What Is a Hedge Fund?
A hedge fund is an investment structure that is typically set up as a limited partnership or a limited liability company (LLC). Hedge funds are similar to mutual funds in that they are pooled investments. However, hedge funds tend to hold alternative securities, like real estate or currencies, and often employ complex investment techniques like leverage and short-selling. They tend to be less popular than mutual funds with everyday investors. Hedge funds get their name from the original strategy of employing a combination of long and short strategies to “hedge” risk for the investors. This strategy aims to obtain reasonable returns no matter which direction the stock market moves. Most investors in hedge funds are accredited investors, meaning they must meet or surpass certain net worth and minimum initial investment requirements.
Why Start a Hedge Fund?
Hedge funds are typically started by money managers or registered investment advisors that are skilled at hedging strategies. These skills and strategies are then used to attract investors and make a profit. As with other products and services, someone might start a hedge fund because of demand in the marketplace. According to Hedge Fund Research, hedge fund assets reached a record level of $3.235 trillion globally in July 2018. Though risky, hedge funds often attract high-net-worth investors, so assets have the potential to grow at a much faster rate than mutual funds or exchange-traded funds (ETFs). This growth potential often motivates money managers and advisors to start hedge funds. Hedge fund managers can also command high fees, often around 1% to 2% of assets and 20% of gains above a certain target return.
3 Steps To Start a Hedge Fund
The process involved in starting a hedge fund shares some similarities with starting a business. However, starting a hedge fund is more complex and is becoming increasingly challenging. Here are four basic steps to start a hedge fund:
The Bottom Line
Starting a hedge fund is not for just anyone with a good hedging strategy. It’s likely you’ll need startup capital in the tens or hundreds of thousands of dollars, plus a hedge fund attorney. Also, your strategy and how it performs in the current market conditions may determine the success of your hedge fund. In simpler terms, you’ll need money, investing skills, a specialized attorney, and some luck to start your hedge fund and find success.
