Tips for Startup Hedge Funds
1. Raising enough seed capital
Some South East fund managers claim profitability with less than $5 million AUM, while others believe that North East & West Coast fund must manage $25 million–$50 million in assets to be considered a serious business venture that has some long-term prospects for survival.
2. Outsource strategically
The best fund managers know their limitations and aren’t afraid to outsource areas outside of their expertise. That doesn’t mean you should outsource everything, however; nor does it mean giving up oversight. Selecting the wrong service providers is an easy mistake for funds to make. Most funds need a prime broker, an administrator, a placement agent, an attorney and an auditor. Avoiding errors in this area is critical because the fund needs these services in order to operate successfully; further, they are part of the image the fund presents to investors in the marketplace.
3. Structure your fund strategically
Contrary to some opinions, determining a fund’s structure is a strategic exercise, not an administrative function. When considering what structure makes the most sense, managers have to take a hard look at their strategy, fee structure, trading frequency, and liquidity.
4. Tax considerations
Most U.S. hedge funds are typically structured as fund limited partnerships, or fund LPs, domiciled in Delaware (that state has a favorable legal environment for business and as such has historically been the preferred locale for U.S. companies). As a partnership, a hedge fund is not a taxable entity; rather, it is treated as a flow-through entity for U.S. tax purposes. Generally speaking, each fund LP will have its own management company and General Partner.
5. Act institutional from the outset
“Institutional quality” has become a bit of an overused phrase, but the thought behind it is as meaningful as ever. The most successful funds build out their infrastructures with an eye for detail and a focus on quality that will pass muster with institutional investors from day one.
6. Be transparent
Transparency has become more than a buzzword; these days it’s a key requirement for investors and should be embraced by fund managers. It’s essential that you document and communicate your processes, and disseminate all offering materials, agreements, memoranda, advertisements, marketing materials, etc., with consistent messaging.
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