raising capital for your hedge fund

An investment fund’s success is heavily reliant on a fundraising team’s capability to raise capital. Fund managers need enough capital to manage successfully and execute their investment strategy. 

There are several things to consider when developing a plan to attract capital. Where will your investors come from?

Here is a list of 5 types of investors:

1. You. If a newly organized investment fund has no track record but has enough trading experience, then you can contribute seed capital to launch the fund. Since you are seeding your own fund, ask your fund administrator for a reduced monthly fee until they can attract more investors. 

During this time, the admin will log your trades, produce monthly accounting statements as well as calculate your net asset value (NAV). You can waive the performance/management fee as well.

Most investors will be more comfortable investing in a fund if they know that the managers themselves have “skin” in the game.

2. Seed investors. Seed investors frequently invest at the early stage of a hedge fund’s development, including start-up. Oftentimes these investors might look for certain benefits, such as reduced performance/management fees associated with making the initial investments.

Depending on the capital required, you might even consider sharing some of the performance fee for a certain time.

3. High-net-worth individuals. High-net-worth (or HNW) investors typically invest on an individual basis. These HNW are made up of doctors, lawyers, CPAs, C class executives, professional athletes, and entrepreneurs. These HNW individuals usually own four cars or more, have two to three homes worldwide and either owns a yacht or a private jet – sometimes both. 

Once a newly organized investment fund has seed capital operating in their fund, especially if part of the capital is from the manager, you will have a good chance of securing a comfort level with these guys.

4. Family offices. Forbes magazine defines a single-family office as an organizational structure that manages the financial and personal affairs of one wealthy family.  Family offices will normally invest in a blend of both start-up funds and established firms. They are more likely to invest in funds with fewer assets under management. 

The “gatekeepers” of this investor group are not easy to penetrate. You will need to spend a considerable amount of time building a rapport with this individual. It’s all about trust and credibility.

5. Institutional investors. Institutional investors include pension funds, foundations, and funds-of-funds (FOF). 

Institutional investors, especially those that manage money for other individuals, have a fiduciary responsibility and are more likely to scrutinize a hedge fund’s size and track record. 

They often look for larger funds that have sizeable assets under management and have had a strong performance record for several consecutive years. Different types of institutional investors include:

· Pension Funds. 

· Foundations. 

· Fund of Funds. 

A word of caution. Beware of Unlicensed Introducing Agents

The U.S. Securities and Exchange Commission (SEC) is specific when it states (Securities Act of 1934) that no U.S. person can be compensated for referring/introducing capital in a private/public offering unless they are properly licensed (i.e. registered broker-dealer). 

A person who sells securities that are exempt from registration under Regulation D of the 1933 Act must register as a broker-dealer otherwise it is illegal to pay them.

You as a fund manager have a fiduciary responsibility to safeguard your investor’s capital. It is always an extreme privilege for an investor to entrust their capital to honest, intelligent, and compliant managers to carefully manage.

Contact us to learn more about starting a hedge fund.