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Hedge funds are sometimes called "the new American Dream." The news reports on managers who make billions a year and because they're mostly unregulated, anyone can start one. Yet becoming a successful hedge fund manager is not easy. Far more fail than succeed. Get a general idea of how you can become a hedge fund manager by starting your own hedge fund.
Decide whether being a hedge fund manager is right for you. There are two viable ways people can start hedge funds: boot-strapping or gaining credibility by working for a large fund manager for several years. If you are good at trading and happen to know a lot of wealthy people who are willing to give you money, you might be able to "boot-strap" a hedge fund, even if you have limited experience. Otherwise, managing funds for a large company for several years will give you the needed credibility and experience to go out on your own and have people entrust you with their funds.
Decide what your hedge fund is going to invest in. Decide what your strategies are, including how you will handle risk management. For example, if you decide you’re going to invest everything in Alaskan opal mines, chances are people won’t be flocking to give you their money because you have poor risk management and a poor investment strategy. Read reports of operational hedge funds and see what works and what doesn’t.
Write a business plan. This should help you figure out how much money you'll need to begin, who you will need to help you and define all your goals.
Write an offering circular. This is a document that lists what your strategies are and how they will be implemented. It also defines what qualifies an investor; for instance, a certain net worth may be needed. Have a finance attorney draft this document.
Find a prime brokerage firm. These firms can not only help find you your start-up capital, they will be able to help sell your fund. Meet with several to find one that will work well for you.
Find your seed money. This will fund your back office and marketing needs. Expect to come up with at least $50,000 to start, if you’re running a one-man show; more if you need to hire extra people. If you don’t have this money, have people who are willing to invest with you.
Hire a compliance officer. This person should have a FINRA Series 24 registration and be well-versed in what is and what is not allowed as far as marketing the fund, what paperwork to file with FINRA and the Securities and Exchange Commission, review all your plans and so forth. If you have a Series 24 registration, you can do this part yourself. You may also be able to hire an outside firm to do this.
Come up with a marketing plan. Decide who you’re going to target and how. Design a logo, letterhead, website and newsletters. Have the compliance officer review all these materials and your marketing plan to see if it meets all the rules set forth by the SEC and FINRA.
Decide how much capital you need to begin trading and set a deadline for obtaining it. If your marketing plan works and you meet your quota, you can start trading.
It can take several years for a fund to become profitable. If you have money manager experience, you may be able to get a job at an established hedge fund instead of starting your own. Some companies offer back office services (administration services, web page designs and more) exclusively to hedge funds to help you get started.
Guidelines and laws governing hedge funds may change. It's important to do your research before you begin. Understand all the risks and responsibilities involved for both you and your investors before you begin.