your clients. It is very important to reward excellent performance in your organization; it will go a long way to encourage healthy competition in your organization.
Starting a hedge fund business is a right step in the right direction. However, you may still need to work with some hedge fund consultants, who are so versed in the trade, and can help you start off in the very best of ways.