A Guide on Starting a Hedge Fund
There are numerous reasons why foreign investors are interested in hedge fund startups. Hedge fund managers can carry out multiple investment strategies, which can yield the highest return on investment. However, in order to start a successful hedge fund, the businessmen will need to establish a reliable business plan, clearly presenting their strategies.
Below, our editors have gathered some useful information on hedge funds and their creation and explain the steps for a quick setup of one of the most employed types of investment funds in the world.
|Availability across the world|| |
Yes, possibility of creation in most countries in the world
Types of investors they address
|Qualified and professional investors|
Legal forms used for creation
|Corporate forms (companies with variable and fixed capital), non-corporate forms (partnerships, other types of entities).|
|Authorization required (Yes/No)|| |
Yes, in accordance with the country of registration
|Investment strategies accepted||General and selective trading, long-pull strategies|
|Local manager required|| |
In accordance with the legal requirements of the country of registration.
|Appealing destinations to be created in||Singapore, Hong Kong, Switzerland, Luxembourg|
|Hedge fund startup use (Yes/No)||Yes|
|Advantages||Popular all over the world, possibility to use for cryptocurrency investment fund creation, low taxes, quick registration procedure.|
The hedge fund – main characteristics
In order to understand why the hedge fund is preferred by investors all over the world and why it is also available in high-end jurisdictions such as Luxembourg, Switzerland, Singapore, and Hong Kong, you should know that this an alternative investment fund relying on pooled funds using a wide variety of strategies that provide active returns for the investors.
In most countries, hedge funds are characterized by the following:
- they are widely used on both domestic and foreign markets, hence their popularity;
- they are employed with the purpose of generating important returns;
- they can be used by accredited investors only, however, they are subject to less financial market regulatory authorities’ supervision;
- they are easier to set up compared to other investment funds, such as mutual funds.
If we managed to convince you why hedge funds are worth your attention, you can start putting together a plan for starting a hedge fund.
What to consider when starting a hedge fund
If you decide to create a hedge fund there are a few mandatory steps to complete and the first one is to choose the jurisdiction in which it will be registered. Then, the legal form for the structure to host the fund must be selected. For these two steps (jurisdiction and legal form), you will need to get acquainted with the investment fund legislation. A change to the Companies Act in May 1998 allowed for the introduction of the segregated portfolio company in Cayman, a type of exempted company. The idea behind an SPC is that a business, which maintains its status as a single legal entity, may create segregated portfolios each of which has its own legal separation from the general assets and liabilities of the SPC and which can be used to create investment funds.
When choosing a jurisdiction, it is good to have in mind a few destinations where these types of funds thrive and among these, the specialists we work with can recommend some.
Once the country of starting the hedge fund has been selected, you can proceed to create an investment strategy. As mentioned earlier, hedge funds can employ various strategies. The most common investments strategies are:
- general trading where the investor will predict and participate in accordance with what happens on the market;
- selective trading which implies picking stocks expected to perform well on a short period;
- buying at low prices and selling at high ones, however, this requires patience and good anticipation of the market;
- long-pull selection where the investor will choose stocks they anticipate to grow quicker than others, however, this is a long-term investment strategy.
Once the strategy is made, you should consider the ways in which the money will be raised. This is will be one of the most important challenges when going for a hedge fund startup.
The most common ways of raising money for a hedge fund are usually your own funds, family, and friends’ money, followed by seeders and foundations that can be contacted for money.
In recent years, cryptocurrency hedge funds have become popular in countries that have created the legal framework for the issuance of digital tokens. Among these, Luxembourg, the Netherlands, Malta, and Singapore are among the most advanced states to provide for the creation of cryptocurrency hedge funds.
Legal requirements to respect when starting a hedge fund
There are various requirements to respect when deciding to set up a hedge fund, and one of the most important is the laws of the country in which the fund will operate. Each state has its own regulations with respect to the creation of investment funds which is why it is important to first verify the conditions applied before choosing a jurisdiction.
Other legal aspects that need to be considered when setting up a hedge fund is the structure employed for the activities. From limited liability companies to partnerships and dedicated investment vehicles, each has its own registration requirements which can imply a specific number of participants and management structure. Also, the managers must have special qualifications or experience when it comes to the administration of the fund.
The licensing requirements that need to be complied with are other aspects that need to be considered when choosing a jurisdiction for a hedge fund startup.
We have dedicated teams of affiliates in some of the most important investment fund jurisdictions in the world. They can offer information on how to choose a suitable country for such operations.
You can find out how to open a hedge fund in the infographic below:
The structure of a hedge fund
One of the important aspects to consider when setting up a hedge fund is its structure. A hedge fund, no matter the country it is registered in will usually have the same structure which will imply an investment manager who will be responsible for implementing the investment strategies and decision-making actions. Then, the fund will need to appoint a broker to handle operations such as the amount of money to be used as loans. All hedge funds must also have their financial statements audited by an external auditor.
The investors are one of the most important actors in the fund, as they will be the ones putting the money together. In the case of hedge funds, natural persons and companies can be investors.
Hedge funds can also require the attention of legal supervisors who can guide on legislation matters with respect to the jurisdiction they are set up in.
Steps for creating a hedge fund
Below, we present some of the steps for starting a hedge fund:
1. Choose the appropriate team
A successful hedge fund will carry its operations through the team that will represent it. For this, investors will need to search for the most suitable candidates to complete various financial tasks. In this sense, the hedge fund will need the following:
• junior analysts;
• junior traders;
• a chief financial officer.
More details on how to set up an investment fund as a hedge fund are available in the video below:
2. Choose a suitable business name
Those interested in how to start a hedge fund will need to register the vehicle under a designated business form. The company’s statutory documents will also require an official business name and it is advisable to choose an appropriate form that will highlight the professional outlook of the company. In this sense, words such as ‘’group”, “asset management” or “partners” are strongly recommended.
3. Pool the necessary capital
Starting a hedge fund will require a considerable initial capital, depending on the country in which the fund is registered. For example, the regulations available in the Netherlands can be different than the ones available in Luxembourg or in other jurisdictions presented in our magazine.
4. Learn the legal requirements for hedge funds
Depending on the country in which the hedge fund will be registered, the investors will have to comply with a set of regulations. To give an example, in Cyprus, the hedge fund market is regulated by five different rules of law, amongst which we mention the Investment Service Law or the International Collective Investment Schemes law.
5. Hire a team of specialists
Businessmen interested in how to start a fund are strongly advised to receive legal and financial assistance during the incorporation procedures.
Raising money for a hedge fund
One of the main particularities of starting a hedge fund is related to raising capital for it. Considering that in certain countries there are no specific capital requirements that investors must contribute with, the creators must gather funds. Luckily, there are several ways through which funds can be gathered, and among these are:
- savings that cam be used for the establishment of the fund;
- crowdfunding platforms.
In the past few years, most hedge funds were created as cryptocurrency funds, as crowdfunding represented one of the main ways through which such structures can raise money.
If you have any questions on how to start a hedge fund, our partners can answer them. They can also guide you through the main requirements to comply with in respect to its creation.
The difference between hedge funds and other types of funds
Deciding to create an investment fund is an important decision as there are many factors to consider. Among these, choosing the type of fund bears an important weight on the future owners.
Out of all types of funds, the hedge fund implies more risks compared to others which is why it is good to note some of the key differences between this and other investment vehicles.
Most of the time, investors can choose between private equity, mutual and hedge funds.
From several points of view, hedge and private equity funds are similar. Among the aspects they resemble is the appeal to high net worth individuals, however, the main difference between them consists in the investments they make: the hedge fund will gather money through various means in order to pay their participants, while private equity funds will invest in company purchases or shares in companies traded on the stock market.
Hedge funds can be created as alternative investment vehicles as they can invest in a wide range of assets, among which stocks, bonds, currencies (such as virtual coins), commodities and derivatives compared to equity funds. Also, the first category is accessible to more investors compared to the second one.
The greatest advantage of a hedge fund compared to a private equity one is that its main interested in obtaining the highest return in the shortest period of time. On the other hand, the private equity one targets investors interested in long-term investments.
Another comparison often made is between hedge and mutual funds. The main differences between the two types of funds reside in the products they offer with the specification that mutual funds provide regulated assets that can be traded daily to the general public. In contrast to these, hedge funds are private and target accredited investors only.
Hedge funds will usually imply more risks because the investment strategies they use compared to mutual funds are provided by institutional managers through a large pool of assets that target retail investors.
The creation of an investment fund must be carefully considered especially when having to choose between the type of fund to be set up. Hedge funds are among the most employed all over the world because of the wide variety of assets they can invest in. The appearance and expansion of the cryptocurrency market have led to the increase of the assets these funds can pool and offer to their investors.
If you want to create a hedge fund and need guidance, our affiliates are at your service with information.
The hedge fund industry around the world
Hedge funds continue to remain one of the most popular types of investment funds in the world. UK bank Barclays has issued a report based on the input of 170 investors all over the world. For 2019, the survey indicates that:
- equity and long-term investment returned the highest yields in the first half of 2019, with an increase of 9.5%;
- in the second half of the year, 1/3 of the interviewed investors said they were interested in generating new investment strategies;
- in the same period of time, nearly 60% of the funds had planned to make allocations to new launches;
- 46% of the respondents said that they were also looking into private equity and venture capital investments in the future.
We invite you to study on a regular basis our online magazine to find out further information on setting up an investment fund in one of the most important jurisdictions so that you can make an informed decision on this matter. Our partners can help investors with solid information on the financial legislation applicable in their preferred jurisdiction.