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Lipper HedgeWorld's Education Center
Starting a Hedge Fund
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How do I start my own hedge fund?
Forming a hedge fund is a relatively easy process, provided that the potential
manager has access to enough capital to implement his or her trading strategy
and to cover the administrative and legal costs associated with the start up.
Essentially, the fund manager needs only a few documents to get started.
These include:
- A Private Placement Memorandum which is drawn up with the aid of an attorney
and reviewed by an accountant, who will typically act as auditor. The
partnership agreement may be in the form of a limited partnership or a limited
liability corporation. The Private Placement Memorandum explains relevant
trading strategies, the associated risks, the biographies of key personnel,
and contains documents disclosing the names of the attorneys, accountants,
and other administrators as appropriate, as well as the partnership's
compliance with blue sky laws.
- Subscription Agreements which are signed by the investors in the partnership.
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A more complete listing of documents that a hedge fund manager may need to
create is listed below:
| Confidential Offering Memorandum |
| Limited Partnership Agreement |
| Offering Memorandum Instructions |
| Subscription Agreements |
| Limited Partner's Suitability Letters |
| Limited Partner's Signature Pages |
| Legal and Regulatory Handbook |
| Accounting and Tax Handbook |
| SEC Regulation D Code (U.S.A. related) |
| Instructions and Ongoing Responsibilities |
| Accounting Spreadsheet & Templates |
| File SEC, CFTC, NFA, and State Forms (U.S.A. related) |
| Quarters End and Year End Duties |
| Fund Account Ledger |
| Prospects and Subscription Log |
| General Fund Ledger |
| General Partner Corporate Books and Records |
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The new hedge fund manager must establish relationships with several industry
service providers from the outset of the fund. Some of these include:
Administrator (typically non-U.S.A. related)
Auditor
Prime Broker
Attorney
Custodian and Registrar Bank (typically non-U.S.A. related)
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A new manager can expect to spend approximately 25 to 75 thousand dollars in
legal and administrative fees. The fees for setting up a domestic fund are, in most
cases, less than the fees forstarting an offshore fund. Once the hedge fund manager
has enough capital to begin implementing his or her trading strategy, and has
established the necessary relationships that are involved in the transactional aspect
of the business, the hedge fund can begin trading.
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How is an offshore hedge fund started?
Since most offshore hedge funds are structured as corporations, the primary difference
between starting a US-domiciled hedge fund and an offshore hedge fund lies in the
process of incorporation as a foreign based entity. The same types of relationships
must be established with industry service providers, and as noted above, the fees
associated with creating an offshore fund may be higher than the fees associated
with starting a US-domiciled fund.
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