Additionally, you need to register as an investment advisor, and any other representatives of the hedge fund manager will as well. That requires you to pass the Series 65 exam administered by the Financial Industry Regulatory Authority (FINRA).
Finally, you'll need to register the hedge fund offering with the SEC using Form D. You need to do this for every state where you'll be offering the fund. Form D is specifically for exempt securities such as hedge funds.
A good lawyer will ensure that you cross your t's and dot your i's when it comes to filing all the registrations necessary to set up your hedge fund.
4. Write your investment agreement
Before you go out and market your new hedge fund, you'll need a clear investment agreement to show prospective investors. The investment agreement will include details such as:
- Your fee structure: What's the expense ratio? Do you have a performance fee? The industry standard is a 2% management fee and 20% performance fee, but there's been pressure on lowering fees over the past decade.
- Minimum commitment: Is there a minimum amount of time or money an investor must commit? Many hedge funds require at least $1 million and a one-year commitment, sometimes more.
- Distributions: Will you have set periods where investors can request distributions, or will they be able to take distributions by providing notice 30, 60, or 90 days ahead?
Again, a good lawyer will be invaluable in making sure your investment agreement covers everything you need.
5. Get your team together
Beyond the aforementioned lawyer, you'll also want to assemble a team of key service providers.
- A broker offering prime brokerage service: Being able to make trades or borrow cash and securities are essential to running a hedge fund. A broker can help facilitate the core activity of a hedge fund. Hedge funds need prime brokerage services for lending securities from other institutional investors and facilitating margin loans from commercial banks.
- Auditor: Hedge funds need their results audited if they want their track record to hold any weight when marketing to potential investors.
- Administrator: As a hedge fund manager, you want to focus on trading. An administrator can handle the day-to-day tasks of making everything else in the business run smoothly.
6. Market yourself
Before you can actually manage people's money, you need to sell them on why your fund will be a better fit than managing their money themselves or allowing someone besides you to do it.
As a hedge fund, you're only able to accept investments from accredited investors. An accredited investor holds $1 million in liquid assets or has an income of $200,000 per year (or $300,000 per year with a spouse). If you have a network of friends and family who fit that description, start with them. If not, you'd better be a really good networker and salesperson.
Be sure you comply with all laws and regulations when marketing. Consult your lawyer.
Show your prospective investors your (audited) track record from using the same strategy you'll use for the hedge fund. Explain why the strategy will continue to work in the future. Then ask for their money.
7. Launch
Once you have enough investors, you can launch your fund. Link up the brokerage account and start trading.
Even after launching, the hard work probably isn't done. In fact, it could be more difficult. Now you have to manage the fund, continue to market it, and attract new investors in order to expand the business.
