How to Start a Hedge Fund from Scratch

Overview

• Discusses the process of starting a hedge fund from scratch.
• Covers key topics: definition of a hedge fund, building and launching one, licenses needed, and the intricacies of managing a fund.
• Speaker has extensive experience, running an eight-figure hedge fund, having launched and sold multiple funds.
• Authored by someone with family ties in the investment fund industry.

Success Stories of Fund Managers

• Warren Buffett: Started at 25 with $15,000, now one of the most successful investors.
• Ken Griffin: Started trading at 19, first fund at 20, billion-dollar fund by 30.
• Ray Dalio: Began managing funds at 26.
• Kathy Wood: Started in her 50s, slow start but successful over time.
• Robert F. Smith: Launched Vista Equity Partners at 39.
• Grant Cardone: Launched Cardone Capital at 52, now very successful.

Definitions and Structures

Types of Investment Funds

• Hedge Fund: Invests in public securities (stocks, bonds, crypto).
• Private Equity: Buys private companies.
• Venture Capital: Invests in early-stage startups.

Basic Fund Structure

• Investors contribute to a pool of money.
• Managers make investments from this pool.
• Profits are split between managers and investors (commonly 2% management fee, 80/20 profit split).

Detailed Structure

General and Limited Partnership

• Limited Partnership (LP): Holds the fund’s money.
• General Partner (GP): Manages the fund.
• Includes a Management Company for operational purposes.
• Governed by legal documents LPA (Limited Partnership Agreement) and PPM (Private Placement Memorandum).

Licensing and Costs

• Initial setup costs around $30,000 for legal documents.
• Licenses required: Series 65 for investment advice, possibly not needed if using a prime broker.
• Prime Broker: Holds licenses, allows leverage and margin trades.

Hedge Fund Incubator

• Cost-effective way to start, around $2000-$5000.
• No investors, no LPA/PPM needed initially.
• Partners become part of the GP.
• Allows building a track record before going full scale.

Fund Launch Formula

1. Find a Credible Investment: Identify asymmetrical risk vs. return.
2. Frame the Fund: Define structure, lock-up periods, withdrawal terms, etc.
3. Pitch to Investors: Obtain verbal commitments, refine based on feedback.
4. Legal Setup: Finalize legal documents once framework is validated.

Conclusion

• Emphasizes building a fund that investors want.
• Suggests iteration and testing before committing to legal setup.
• Recommends ongoing learning and adaptation to ensure success.