Start Up Hedge Funds: 3 Tips to Raise Investment Capital

May 27, 2008 | 4 Comments

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For most start up managers, the most difficult part of starting a hedge fund is raising investment capital.  I’m hoping you have read our previous posts about how to start the hedge fund.  Without a sound foundation for your business, it won’t matter how much investment capital you raise if your business is plagued with problems.

1. Rarely does someone invest their hard earned money with a manager solely based on theoretical results.  Therefore, you will have to put some “skin” in the game and invest your own money — and demonstrate results.  If your strategy is working and you begin to talk to others about your success, you will begin to attract interest — and investment capital.  Ask yourself, “how much of my own capital am I willing to invest?  As my fund grows, what percentage of my own capital will I keep in the fund?”  Tip: keep a substantial portion of your own money in the fund — it demonstrates your confidence in your strategy and abilities.

2. Make a detailed list of relatives, friends and business contacts who might be interested in making an investment. These people are “warm” contacts and are already comfortable with you. Contact them and tell them about your new venture and why you think you will be successful. Be sure your fund is equiped to accept investment capital immediately.  This goes back to my preface to this post — do you have all the necessary pieces in place for your fund?

3. Develop your pitch.  Keep it focused. Most likely you want to put together a Power Point presentation about your fund and strategy, so be sure to keep the number of slides to a maximum of 10.  I like to refer people to Guy Kawasaki about how to keep a pitch focused.  Kawasaki explains about how to put together a pitch for investors.  He offers great advice that applies to both high net worth investors as well as institutional investors.

Stay tuned.  We will  be publishing more tips on this topic in the future.

How NOT to Start Your Own Hedge Fund

August 29, 2007 | Leave a Comment

I have heard about these hedge fund “meet and greets” before, but this one sounded completely awful.  The Fourth Annual New York Hedge Fund Startup and Business Development Forum  (last year) sounds like a shopping mall for turn-key “solutions providers” hawking their wares with wanna be managers hoping to bump into a high net worth investor or two. Of course this forum was held at an upscale facility - Gotham Hall in NYC – a place meant to imbue the feeling of class and professionalism.  From the sound of it, Fortune reporter, Marcia Vickers, seemed anything but impressed. 

It also sounded like a complete waste of time and money — aside from sleazy — with some of the service providers offering up some less than honest tips on how to domicile your fund in the Caymans while hiring an auditor to reset your NAV after you’ve had a good quarter or two so others wouldn’t know you have been trading your own money instead of investors’.

Tip: If you are serious about starting a hedge fund, stay away from these one stop shopping trips to hedge fund land.  Do some research and you’ll quickly find out the worthy service providers from the scags.

Wink, Wink: High net worth types DON’T frequent these events!  They’re too busy making money.

Got any stories to share about these things?  I’d love to hear ‘em.

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And That’s The Week That Was

August 27, 2007 | Leave a Comment

Attached/linked please find And That’s The Week That Was…the Brounes & Associates market/economic commentary for the week ended August 24, 2007.  The summer is winding down; folks are planning for one last Labor Day vacation getaway; schools are back in session; the NFL season is upon us.  And, yet, the business news of the day never seems to change.  Subprime, Countrywide, Fed actions, flight-to-quality…its beginning to sound like a broken record.  Subprime, Countrywide, Fed actions, flight-to-quality…its beginning to sound like a broken record.  Well, for a change, this week’s market movements had a positive feel (unless you owned the 3-month t-bill) as investors took another flier on equities.  There was a short-lived rumored Warren Buffett sighting, a Bank of America-led “bailout,” and some decent releases on the economic front.   At this point, we will take any positive news we can get.

Coming up in the week ahead:  Existing Home Sales (Monday), Consumer Confidence (Tuesday), GDP (Thursday), Personal Spending/Income (Friday)
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How to Start a Hedge Fund: Part 4

August 15, 2007 | Leave a Comment

This is the final installment in a four part Q&A on “How to Start a Hedge Fund” with Jeffrey F. Kuchta, CFA, Managing Member of Hedge Fund Launch LLC

HFL:Should I just hire an internal marketing staff?

If you have a sufficient amount of operating capital, then it may make sense to hire an internal marketing staff.  The key point is that most dedicated internal marketing professionals will require a salary, benefits, as well as a percentage bonus based on the capital raised and retained.  For some start up managers this is not feasible, for others with an appropriate amount of operating capital, this situation is preferable as there is more internal control over the activities of the marketers.  Most mature managers eventually gravitate toward hiring and internal marketing and client services team as operating capital is less of an issue at AUM levels greater than $250 mil.

HFL: I generate spectacular returns, and that’s all investors should really care about.  Why should I provide investors any sort of transparency?

Kuchta: The days of attracting and retaining investors solely by providing a great monthly return stream are largely gone.  Given the increase in hedge fund frauds and operational-related blow ups over the last decade, individual investors, institutions, fund of funds, and consultants are requiring greater levels of transparency before considering an investment with a hedge fund manager.  Add the fact that you are a start up, and the required level of transparency will be significant. 

You also must understand that you may be one of a number of hedge funds in an investor’s portfolio.  Most astute investors these days are methodically risk managing their aggregate hedge fund holdings and rely on a certain amount of transparency in order to properly manage their exposures.

HFL: What sort of transparency might I be required to provide?

Kuchta: In the initial phase, most investors will require references, background checks, a standard industry due diligence questionnaire, some sort of proof of prior success, numerous phone calls to discuss your investment process, risk management and operations, and on site visits.  They may also want to speak with all of your service providers to confirm that they have been retained by you.  On an ongoing basis, it would not be out of the ordinary for investors to want quarterly (or more frequently) updates via phone, in person, and/or in writing. 

It is a good policy to formulate a monthly or quarterly letter that explains performance for the past period, the outlook for the near future, and any significant operational changes.  You should also include portfolio exposure information in the letter to keep the investors apprised of the portfolio make up and any significant shifts in exposures.  These sorts of letters go a long way towards keeping investors informed and happy, even if the news is negative.  Hiding negative news from investors always ends in disaster.

The times they are a changin’.  Competition amongst start up hedge funds is heating up and it really is a buyers market.  In other words, investors wield a big sword in this game and start up managers are going to be increasingly required to cater to investors’ wishes if they hope to have any success in growing their operations.

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