After finding your edge in the financial markets you may probably aspire to become an investment manager. You will need the right mix of trading success, industry experience, and business know-how in order to make it as a hedge fund manager in what has become a highly competitive industry. To attract sophisticated investors, the prospective hedge fund manager will also need to engage a capable team of service providers to start the fund off on the right footing. This article is to provide an overview of the process for would-be managers in starting a hedge fund.
Starting A Hedge Fund Overview
Starting a hedge fund demands a concentrated effort on the part of the manager, sponsor, and key personnel that will form the core operating team for the fund and adviser (e.g., management company). Managers and sponsors that do not effectively delegate launch responsibilities among team members and service providers will find the process to launch a hedge fund to be a challenge. This does not have to be the case.
Challenges With Starting A Hedge Fund
Typically, the greatest difficulty in launching a hedge fundwill be attracting investor capital in an amount that provides the would-be manager with a platform to grow a professional advisory business (please see our discussion further below on capital raising). Besides capital raising, the investment advisor registration process can also present a hurdle for advisers who are unprepared for the regulatory requirements of state or federal securities laws.
Depending on where the hedge fund manager’s place of business is located, where investor solicitation activities will occur, and applicable state rules, the fund’s management company may be required to register as an “investment adviser” at the state level, even prior to the fund’s launch. Only a handful of states are “friendly” to startup hedge fund managers and do not require registration until the fund’s adviser accumulates a significant number of clients or level of assets under management. However, in the past few years, many states and the SEC have adopted “private fund advisers” exemptions to allow investment advisers whose only clients are private funds (and not separate managed accounts) to avoid registration.
For hedge fund managers that do need to register, investment adviser registration will generally require that the principal or principals of the management company – those persons that will be involved in client solicitation or investment management roles – take and pass the Series 65 examination (although certain waivers may be available). Anyone who supervises personnel that are involved with client solicitation or actual money management functions will also need to meet this exam requirement.
Registered investment advisers will be subject to a review and approval process by their home state’s securities division. Depending on the state, this process can take anywhere from several weeks to several months. Also, any would-be hedge fund manager with a significant criminal record, substantial past industry misconduct, or an otherwise questionable personal record may be disqualified from state or SEC investment adviser registration.