The appeal of launching a hedge fund is undeniable for portfolio managers and investment professionals with the vision to innovate and the drive to succeed. However, the path from ideation to an operational, functional business is complex and requires careful planning and execution. Our explored the foundational steps and key considerations for successfully launching and scaling a hedge fund. The discussion featured Robert Leonard, Partner at Dechert; Bryant Morse, Managing Director and Head of Business Consulting Services at UBS Prime Brokerage; Chris Lombardy, Founder and President of Salus GRC; Bob Zibelman, Managing Director, Hedge Fund Services at 天美传媒; and was moderated by Johnine Kilgallon, Managing Director, Business Development at 天美传媒.
Legal Foundation and Structure
An early step in launching a hedge fund requires setting up a legal entity. This involves reviewing potential limitations, such as non-compete agreements. Choosing the right name for the firm and fund is also important, and needs to take intellectual property rights and web domain availability into consideration.
Understanding the target investor base and fundraise size are additional critical aspects. Key attributes to consider include whether investors are foreign, domestic, tax-exempt or prefer separately managed accounts (SMAs). Additionally, regulatory requirements must be addressed, such as registering as an investment advisor or filing for exemptions with regulatory bodies such as the SEC or CFTC.
Assembling reliable service providers is essential for operational success. This includes prime brokers, fund administrators, auditors and compliance consultants, among others. Careful planning in these areas ensures compliance and lays a solid infrastructure from which to scale.
Operational Readiness
Once the legal framework is in place, operational readiness becomes the focus. The webinar discussed considerations for emerging managers, including determining fund structure (onshore vs. offshore), trading strategies (e.g., long-short equity or derivatives etc) and choosing the right domiciles for investor alignment.
Of equal importance is the selection of systems and workflows to manage trade operations, settlement and reconciliation effectively. Emerging managers should prioritize building an operational model that balances cost-effectiveness with institutional standards to meet investor expectations and regulatory requirements.
Raising Capital
Securing capital is often the most challenging and time-consuming component of launching a hedge fund. Fundraising requires a strong pedigree, demonstrable track record and clear narrative. Our panelists highlighted the growing prevalence of SMAs, which offer transparency and capital efficiency that many institutional investors prioritize.
While raising capital in today鈥檚 environment requires persistence and adaptability, opportunities exist for managers who can deliver differentiated value aligned with investor needs.
Compliance, Cybersecurity and Transparency
Establishing a compliance framework from the start is a must. Comprehensive policies and procedures should be implemented (even for exempt reporting advisors), with a focus on key areas like material non-public information, personal trading and marketing materials oversight. Early regulatory examinations are common, making thorough preparation essential.
Cybersecurity is another top priority. A strong IT infrastructure with features like multi-factor authentication and mobile device management are increasingly expected. These measures reduce risk and build trust and confidence with investors that you are building an institutional-grade firm.
Scaling for Growth
For emerging managers, designing a business model that accommodates growth is essential. This involves anticipating transitions in operational complexity, such as exploring outsourcing vs. in-house support as AUM expands. It's important to maintain clean, well-organized data from the outset to enable smoother transitions and scalability.
Additionally, managers must demonstrate institutional-level operations through their technology stack. Leveraging AI for efficiency, improving transparency and providing customizable reporting are all effective ways to showcase operational excellence.
Final Thoughts
Launching and growing a hedge fund is a challenging but rewarding endeavor. Success demands careful attention to legal foundations, operational readiness, capital raising, compliance and scalability. By addressing these key areas systematically, emerging managers can position themselves as credible, institutional-grade operators ready to attract both investors and opportunities.
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