How to launch a hedge fund: key aspects

Author: Baiana Kashaeva

Launching a hedge fund is not a very difficult process from a bureaucratic perspective. However, it’s crucial to go through a defined set of steps at the beginning and build a solid foundation that will secure long-term success and stability.

Today, we’d like to go through the key aspects of starting your own hedge fund and succeeding with it.

Step 1: Identifying your customer base and investment strategy

It is vital to consider such things in the early stages of building your hedge fund. Many decisions down the line will be made based on your preferred investor base and what kind of investment strategy you’re planning on carrying out.

You can pivot later if you find out that the initial model is not working for you. But try to make a thorough market analysis first and make data-driven decisions for your future hedge fund.

Step 2: Select a jurisdiction where you will be registered and operating

The jurisdiction is just as important as selecting your target audience. It will heavily influence your business potential, defining the amount of reporting you’ll have to provide to the regulator and the markets where you’ll be able to operate.

Many TFB clients choose Malta as the headquarters for their hedge fund because it unlocks access to European clients, offers tax exemptions, and provides a transparent regulatory system. You can read more about launching a hedge fund in Malta here.

Step 3: Choose what will be done in-house and what should be outsourced

Hedge funds can outsource many operations, from marketing to IT.

Define what you are comfortable with outsourcing and what should stay in-house. Outsourcing helps keep costs low, which is especially important at the beginning. Additionally, you can offload part of the workload to professionals who will do the work faster and better, giving you the space to focus on the side of the business that only you can handle.

Depending on your decision, either look for talented candidates to fill positions or evaluate and select outsourcing companies that will help you scale your hedge fund.

Tools for Brokers can take care of the technical aspects of launching a hedge fund, such as setting up the bridging solution and building an infrastructure that meets your needs and enables seamless operations.

Step 4: Think through the fund governance

Fund governance is a critical process required to help you stay on top of what’s going on with the fund. It is also vital for potential investors looking to join your hedge fund and want to have a clear understanding of how their money will be treated.

Today’s investors are very careful and knowledgeable, and they will be twice as cautious about trusting a newly formed fund. A proper fund governance plan will help persuade them that you can be trusted.

As a part of your fund governance, consider:

  • Creating a board of directors who will oversee the hedge fund’s operations and be able to advise and intervene whenever necessary.
  • Creating reports with meeting minutes that can be shared later with stakeholders. Not every jurisdiction requires keeping written records of meetings, but it’s a good practice regardless of where your hedge fund is based. Investors and others involved with the fund greatly appreciate transparency and timely updates.
  • Create a compliance plan. Failing to comply with regulators is, perhaps, the worst thing you can do, especially as a newly-formed hedge fund with no reputation.
  • Create a detailed plan that outlines all regulatory requirements and processes. Make a list of activities that have to be performed to ensure 100% compliance. Also, dedicate the time to draft a risk management plan specifically for compliance. Outline all risks (even the unlikely ones) and what you will do should any of those risks occur.

Step 5: Start attracting investors

Outsourced or in-house, don’t delay launching marketing promotions to attract new investors who will fuel your fund. Don’t wait for everything to be 100% ready to promote yourself, but make sure the key milestones, such as getting a license, are achieved before you start negotiations.

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