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Hedge fund strategies anybody can use to set up their own fund

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This guide outlines how to set up your own hedge fund, outlining the hedge fund strategies to use.

If you’ve made a lot of money for yourself in the markets, you’ve probably toyed with the idea of setting up some sort of business that involves investing other people’s money, too. What’s more, you want to do it on your own terms using insights you’ve gained over the years. You don’t want to have to fit into a stringent regulatory framework. You need to be free to take risks and earn rewards. 

Because of this, setting up a hedge fund is your best bet. And while that might sound daunting, it’s something that practically anyone can do with the right information on hedge fund strategies. 

Hedge fund strategies and steps: overview

A hedge fund is essentially an investment company that draws together the funds of multiple investors. It’s a bit like a mutual fund, but there are some differences. For instance, hedge funds don’t have to comply with various registration rules, as mutual fund companies do. What’s more, they have more freedom in the type of investments they make, usually because they cater to a wealthy clientele who should know what they are doing with their funds. 

Hedge funds are also extremely profitable. While mutual funds might charge a 2 percent fee, hedge funds often charge clients significantly more than this in exchange for higher long-term returns. A mutual fund might generate 6 percent net returns after taking its cut, but a hedge fund might yield 12 percent net, encouraging investors to pay significantly higher fees. 

In this guide, we take a look at how to set up a hedge fund and some of the hedge fund strategies and rules you’ll need to follow:

Define your hedge fund strategies

To set up a hedge fund, you’ll need hedge fund strategies that lets you consistently beat the market long-term. If you don’t have this in place, you’ll struggle to attract clients and, if you fail, you could get a bad reputation that prevents you from succeeding in the future. 

Unfortunately, coming up with original hedge fund strategies is hard in today’s economy. Fund managers have tried just about everything, meaning profit opportunities are few and far between. 

Only you will know if you have a strategy that is likely to work (perhaps because it’s worked for you in the past and nobody else seems to be using it right now). Do some soul searching and try to figure out whether your personal gig will translate when managing a multi-client portfolio worth hundreds of millions, or billions, of dollars. 

If your idea is classical (that is, it’s something that people could have done in the past), profit opportunities will be scarce. However, if it is innovative, such as using new algorithms or AI that nobody else has right now, your chances of beating the market are significantly higher. Remember, you need a strategy that the market either undervalues or flat out doesn’t know about right now. Only then can you win the long game. 

Set Up As A Limited Partnership

The next step  in the hedge fund strategies is to set your firm up as a limited partnership. This way, you can cut your losses and go out of business if you fail without wrecking your personal finances. 

After that, file for your EIN with the IRS and get a legal entity identifier so that market participants can track who you are. Also, make sure that you carry separate liability insurance, just in case you get sued. If setting up with a partner, make sure that you have a clear legal agreement in place, describing who owns what. 

Register With Various Legal Authorities

After that, you’ll need to register with various legal authorities. First, you’ll want to approach the Securities and Exchange Commission (SEC) and get their approval to start operating. You’ll also have to get your company certified as an investment advisor. To do this, you’ll need to pass FINRA’s Series 65 examsLastly, you’ll need to send Form D to the SEC. This document is something you need to provide to every state you’ll operate in. 

Write Down Your Agreement With Investors

Once you’ve dealt with all the legal issues, the next step in the hedge fund strategies is to write down things like your fee structure and minimum commitment. The fee structure tells investors what they are liable to pay if they work with you, while the investment minimums tell them how much they need to invest to benefit from your services.

Experienced and well-respected hedge funds can charge high fees and insist on large minimums. However, if you are just starting out, you might want to stick to the standard 2 percent fee and minimuims of $100,000. This way, you can attract smaller, niche clients before trying to net some bigger fish. 

You’ll also want to set up your performance fee. Many investment houses ask for investors to share 20 percent of the profits they make with them. This way, hedge fund managers have a strong incentive to beat the market. However, thanks to passive funds, many high-net-worth individuals are now using passive funds and not looking for aggressive management. Because of this, you may need to lower fees slightly to attract more people to your market. 

Lastly, write down your distribution rules. Most hedge funds ask that investors give them anywhere from 30 to 90 days to pay out. How long you choose, though, is entirely up to you. 

Put A Team Together

While you might be a stock market whizz when managing your own money, hedge funds require considerably more people. They’re not one-man bands. 

At the very least, you’ll need brokers to facilitate the core activities of the hedge fund. These are individuals who go to the open market and make trades with other market makers on behalf of the fund. Market makers attempt to clear the price at the level set by the fund. If the price doesn’t allow the market to clear, they keep increasing or reducing it until it does. 

Hedge funds also require an auditor. This is a person who tracks the fund’s performance over time and then uses that information to market it to investors. Lastly, you’ll need an administrator. That’s a person who handles all the day-to-day tasks and makes everything in the business run smoothly. 

Photo by Patrick Weissenberger on Unsplash

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