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How to Start a Hedge Fund

An image representation of the increasing revenue of hedge funds.

Have you ever wanted to try your hand at high stakes, top dollar investing? That’s the type of person who feels drawn to risk, likes a challenge, and wants to start a hedge fund.

However, it’s not easy to start a hedge fund. In fact, many people advise against it and suggest that anyone wishing to start a hedge fund look into other investment strategies. You can also invest in a hedge fund if you want to get involved but don’t want to strike out and start a hedge fund on your own just yet.

Still curious about what it takes to start a hedge fund? Don’t worry – we’ve got your back with this comprehensive guide on how to start a hedge fund.

Whether you’re just a curious investment geek or someone looking to take the next step into hedge fund work, here is everything you need to know:

What is a Hedge Fund?

Before you can even start to think about how to start a hedge fund, you first need to understand the ins and outs of what a hedge fund is!

You can learn more about the history of hedge funds, how they got started, the types of hedge funds, and the pros and cons of hedge funds in our article here.

A hedge fund is actually not a type of investment. Instead, it is a way of making investments. With a hedge fund, investments are “pooled” by someone who is qualified to manage it, creating something like a limited liability company or a limited partnership setup.

The person or group managing the hedge fund then collects money from investors and puts that money into a specific investment strategy that they believe will create a return on investment. Different people who start hedge funds have different strategies, which can include trading junk bonds, doing private equity work, or even investing in other hedge funds!

That means that to start a hedge fund, you need two key things: investment money, and a plan for what you will do with that money in order to create a return.

Who Can Start a Hedge Fund

State laws have a significant impact on who can start a hedge fund. You’ll need to understand the laws in your area governing the qualifications and certifications you need to start a hedge fund.

You can also hire a lawyer who specializes in helping people start hedge funds to walk you through the process and make sure you have everything you need to start a hedge fund.

Certifications to Start a Hedge Fund

There are a number of certifications that you can get that will help you be taken seriously and understand your legal obligations as you start a hedge fund. Some of these certifications include a Certificate in Hedge Fund Regulation, a Certified Private Wealth Advisor, a Chartered Alternative Investment Analyst, and a Certificate in Investment Performance Measurement.

Becoming a Registered Investment Advisor With The SEC

In some states, anyone who plans to start a hedge fund needs to become a registered investment advisor. In other states, you only need to become a registered investment advisor if you plan to have more than fifteen investors for your hedge fund.

Becoming a registered investment advisor requires you to take and pass the Series 65 exam, which takes three hours and covers ethics and best practices around securities and investing.

Get a Series 7 License

If part of your strategy for your hedge fund involves buying and selling stocks, or trading within the stock exchange, you’ll need a Series 7 license. This allows you to become a broker of stocks and requires you to pass the Series 7 test.

The Series 7 test, also called the General Securities Representative Exam, is administered by the Financial Industry Regulatory Authority.

If you don’t have a Series 7 license but still want to start a hedge fund that can trade stocks, you can also hire someone else who has passed the test and earned this certification.

Get a Series 3 License

If, instead of stock trading, you plan to start a hedge fund that works by buying, selling, or trading things like commodities, you’ll need to register with the National Futures Association as a commodity pool operator.

To get a Series 3 license, you’ll need to take and pass the Series 3 exam, also called the National Commodities Futures Exam. This exam is also administered and graded by the Financial Industry Regulatory Authority.

A couple of businessmen shake hands in front of the stock exchange building.

Learn How to Start a Hedge Fund

While this article aims to be a good starting resource for anyone thinking about starting a hedge fund, we recommend expanding your knowledge before you try to start a hedge fund by working in the industry and taking classes about this exciting but difficult type of investing.

Jobs That Can Help You Start a Hedge Fund

Nearly everyone who goes on to start a hedge fund has some background in investment or financial management. Check out some entry-level job options that can help you get your foot in the door.

Before striking out to start a hedge fund on your own, consider working at an established hedge fund first so you can understand the strategies and behind the scenes requirements of the industry.

Take an Online Course About Hedge Funds

In today’s digital culture, you can learn just about anything online! Here are some good places to learn more in-depth material about how to start a hedge fund of your own:

Harvard Business School

Harvard Business School Online offers an Alternative Investments course, which teaches about investment options such as private equity, hedge funds, and real estate. It lasts for five weeks and requires at least one undergraduate-level introductory finance course as a prerequisite.

Coursera

This all-online program brings you a number of courses from the Indian School of Business that cover all aspects of portfolio management, including lessons and modules specifically about hedge funds.

Investment Certification Institute

You can get your Certified Hedge Fund Professional certification through this online course, where you’ll learn about hedge fund fundamentals, hedge fund investment strategies, and current hedge fund trends and terms.

Books About Hedge Funds

So You Want to Start a Hedge Fund: Lessons for Managers and Allocators
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You can also check out books about starting hedge funds, like So You Want To Start A Hedge Fund by Ted Seides or From Zero to Sixty on Hedge Funds and Private Equity: What They Do, How They Do It, and Why They Do The Mysterious Things They Do by Jonathan Stanford Yu.

From Zero to Sixty on Hedge Funds and Private Equity: What They Do, How They Do It, and Why They Do The Mysterious Things They Do
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You can also learn about the history and culture of hedge funds in the book More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby.

More Money Than God: Hedge Funds and the Making of a New Elite (Council on Foreign Relations Books (Penguin Press))
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People Who Have Started Hedge Funds

It is not easy to start a hedge fund, but plenty of people have done it. Unless you’re really plugged into the business and investing world, however, you might not recognize most of the names.

George Soros

Perhaps better known for his political activism, is a famous man who started a hedge fund and uses techniques like currency bets to build wealth.

The Alchemy of Finance
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If you want to learn more about George Soros’s methods for building fortune, check out his book The Alchemy of Finance.

James (Jim) Simmons

James Simmons is a mathematician and former math professor who also founded a hedge fund that now manages over 68 billion dollars and has a special “Medallion Fund” for owners and employees of his hedge fund business called Renaissance Technologies.

Daniel Loeb

Daniel Loeb is a hedge fund manager who uses his hedge fund position to make activist changes at major companies he influences.

Causes important to him and his foundation include reforming the country’s educational system, finding cures and treatment for Alzheimer’s disease, and advancing LGBTQ+ rights and equality.

If you are curious about whether a young person can start a hedge fund, check out this list of ten “rising stars” in the hedge fund world, including Angela Aldrich of Teca Partners and Sarah Carne of Australia’s Future Fund.

A man putting a stack of money on a desk.

How Much Money You Need to Start a Hedge Fund

You’ll also need a lot of money to start a hedge fund.

Seed Capital

The money that you start out within your hedge fund is called “seed capital.” Seed capital is the money you use to make other investments and execute on the strategy you believe will grow the money.

Ten years ago, an article in Business Insider said that five million dollars were a good place to start when it came to the amount of seed capital you need to start a hedge fund. However, as times have changed, it’s taken more and more money to get investors interested and to improve success rates for your investment.

Smaller hedge funds can survive with a seed capital around twenty million dollars, but that might limit the type of investors you can attract. If you want to start a hedge fund that includes larger-scale investors, you’ll need at least 100 million dollars.

This helps demonstrate that you’ve managed past investments with a sound strategy and that you have enough money to start executing on the specific strategy you plan to use to make your hedge fund profitable.

Startup Costs

There are many more costs when you start a hedge fund beyond the initial seed capital. Because a hedge fund works like a company or other organization, managing a hedge fund takes a lot of overhead costs that you need to account for.

For example, you’ll want to hire lawyers and accountants, who need to be paid. You’ll also need to pay legal fees and administrative costs. Budget for the salaries of the people you plan to hire, as well as things like health insurance, bonuses, and insurance.

Next, think about the supplies and technology you’ll want when you start a hedge fund. Everything from office space to computers and internet access costs money that can’t be counted as part of your seed capital, but still needs to come from somewhere before you can start a hedge fund.

Finally, marketing is a major cost many people don’t consider when they think about whether to start a hedge fund. Hiring graphic artists to build you a logo, putting your name out there with advertising, and hosting potential investors for charming lunches or luxurious trips to woo them all requires money!

Raising Money to Start a Hedge Fund

A critical aspect in the early process as you start a hedge fund is to gather investors who can help you build seed capital. Remember that a hedge fund is a type of “pooled” fund, so if you can’t find people whose wealth can pool together, you’ll have a very shallow pool!

Getting The Attention of Potential Investors

Investors also want to see that you have “skin in the game,” meaning that you trust your methods enough to throw in a lot of your own money when you start a hedge fund. The more seed capital you can start with, the better.

It’s also easier to catch the eye of investors if you already have a good reputation within the investment and hedge fund world. Make sure that your online presence is positive and reputable, and ask around within the industry to identify allies and potential partners.

Of course, if you’re able to put up most of the seed capital yourself, you don’t have to collect a bunch of investors in order to start a hedge fund. But unless you have a few hundred million dollars lying around, you’ll need to pitch to investors.

You can hire a consultant, also called a placement agent, to help you pitch to investors and get your name spread around within the investment world. However, it can be hard to get the attention of a consultant or a placement agent as a small startup hedge fund without many investments or years of experience.

Pitching to Investors

When you pitch to investors in order to start a hedge fund, you’ll need to explain what strategy you plan to use to make money with other people’s investments. Make sure to tell them about past investment projects that you managed successfully, and explain clearly how you came up with the idea, how you executed on it, what obstacles you overcame along the way, and what the final results were.

But don’t just focus on your success stories. Be honest about where you’ve failed and times that you’ve lost money. Explain what went wrong, what you learned from it, and how you were able to recover from the losses.

Pitching to investors is not easy, and you won’t be successful very often. Many investors will turn you down, even if your ideas are awesome and your pitch is perfect. Even those who choose to join your pool can take up to a year to get back to you!

If you have thin skin or need something you can get off the ground very quickly, it’s probably not a good time for you to start a hedge fund. Before you start a hedge fund, make sure you have the skills, patience, and runway money to wait out the long and difficult pitching process.

A hedge fund manager pitches his financial strategy to an investor.

What Happens After You Start a Hedge Fund

Once you’ve pooled together enough seed capital, budgeted your way through startup costs, and gotten all the required license and certifications, you’re ready to open the doors and actually start a hedge fund.

Now what?

Hiring a Team to Start a Hedge Fund

The first thing you’ll need to do is build a team. Hire people you trust and enjoy working with, but also the people with the right experience and expertise to make your hedge fund a success.

Focus on people who are hard workers and who are excited to be part of a brand new hedge fund, where things are often chaotic, everyone has to be flexible and cooperative, and the potential risks and rewards are both very big.

You’ll also want to fill any gaps in skills or licensing. Think about the strategies you want to pursue with your hedge fund, and hire people who have the requisite certifications and knowledge sets.

Whether that’s buying and selling stock, trading in commodities, taking on private equity or working with other hedge funds, ensure that you’re hiring the right people for the strategy you pitched to investors.

Put in The Hours

People who have just started a brand new hedge fund often work very long days. You’ll need to listen to new pitch ideas and consider potential candidates, but you’ll also need to work hard to manage the investments of clients you’ve already taken on.

Watching the markets and responding to anything new that comes up is a major part of running a hedge fund. But the financial work is not the only aspect of the job that takes up a lot of time.

Managing your team, including making sure your company culture is healthy and effective, and addressing any issues that arise, is also part of your role.

Finally, maintaining your reputation and relationships in the industry is key. Evenings are often spent at dinners and parties hosted by investors, where you can make connections and keep your finger on the pulse of everything going on in your corner of the hedge fund world.

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