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Hedge Fund Start UpIt is difficult but not impossible to launch a Hedge Fund Start Up. The two main issues and obstacles you need to deal with are Formation and Funding. FORMATION One of the first questions I ask clients who are looking to launch a Hedge Fund Start Up is, In which state will the office of the hedge fund manager be located? The state in which the office of the hedge fund manager will be located will determine my answer to the next question, which most of my clients ask. That question is, Do I have to register as a hedge fund manager? Most hedge fund managers can qualify for an exemption under federal law, but might not qualify for an exemption under state law. Connecticut for instance does not have any exemption for hedge fund managers and requires all to register with the state, unless required to be registered at the federal level with the SEC. New York, on the other hand, basically mirrors the federal statute and it is fairly easy to qualify for an exemption in New York. In 1940, the United States Securities and Exchange Commission adopted the Investment Company Act of 1940 and the Investment Adviser Act of 1940 to regulate investment funds and their managers. The term Hedge Fund evolved a number of years later and is used interchangeably with the term Investment Company. Likewise, the term Hedge Fund Manager came into common usage and today is used interchangeably with the term Investment Adviser. Most hedge fund start up firms dont need to be registered at the federal or state level. Most of the firms that operate as registered Investment Companies are mutual funds. The same is not true in the case of hedge fund managers. Many hedge fund managers are registered at either the state of federal level. The key regulation on this issue is Section 203A -- State and Federal Responsibilities of the Investment Advisers Act of 1940, which provides as follows: a. Advisers subject to State authorities. Once all the legal issues have been reviewed with counsel and you have decided to launch a hedge fund start up, your team is now ready to begin the next series of steps in the formation process. These steps include the following: corporate formation; These steps can take anywhere from one month to two or three months to complete. The length of time depends on how focused everyone is on the project and the number of people that need to review the offering memorandum before the final version is ready. Usually the attorney does most of the drafting and works directly with the hedge fund manager on changes. After several versions it is then sent to the accountant or auditor for additional input, suggestions and changes. FUNDING Once the above steps have been completed, the hedge fund is now ready to be funded. The best way to get funded, of course, would be through existing clients or past business acquaintances of the hedge fund manager, or possibly another hedge fund manager that provides seed capital to the hedge fund start up. Without a strong source of initial funding, it can be a very difficult task to raise capital for the fund. Having a track record or trading history helps. Some hedge fund managers work for several years for a hedge fund and then have several approaches to get initial funding. They can seek funding from the hedge fund they worked for, they may be able to use their past track record to attract capital or they may self fund the launch with several colleagues who form the management team. One thing to keep in mind regarding initial funding and the first year of operations, if the fund manager requires registration at the state or federal level, then more capital will be needed to get the fund through its first year. Registered investment advisers are required to have a designated compliance officer. Compliance is a full time job. Some funds have a whole compliance department with several people that just handle compliance. Heres some more information on Hedge Fund Start Up Formation
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