With an SEC crackdown on fee disclosure said to target smaller, less established firms underway, one firm says now is a great time to launch a hedge fund. That firm sells hedge fund administration services.
Launching a hedge fund
A research note from the Rothstein Kass Institute acknowledged the “regulatory environment for hedge funds has become more complex and time consuming in recent years,” but also said the “startup market is alive and well. In fact, it’s thriving for those who go about it the right way.”
One might assume that by “the right way” a message not included was that performance should always be reported net / net of all fees and expenses and that all fees should be clearly disclosed on a performance table without unnecessary complexion. But this is potentially the verbal advice.
Rothstein Kass recommends traders follow 10 Tips for Launching a Successful Hedge Fund.
It’s a business
A key issue with new funds, often operated by traders and quantitative scientists, is the business aspect of fund management. Brining in and managing assets can be a foreign concept to those focused solely on trading. “Build a fund like you’re building a business,” the firm recommends. The “if I build it, they will come” mentality is no longer a viable option, the report notes, illuding to many small fund managers who think generating returns is all that matters. “Fund managers must take the time to create a real business plan with realistic projections of operational and cash flow needs.” Business and asset raising issues, not just trading, are among the leading causes of hedge fund failure.
Play the game
Raising assets for a trading strategy is a finely honed skill to which trading managers must understand. Learn the hoops that are required to be jumped through to obtain assets. Among these hoops is the “institutional appearance.” Never mind your long term trend following program doesn’t need a redundant server backup in your office and co-location at the exchange center. If it’s on an institutional check list you need to “look institutional,” is the advice often heard from asset raisers. “The most successful funds build out their infrastructures with an eye for detail and a focus on quality that will pass muster with institutional investors from day one,” the report noted.
Its not about trading… that much at all
The report went on to discuss strategic fund structures, understanding tax implications, and keeping control of capital raising costs. For instance, obtaining space on a broker-dealer’s alternative investment platform is known to include large fees paid to the brokers and then involve a significant and costly sales cycle to get coverage.
Most of the issues covered in the report centered on non-trading related activity. Developing a successful hedge fund is more than having a good trading strategy. Understand all these realities of the alternative asset raising game before entering the waters is good advice, and the Rothstein Kass piece provides a starting point.