How Much Money Do I Need to Start a Hedge Fund?
Original post by Geri Terzo of Demand Media
Hedge-fund managers do not run all aspects of the investment vehicle alone. The quality of the service providers selected affects the overall cost of a new fund. Fund managers who are willing to invest in top-tier providers might spend more upfront but save money in the long run. A fund manager can keep costs especially low if he manages money for family members and friends without charging fees.
Assets Under Management
In order to register a hedge fund with the U.S. Securities and Exchange Commission, a hedge-fund manager must oversee at least $25 million. In 2011, new laws were introduced that require hedge funds with assets in excess of $150 million to register with the regulatory agency. Hedge-fund managers who are intent on being a registered investment adviser must meet the minimum assets under management requirement. A hedge-fund manager might prefer to register with the SEC as a way to give investors confidence about the transparency in the fund.
Once the fund is legally structured as a limited partnership, which is the standard in the U.S., a fund manager should consider that he is going to need to raise additional capital from outside investors. The quality of the third-party service providers hired, including auditors, lawyers and prime brokers, is likely to elicit a response from prospective investors and affect capital-raising activities, according to a July 2007 article on the Hedge Fund Launch website.
According to Hedge Fund Launch, it is possible to start a hedge fund and hire a prime broker with as little as $5 million. To secure all top-notch service providers, such as prime brokers, custodial firms and attorneys, all of whom can help reduce other expenses, a fund manager should expect to spend between $5 million and $10 million. In an ideal situation, a fund manager could invest up to $25 million to get top-notch support in place and focus on investing.
Incubator Hedge Fund
A successful hedge-fund manager might go on to manage his own assets upon retirement or after earning enough money to do so. A new hedge-fund manager can similarly manage and invest capital for himself or family and friends in an incubator fund without charging investors fees for a profit. According to the Green & Company website, a fund manager can launch an incubator fund and trade his own money for $3,000. Upon establishing a trading history, a fund manager might be better able to attract new capital from investors and start a for-profit hedge fund.
- "Hedge Fund Law Blog"; How To Register as an Investment Advisor; October 2008
- "Forbes"; SEC To Raise Threshold for Hedge Fund...Investments; Timothy Spangler; May 2011
- Business Insider; Julian Robertson Promotes His Son...; Courtney Comstock; July 2010
- Hedge Tracker: Top Hedge Fund Firm Launches of 2011
- "Hedge Fund Launch"; How to Start a Hedge Fund: Part I; July 2007
- Green & Company; Investment Management: Incubator Funds
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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