When you are set to start a hedge fund, many aspects will certainly determine your success. Here are 7 essential tips that you should think through and be cognisant of, to guide you into your new venture before you show any potential investors and partners the plan for your fund.
- Competitive Advantage
Your fund should have a considerable competitive advantage over the others in the same market. Such advantage could be information advantage, resource advantage, marketing advantage, or a trading advantage. Marketing advantage may arise from a career-long relationship with several high net worth individuals or even family offices. Similarly, resource advantage can be working with large asset management firms, which would invest heavily when you launch a hedge fund.
- Definition of Strategies
The importance of clearly defining the fund's investment strategy is often overlooked by some hedge funds startups. Clearly outline your strategy, and how you can explain the investment process to your team of investors. It can be quite a daunting task to develop a profitable, defendable, and repeatable investment process after taking into account the costs of running the fund.
Keep in mind that untested ideas, or those that have only been backtested in the real markets are likely to be rejected by investors, who usually come across hundreds of wannabe fund managers a year. Do in-depth hedge fund performance research to establish which strategies are currently performing well.
- Seed Capital And Capitalisation
It is crucial to be well capitalised when starting a new hedge fund. The assets your fund need to manage for profitability rely on team size, unique cost structure, and your investment partners. Although some fund managers claim profitability with assets under management of less than $10 million, many claim that you should be managing $110 to $125 million in assets for your fund to be considered serious, and of long term survival prospects. However, every business is unique.
Sales are a crucial part of any business therefore; you should have a sales plan on how to raise assets before you open business. One of the initial steps is deciding where you will raise assets from. Potential sources include family and friends, financial advisors, seed-capital providers, corporations, pensions, high net worth individuals, etc. Some marketing activities to start you off can be Business cards, newsletters, PowerPoint presentation, letterhead, etc.
- Risk Management
Your hedge fund should develop a competitive and concrete way of both portfolio and business risk management. Otherwise, it may appear to be not serious about the long term goals or business in general. Several firms specialise in offering help on risk management issues in hedge funds.
- Legal Issues
Acquiring an exceptional legal team or counsel should be seen as an investment. Experienced counsel will help your firms avoid pitfalls and essentially build more relationships for business networking. It also shows you are investing in your business as you aim to be in the industry for long.
- Selecting Prime Brokerage
Prime brokerage firm is vital, as they can act as a partner in business. It plays an important role on how your fund will operate and trade because you may take several weeks to evaluate the cost and benefits of conducting business with the various firms in the industry.