How
to
Start
a
Hedge
Fund
By Bart Mallon
Many future hedge fund managers have misconceptions about how to start a hedge fund – eitherthey think it is a very basic process that takes no time or resources, or they think that it will taketoo much time and will be cost prohibitive. For most start up hedge funds, the manager can beup and running within a month depending on whether the manager will need to be registeredwith the state securities commission (please see our article onstart up hedge fund timelines).This article will detail the steps the manager will need to take to start the hedge fund.
Starting a Hedge Fund – First Steps
First, the manager should have an understanding of the expected hedge fund investment programand the potential seed investors. At this point the manager will want to soft circle assets – askingfriends and family if they would be interested in investing in a potential hedge fund.Second, the hedge fund manager should begin to choose his service providers. The mostimportant is thehedge fund attorney. The hedge fund attorney will help the manager with boththe legal and logistical aspects of establishing the hedge fund. The lawyer will also be able tosuggest other service providers to the manager. After discussions with potential attorneys andservice providers, the manager will probably sign some sort of engagement letter and submitappropriate retainers or fees for services. Then the manager will go through the documentformation and account opening process.
Hedge Fund Documents – Private Placement Memorandum, LP Agreement, SubscriptionDocuments
The central part of the hedge fund start up process is creating thehedge fund offeringdocuments. The offering documents (the PPM, LPA, and subscription documents) are importantbecause they actually creating a legal agreement between the hedge fund manager and the hedgefund investors. That legal agreement will need to detail the rights and responsibilities for boththe manager and the investors. The lawyer will draft these documents with input from themanager as well as the service providers.
Hedge Fund Administration and Primer Brokerage
Once the offering documents have been finalized the hedge fund administrator will begin tocreate the back end items for the hedge fund. These back end items allow the administrator tocalculate the NAV for the fund and prepare statements for the hedge fund investors.
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