Tips for Aspiring Hedge Fund Managers

Some consider managing a hedge fund to be the modern version of the “American Dream,” well… at least for individuals who are excited about investing, that is. Perhaps the popularity comes from the mainstream media coverage, from which many of us have read or heard stories about hedge fund managers earning hundreds of millions, if not billions, of dollars. Or, maybe it is the slightly secretive and exclusive allure that surrounds hedge funds that catches our interest more than other financial vehicles might — which can sometimes seem more straightforward and even repetitive to some people. Interestingly though, it is relatively simple to start a hedge fund as long as the founders can raise some capital. That said, according to Investopedia, somewhere between 4 – 10% of hedge funds shut down each year meaning that it can be a tough business to be in if those in charge are not careful. Still, every investor knows that there is minimal to no reward without risk so hedge funds remain exciting and attractive to those with aspirations of making big financial gains. If starting a hedge fund is a goal you have for your future, or if you are just curious to learn more about them, here are a few tips that could come in handy:

1. Have a Solid Strategy

To put it simply, without a strategy it will be especially difficult to turn a profit and likely even more difficult to gain the trust of investors so that they will want to let you invest their money for them. To this point, it is also particularly important to develop a strategy that is clearly defined and relatively easy to comprehend. This is because your team, and investors, must be able to understand — at least at a basic level — what you are planning to do. Secondly, it is important to test your strategy and document its success. While it is true that ideas can be awesome, they often do not hold much weight with investors without being tested in the real market first. Additionally, it might be a beneficial to research existing funds that use strategies similar to yours to gauge the likelihood for success or at least have some references that could back up your own ideas.

2. Establish a Strong Legal Team

In order to make sure that your fund is meeting all regulatory and compliance standards it is nearly crucial to hire experienced legal counsel. In fact, legal assistance can be viewed as an investment in your own fund as it could save you from legal pitfalls while also aiding in relationship building. At the same time, the willingness to spend money on your own business will often help your fund to gain legitimacy in the eyes of others within the industry since it shows that you plan to be in the industry with them for a long time. Essentially, it shows that you are taking your fund seriously and they should too.

3. Find Your Competitive Advantage & Exploit It

Finding, or creating, a competitive advantage for your fund over others competing in the same market is possibly the most crucial thing you can do to help build success from the start and maintain it over time. Similar to many other industries, there are multiple different types of competitive advantages. For instance, there are marketing advantages, resource advantages, and information advantages, just to name a few. The term ‘marketing advantage’ can refer to many different things ranging from a memorable name to a long-standing relationship with a high net worth individual (or family office). A resource advantage, on the other hand, could be the ability to launch your fund as a subsidiary of a larger company such as an asset-management firm. Finally, information advantages can be achieved through your own research, maybe you are interested in a field that is generally considered a niche and offers a great investment opportunity. However, it is wise to be careful with regard to how you are receiving your information and who you are receiving it from, always check with your legal team if you are unsure to avoid compliance and regulatory issues.

Even if you are just now becoming interested in investing, it is never bad to look ahead at what the future might hold for you. Further, by better understanding how different funds are created, function, and sustain themselves, you are likely putting yourself at an advantage if you do want to pursue a career in this field. Just remember, knowledge is power and it is never too soon to start planning now if you want to do something big like manage your own hedge fund some day!