First Steps to Launching a Hedge Fund: Legal, Marketing & Service Provider Selection
The following is an excerpt from our new whitepaper, Launching a Hedge Fund: 10 Keys to Success.
Do your legal homework.
One of the first decisions you’ll need to make as a new investment manager is how to set up your hedge fund. Your organizational structure will typically reveal itself as a limited partnership (LP) or limited liability company (LLC). You may also consider a master-feeder fund structure, which could provide favorable benefits, and a domestic or offshore choice may also come into consideration. Many of these decisions will be impacted by the assets you plan to launch with or if you’re using or planning to solicit seed or acceleration capital.
Based on these structural decisions, you’ll need to determine your tax implications as well as regulatory requirements. In the United States, the Securities and Exchange Commission (SEC), under the Dodd-Frank Act, requires asset managers managing more than $150 million in AUM to register and hence meet a host of reporting requirements.
Create a marketing plan.
Once upon a time, hedge fund marketing was generally frowned upon, and in some cases, illegal. It wasn’t until the JOBS Act was enacted in 2013 that hedge funds finally had the opportunity to shed their fears of noncompliance and publicly market and advertise their funds. There are a variety of communication options firms can use to solicit investors – from traditional print and websites to social media, video and email marketing. Regardless of how, firms should build comprehensive marketing plans that will support their business beyond the launch phase.
During the initial marketing phase when a new launch is looking to secure startup capital, it’s important that firms understand their key selling points. Ask yourself: who am I and what makes my firm stand out? Determine what exactly your marketing pitch will be and how you plan to go about promoting it. During this initial period, consider investing in a customer relationship management (CRM) tool to help you monitor and track investor communications.
Post-launch, you’ll want to stay in close contact with those early-stage investors (here’s where the CRM system becomes critical). Your success at this point – or lack thereof – will help you determine if you need to tweak your marketing pitch moving forward.
Long-term, you should plan to implement a comprehensive marketing plan. Identify your targets and marketing/advertising venues so you don’t have to make decisions on the fly. Again, your CRM system comes into play here and will assist you in tailoring your messaging for future communications.
Select the right service providers.
Every successful hedge fund needs smart partners on their side, therefore deciding what service provider your firm is going to engage with is one of the most critical decisions your new startup will make. As a new firm, you won’t be able to manage all aspects of your operations internally. The due diligence process plays an important role here; you should thoroughly vet service providers to ensure you have the information necessary to assist you in the decision process.
You’ll want to select vendors and service providers your firm can grow with. If you outgrow your vendor quickly, it can be a significant operational disruption to transition to a new one. On the technology front, for example, migrating your data from one provider to another can be a tedious and time-consuming effort – one you likely won’t want to spend time on.
Positively, using best-in-class vendors will say a lot to investors about the value you place on your firm. You recognize you can’t do it all alone and have selected reputable service providers to entrust with your firm’s needs. From a technology perspective, investors will appreciate that you’ve made an investment in systems and processes that support your business and trading operations, and it will give them peace of mind knowing your IT vendor is equipped to handle any issues that may arise.