Launching a fund requires proper guidance, support, and a robust business plan. The launch process is not an easy or inexpensive undertaking, but it can be both personally and financially rewarding. Below are some best practices to consider when starting a fund.
Develop an effective investment strategy that can position the fund to become a leader in its market and ensure long-term sustainability.
As the business environment becomes increasingly competitive, devising an investment strategy allows the manager to determine the markets it wants to participate in and the tools it will need to implement its plan. The fund should clearly define its objectives and goals so that potential investors can have a clear understanding of the fund’s mission. Some additional considerations to keep in mind are the fund’s sector and geographic focus.
Set up a detailed strategic business plan.
A business plan not only supports the manager in establishing specific guidelines but also helps it focus on short-term and long-term objectives. A business plan will usually consist of a budget, cash-flow projections, expenses paid by the management company or absorbed by the fund, and a timeline for execution. A solid business plan contains growth strategies, a marketing plan, and a detailed executive summary with a conclusive section tying all these areas together. The business plan should also be refined by external service providers and other industry specialists.
Invest your own capital and use a pitchbook when approaching potential investors to raise capital.
Another consideration is your ability to raise capital. While your initial sources of capital will likely include friends and family, other sources such as hedge fund seeders, high net worth individuals, family offices, endowments, pensions, insurance companies and other institutional investors will want to see a favorable track record before they will invest. Potential investors expect you to invest a significant amount of capital to demonstrate that you have faith in yourself and your strategy.
Outline your marketing plan in a pitchbook. As you reach out to investors, expect to discuss your background and experience, your investment process and strategy, your track record and your expected returns for the fund. Be mindful of legal issues such as limiting your marketing efforts to accredited investors.
The dollar amount you need to raise for a profitable fund depends on your costs and fee structure. While at least $10 million in assets under management may get you started, $100 million is more appropriate if you want institutional investors to take you seriously.
If you are confident that you can raise sufficient capital, reach out to the right advisors and attorneys to discuss the legal process of raising a fund.
Fundraising is heavily regulated and involves many legal and regulatory requirements that a fund manager must adhere to in order to comply with securities law. A qualified attorney must be involved in the process and inform the fund about the rules and regulations associated with fundraising, investing, and managing a fund. Some questions to discuss with an attorney include: Who will I be able to raise money from? How can I raise the money? What kind of money can be invested? How much will the legal work cost? Having the fund’s marketing materials and fee structure ready for review can help make the legal process much more efficient.
It is highly recommended that your documents be prepared by an attorney familiar with hedge fund regulations. Startup legal costs can run from $35,000 to more than $100,000.
Select the right management team members to ensure the growth and sustainability of the fund.
An effective management team provides a strong foundation for the fund to grow. Having a strong management structure can improve key areas of communication flow and decision-making. The fund manager must decide on the roles of the firm’s leaders, such as the role of the general partner or portfolio manager, as well as the establishment of a management team, including the CEO, CFO, CIO, and CCO. For start up funds that may not have the capital for these positions, you can lower your salary costs by outsourcing these roles. The tradeoff is that these professionals would not be fully dedicated to your fund and may not be available to you when needed.
Cultivate the necessary external connections.
To ensure the necessary support, a fund should consider engaging attorneys, independent accountants, fund administrators, brokers, and other external consultants. Additionally, a fund can benefit from developing banking relationships, outsourcing to a professional employer organization (PEO) to handle human resources tasks, and ensuring it has the proper IT support. Remember that an audit and tax preparer are essential. The fund will require an annual audit and a tax return needs to be prepared with K-1s being provided to the investors. These decisions can optimize efficiency and provide a strong, reliable network.
Starting a fund can be challenging especially for those who do not have prior experience in doing so. It requires working with experienced accountants and attorneys to refine your business strategy, business plan, and legal considerations. The above guidelines can be used as a roadmap for establishing a foundation for your fund. If you are considering starting a fund, have questions, or would like our assistance, please contact David Horton or your Anchin Relationship Partner.
