Everything in this world requires a proper procedure to originate. The same applies in starting a hedge fund. Starting a hedge fund is not a very easy task. It requires many cyclic steps, which have to be strictly abided. If any of the regulations is not followed properly, the fund might land in a financial problem. So, let’s start the discussion about How to start a hedge fund and its requirements.
A hedge fund requires money to invest in the market. The absence of money can end up the hedge fund before it gets started. You should not be fooled by those who say the capital required to start a hedge fund is a small one. It is not at all true. You need have money to invest, money to pay to your legal advisors, money to pay your fund manager, money to pay your team and this list is quite long. If you are not able to pay any of the above, the fund will not function at all. As all of them have a very essential role to play.
Even if you start with a small investment of $100,000 in your early stage, then also you will have to have a good amount of money for getting your other jobs done. For example paying your fund manager, a good fund manager usually charges in the range $25,000-$50,000 annually. Similarly the other charges drastically lift up the start up cost.
LAWS TO FOLLOW:
Unless you have a good financial advisor in your family, you will require taking help of a professional financial advisor. As starting of a hedge fund requires many investment compliance rules to be followed. Precisely speaking about the laws, they change from one country to the other. And to know about these rules you will have to pay a good amount. You don’t only require a financial advisor during the starting but you will need to take regular advises from them.
A good financial advisor normally charges in the range $20,000-$80,000. A good financial advisor is helpful not only regarding the legal terms but also because along with them comes a long list of reputed customers for the fund. The bad thing about working with a reputed law firm is in most of the cases you will be paying to get your work being done by the juniors, as the seniors involved will be very busy. So, they will not have the time to look into your start up documents. They will just be reviewing it and signing it.
TEAM UP WITH THE INVESTORS:
The primary requirement of a hedge fund is to have money for investing. This money comes from the investors associated with the fund. So, if you are starting a hedge fund you will need to convince the investors to invest in your fund. While convincing the investors you should not reveal your strategy to them, as it can be misused by them. If the investor knows your strategy and likes it, then there is a probability of him/her starting one’s own hedge fund, as they already have the money. They did not have a strategy which you just gave them. So, you should try to convince the investors without telling them the strategy.
This is a very tough part. Before going to an investor, do a proper research. And tell them about the positives of your fund, but do not hide the risks involved. You should rather try to present them in such a manner that they appear to be reasonable, in comparison to the return expected.
STRATEGY TO EXECUTE:
This part solely depends on the fund manager or you if you become the fund manager. You should plan this part completely before taking any other step. The strategy of the trades will decide the future of your fund. If the strategy is good, it will bring profit for the investors and for you. And also will bring more investors for the fund. So, have a good strategy.
This part might have surprised many. But currently softwares have a very important role to play in our trades. The smoothness of your trades depends on the efficiency of your software. Imagine while executing an algo trade the software crashes. What will happen? Whom will you blame? There are lots of examples of different stock broker softwares being available. Not only this while picking a trade you need to properly analyse the situation and this also is done using softwares. So, it is up to you to select the right one.
So, keep all the points in mind.
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