With a challenging regulatory environment and a host of competitors vying for accredited investors, hedge fund managers face an uphill climb on the road to establishing their fund. Grant Thornton estimates that new hedge funds will need $75,000 for startup costs, with $100,000 needed annually for ongoing operations. While there is no set requirement for the amount of money that should be raised, you should work backward from your costs and fee structure to derive an assets-under-management figure. According to Mergers and Inquisitions, prime brokerages will not even consider assets under management less than $5 million.
Business Insider said in 2009 that $1 million will not get you very far in the launching of a hedge fund and that $5 million is a more realistic target to aim for when all costs are considered. With $5 million under management, success rates for hedge funds improve, observed one hedge fund consultant. Beyond this, other notable thresholds are the $20 million mark, which will make you more noticeable to investors, as well as the $100 million hurdle, which will open the door to more institutional investors.
While you are not specifically required to hire a lawyer to launch a hedge fund, many managers find that legal counsel is useful in keeping them in compliance with securities laws and drafting offering documents and other agreements. An attorney can also advise on fund structure, fees and potential risks. This can cost a new manager between $20,000 to $150,000, depending on the size and structure of the fund.
As with any business, there will be upkeep costs in the starting and continued operation of a hedge fund. Administrators fill the back-office function of the hedge fund by reconciling trades. It is important to investors that you are working with a reputable administrator, says Mergers & Inquisitions, so it may be worthwhile to pay more for a quality one. Grant Thornton estimates that fund administration fees will range from $24,000 to $100,000 annually, depending on the complexity of the hedge fund.
Not to be overlooked is the marketing portion of a new hedge fund business. This is where you hire third parties to build your brand and distinguish yourself in the hedge fund universe. In the wake of hedge fund scandals and collapses, these imagemakers can help ease perceptions and court public confidence. Costs involved in designing websites and media campaigns could be anywhere from $15,000 to $25,000.
Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.