8 business secrets for hedge fund managers

There are many reasons why the creation of a hedge fund has become the new American dream. Almost everyone has read stories about hedge fund billionaires. Their faces appear in the mainstream media almost every day. However, compared with many other seemingly ordinary financial and investment fields, the secrecy and exclusivity of the hedge funds they created is inherently attractive.

With a little capital, it is easier to set up a hedge fund. However, implementing risk control, increasing assets, recruiting employees, and operating the organization as a profitable business while generating positive performance is very challenging.

Key points

  • If you want to start a hedge fund, think of it as any other startup: build it like a business.
  • Clearly define your investment strategy and be prepared to effectively communicate it to employees and initial investors.
  • Develop a marketing plan and start looking for sources of start-up capital and talents.

Hedge fund roller coaster

First of all, you better make sure you know what you are doing. The entire hedge fund industry has experienced ups and downs, with many participants going bankrupt year after year.

According to CNN, in 2018 alone, investors withdrew US$88 billion from hedge funds and liquidated more than 400 funds. Poor performance and high fees mean death for these funds. However, hedge funds as a whole still have approximately US$3.2 trillion in funds under management.

In 2019, the industry ushered in a pick-up. The HFRI Fund Weighted Composite Index, which tracks the entire industry, has an annual return of 10.4%, the best year since 2009. Hedge funds performed well again in 2020, with a full-year return of 9.8%.

Tips for hedge fund startups

It is important to realize that hedge funds are a business and must be treated with the same systematic approach and long-term perspective. Here are seven main factors that need to be addressed.

1. What is your competitive advantage?

Your hedge fund must have a competitive advantage over other funds in the market. This can be a marketing advantage, information advantage, trade advantage or resource advantage. The marketing advantage may be the close relationship with hundreds of high-net-worth investors. The resource advantage may be the connection with the asset management company, which may invest heavily in the launch of hedge funds.

2. Define your strategy

Some hedge fund startups underestimate the importance of clearly defining fund investment strategies. Define your strategy and hone it until you can explain it concisely to your own team and initial investors. After paying for the cost of running a hedge fund, the strategy must be repeatable, defensible, and profitable.

Ideas that have not been tested by the actual market do not make much sense to investors and advisers, who every year see hundreds of people who want to become hedge fund managers.

Ethically and legally, conduct competitive research on your competitors as much as possible.

Do some hedge fund performance research so you know which strategies are currently doing well, which ones are not doing well, and why.

Are you launching your fund when your strategic needs are very high or is the pendulum swinging in the other direction? Begin to build a list of hedge funds that operate similar strategies and use competitive intelligence on them as much as possible ethically and legally.

3. Looking for seed capital

The important thing is that your new hedge fund has enough capital. The number of assets your fund needs to manage for profitability depends on three things: the size of your team, your investment partners, and your unique cost structure.

In terms of capital, according to Seward & Kissel, a hedge fund law firm, the amount required to start a hedge fund is increasing. The law firm stated in its 2019 new hedge fund report that compared with funds launched in previous years, hedge funds have significantly higher minimum commitment requirements for investors. Seed funds for new products sometimes far exceed $100 million.

In 2018, Steven B. Nadel, the lead author of the Seward & Kissel report, stated that the increase in investment minimums was partly to help new hedge funds attract the attention of institutional investors. “Some large institutional distributors, unless you manage $100 million or more, they may not even speak to you,” he said.


The number of hedge funds liquidated from 2015 to 2020.

4. Develop marketing and sales plans

In any business, nothing happens before the sale. Before you open for business, it is important to develop a sales plan to raise assets.

The first step is to decide where you will try to raise assets. There are many sources of potential investors, including:

Small hedge fund startups often rely on seed capital providers, family and friends, and high-net-worth individuals (directly or through their financial advisors). It can be difficult to work with institutional investors who may invest between US$25 million and US$100 million at a time, unless you have a good track record and total assets under management of more than US$100 million.

Your toolkit must contain all the basic knowledge of any solid business today. This means a website, a two-page marketing work, a 20-page PowerPoint presentation, a professionally designed logo, letterhead and business cards, and a folder with a logo for presentation at business meetings.

These sounds like details of Business 101, but they are often overlooked or poorly implemented. Anyone who can really help your business will see hundreds or even thousands of hedge fund managers every year. They can easily see which managers have invested time and energy, and which managers have put something together at the last minute.

All marketing and sales materials should be produced under the guidance of your chief compliance officer or compliance consultant, as there are many restrictions and details that require approval and review.

5. Consider risk management

Risk management is an important problem for the successful operation of hedge funds. Your company must have a specific and competitive approach to manage business and portfolio risks, otherwise you will not be seen as taking your business or long-term growth goals seriously.

Hedge funds often use leverage or derivatives, or use complex trading strategies in new asset classes. This means that the risk exposure of hedge funds will be different from traditional funds, and may indeed be unique to a particular hedge fund. Professional risk management personnel are the key to ensuring correct hedging and consideration of risks and keeping unexpected events to a minimum. Market and strategy risks are integrated, but you must also pay attention to model risks, operational risks, and counterparty risks.

There are many consultants and consulting companies that only advise hedge funds on investment portfolio and operational risk management issues.

6. Find a good lawyer

Hiring good legal counsel is an investment. Experienced hedge fund lawyers can help you avoid traps and build relationships, and take you to private capital introduction dinners and other social events.

It will also show others in the industry that you are investing in your own business because your goal is to be in the industry for a long time.

7. Decide on the prime broker

Many start-up hedge fund managers underestimate the importance of choosing prime brokerage companies that can serve as business partners.

The prime broker is an integral part of your hedge fund trading and operating methods. It may take you weeks or months to evaluate your options and weigh the costs and benefits of doing business with the various companies you encounter.

It is wise to choose a prime brokerage team that is very motivated to meet your needs, but not too small to meet all your trading and prime broker requirements. Although capital introduction services may be a great thing for your main broker, please note that they usually require 9 to 12 months of track records before they can do more to help explore the source of seed funding.

Once your team has proven themselves, if you have outstanding performance and a solid team behind your portfolio, then a good main broker will help with the introduction.

8. Build your skills

Today’s transactions are mainly done through technical backbones. You need to decide whether to build a trading system in-house or buy a system from a supplier. If you build in-house, you will have greater flexibility and keep your strategy confidential, but you also need to hire competent programmers and software engineers.

More and more financial companies are using cloud-based systems to run their platforms instead of installing their own servers. No matter how you place your own IT or outsource it, you need to pay close attention to security and disaster recovery in the event of a system failure.


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