How To Start Your Own Hedge Fund

Filed in archive FAQ on August 21, 2006

Hedge funds make a lot of money - so much that you may have wondered if you could start your own. Fortune magazine has an article explaining how.

First, I needed a lawyer to create investor contracts and such, at a charge of $400 an hour, or about $30,000 a year. Other gotta-haves are an auditor ($30,000 a year) and an accountant (ditto).

A back-office outsourcer to handle stuff like shareholder communications runs as much as $75,000 a year - though a conference exhibitor that uses workers in India was peddling itself for about half that.

I also needed to trade through a brokerage. One exhibitor uses Bear Stearns and Goldman Sachs as clearing agents. ("If you use us, you can use Bear and Goldman's names on your marketing material. It really makes you look legit," the salesman told me.)

Then there was the optional compliance consultant ($15,000-ish), who ostensibly would keep the regs away. We're talking $200,000 just to get going!

Ah, but that's why there are funds of funds - hedge funds that invest solely in other funds - aching to provide seed money to folks just like me! They'd supply me with $20 million as long as I handed over half my annual fees and profits. Bill, a former Merrill Lynch broker who'd spent the past two years "sailing around the world, just diggin' life," said the terms seemed onerous: "They'll own you, man!"

Since hedge funds have become a big business, there are plenty of people willing to help you out. So check out the article, attend a conference, and find a few investors. When it is that easy, it makes me wonder if a hedge fund bubble is coming.