How to Set Up Your Own Hedge Fund
By Hannah M. Terhune, Esquire 2006©
Capital Management Law Group, PLLC, Washington, D.C.
        
By and large there seem to be two groups of people in circulation these days: those who want to run a hedge fund and those that want to invest in them. For many, the dream of running a hedge fund is realized once they move beyond the bounds of cocktail party chatter and investigate for themselves what is required to set up a hedge fund.

Luckily for Main Street, the answers from Wall Street are amazingly simple. Today, pretty much anyone with $15k or thereabouts can start a hedge fund. What money cannot buy is talent, courage and entrepreneurial drive. Traders and money managers often dream about one day running their own hedge fund, managing large sums of money, and competing toe-to-toe with the world’s top traders. For the uninitiated, the first step toward setting up a hedge fund is getting a better grasp on what exactly a hedge fund is and what it is not.

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Do Hedge Funds Pose any Risks for the Global Financial Markets?

The global hedge fund industry has continued to grow during the past decades, and as their influence increases so also are the concerns of some market analysts who believe that Hedge Funds pose dangers to the global financial markets. These fears are always exacerbated particularly during high market volatility. But there remain no scientific studies, which demonstrate empirically that hedge funds are dangers to the financial markets.

At the turn of the century, hedge funds globally managed assets in the range of $500 billion. In 2006, the exponential growth in global assets managed by hedge funds has pushed the level of assets under management to the range of $1.4 trillion.  But concerns about the dangers of Hedge Funds to the global financial markets may be exaggerated. In the past hedge funds utilized high leverage in trading, which may have been a factor in the enormous losses encountered by the Long Term Capital Management when the fund collapsed in 1998. Today contemporary hedge fund managers have lowered the levels of leverage employed in trading.

During the Asian financial crisis, many including some Asian Tiger governments charged that hedge funds were responsible for the crisis of Asian currencies, but a study by the International Monetary Fund concluded that hedge funds were not responsible for the Asian financial crisis. But while no evidence have been shown to support the claim that hedge funds pose dangers to the financial markets, hedge funds are generally blamed any time something goes wrong in the markets.

Few years ago, the U.S. Securities and Exchange Commission introduced its Hedge Fund Regulatory initiatives aimed to increase scrutiny of Hedge Funds. The SEC scrutiny may also help to increase transparency of hedge Funds, to the level not seen in the past. . In February 2007, a study group led by Henry Paulsen, the U.S. Secretary of the Treasury, recommended new proposals. The group recommended that the minimum net worth required for individual Hedge Fund investors be increased from $1 million to $2.5 million, but the hedge fund industry was left without any further regulatory proposals, indicating that no major hedge fund regulatory issues are pending, even after the study took an evaluative examination of the economic risks of hedge funds.

But critics of hedge funds have always ignored the potential benefits of hedge funds through the liquidity it affords to the markets. Hedge funds would always have a place in investment portfolios; for one thing their role for portfolio diversification would always be in demand. Today hedge fund investment strategies have increasingly been adopted by many conservative investment funds such as Pension funds, such shift illustrates that hedge funds have now become part of the mainstream investment asset allocation process.

Paul Oranika
Editor-in-Chief
Hedgefundexchange.net
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What is a Hedge Fund?

A Hedge fund is an investment vehicle, which can use many different strategies in the pursuit of their trading objectives. They can take long or short positions in equity markets use arbitrage, trade options, commodities, bonds and other derivatives trading instruments available for trading.  Hedge funds simply trade any asset, which the fund manager believes can offer potential benefits for its investors, at reduced risk.

How many Hedge Funds are available globally?

The number of hedge funds in the world is in excess of 8,400

What is the total global asset managed by hedge funds?

Globally hedge funds manage about $1.3 trillion in total investor assets.

What is the annual growth rate of Hedge funds?

Hedge funds have been growing at the rate of 15-20% annually

What types of Strategies do Hedge Funds use in trading?

There are over 14 strategies used by hedge funds in trading. Some of the most common strategies, include Short Selling, Global Macro, Equity Neutral, Merger Arbitrage, Convertible Arbitrage, Emerging Markets, Long Equity, Distressed Securities, Futures and Options, plus many more.

What types of Hedge Funds are available?

There are two types of hedge funds, a domestic hedge fund, and offshore hedge fund. Domestic hedge funds are based in the United States and are organized under the laws of the United States. Offshore hedge funds are generally domiciled in foreign low tax jurisdictions such as Cayman Island, Luxemburg, or Dublin.

Are Hedge Funds Regulated?

In the United States, the U.S. Securities and Exchange Commission lightly regulate funds.

Can I invest in Hedge Funds?

Anyone that meets the US Securities and Exchange income requirements can invest in Hedge Funds.

What is the Securities and Exchange Commission income requirement for investing in Hedge Funds?

Any investor that meets the U.S. Securities and Exchange requirements of accredited investor as stipulated in the Securities and Exchange Act of 1940 can invest in Hedge Funds. Accredited investors must have a net worth of over $1 million.  You may also qualify to invest in hedge funds if you earned $200,000 in the past two years not including your spouse’s income, and you expect to continue earning such income in the near future. For husband and wife the combined net assets must be at least $1.5 million.

Do Hedge Funds have minimum investment requirements?

Yes, each hedge fund sets its minimum investment levels. The minimum investment requirements for hedge funds differ from one hedge fund company to the other. Newer hedge funds may charge between $250,000-$500,000. Hedge Fund of Funds may charge smaller amount. The older and more established hedge fund managers may charge much more as their minimum investment, may range from $1million to $5 million and possibly more.

Other than individuals who else invest in Hedge Funds?

There are many other institutions that invest in Hedge Funds, including Family Offices, Pension Funds, Endowments, Insurance establishments, Banks and others.

What types of fees are charged by Hedge funds?

Hedge Funds charge two kinds of fees, the annual management fee, and the Performance fee.

What are the average fees charged by hedge funds?

The annual management fee may range from 1-2% of the total assets, while the performance fee may range from 15-20% of the realized profits. The performance fees are waived if the fund made no gains during the period in question.

What is the job of a hedge fund manager?

The hedge fund manager oversees the day-to-day trading decisions of the fund, in addition to other important tasks of the firm. Hedge Funds are generally organized as limited liability companies, where the fund’s risks are shared by the limited and general partnerships of the said fund. Fund managers are highly skilled and talented in asset management. Their pay is tied largely to the amount of gains they make in their managed portfolios.

When can I withdraw my assets from a hedge fund?

Your assets invested in hedge funds may only be available for withdrawal on quarterly, bi-annual or annual basis. Each fund establishes rules, which guides investor withdrawals from their account. During a lock-up period no money may be withdrawn from individual hedge fund accounts.

What are Lock-up period?

Lock-up period refers to a specified period when investment assets in the fund may not be available for withdrawals. Until the expiration of the lock-up period, investors may not be able to withdraw any money from their accounts. Locks up periods differ from one fund to the other, and some funds may not have lock-up periods.

Do Hedge Funds Use Leverage in Trading?

Many hedge funds use differing levels of leverage in trading. However, following the collapse of Long Term Capital Management over a decade ago, the levels of leverage in trading by hedge fund managers have been trending lower.

What is the average annualized hedge fund return?

According to Credit Suisse/Tremont,  between 1994 and 2005,  hedge funds,  produced an 11 per cent average annual return. That means that hedge funds generally outperform the returns of the general market indexes, such as S&P 500.

What is Hedge Fund of Funds

Hedge fund of funds are smaller pools of funds, which may invest in other hedge funds. They generally require smaller minimum investments, typically about $25,000. Their purpose is to achieve higher diversification through investing in multi-manager, multi-strategy funds, thereby limiting risk exposures of investing in one hedge fund. Many fund of hedge funds are registered with the Securities and Exchange Commission.

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