How to start a hedge fund
It is not unusual for most of us to think to start a hedge fund is daunting and an area reserved for the very wealthy. Sadly this is a fallacy that so many now embrace, as a result fewer people are conscious of even how to start their own investment fund. I have had the misfortune of starting a business and becoming an entrepreneur (Not just saying that because I opted out of running my own companies). I can safely say running your own company is a risky investment not only is this a black hole for your capital or those of others, it is near impossible to quantify risk, especially when that word ‘marketing’ comes into it. Statistically 70% of businesses fail before their 10th birthday; there is no single reason for this happening only it is a reality that we shall face if we choose this path.
I prefer not to put my money into a black hole, I want to see my money work and I would also like to quantify my risk and my return. This is the art to becoming a successful investor. I will be exploring the steps anyone can take to start a hedge fund. Below are some of the steps you can take to start a hedge fund anywhere in the world
Step 1 – If you don’t already have capital then it is essential that you take gainful employment and start building your capital through saving. This simply means no more Armani Jeans or dining at that Italian restaurant you love so much. It is said most people spend 60% of their income on accommodation; you may need to get that number to 30%. If you are married then your spouse has to be on board meaning he/she has to understand the importance of what you are doing because they may have to cover a lot more of the expenses as you capitalize. Note, Warren Buffet and others raised a significant sum from employment. The idea is to be able to quit at some point.
Step 2 – Potentially 2 or 3 years down the line you should have enough capital providing step 1 goes to plan. Next stage should involve a lot of self education on various investment vehicles and how they could be potentially utilized for short term and long term gain. Knowledge in Technical and fundamental analysis is crucial as part of your educational process, this should can be achieved between 6 month to a 1 year depending on your ability to absorb information. I will assume that the smart individual would have been gaining education from step 1, at this stage it should be really a refresher.
Step 3 – Building your investment strategy will be your key focus, this should include a detailed business plan covering your investment objectives and details on your overall portfolio make up. This will define whether you fail or succeed, so take this bit seriously. This can take you a month or two to prepare. At this stage you should be ready to step into the world investing with your own hedge fund.
A hedge fund should be typically diverse and protect the investor from exposure to a single asset. A hedge fund has the ability to go both long and short meaning that regardless of the market your investment fund can make a profit. Assets in a hedge fund include Equities, Currency, Fixed income, Real Estate and Commodities. Your hedge fund can take advantage of leverage to increase your purchasing power and in turn make larger profits but similarly losses can be greater if used incorrectly.
Today you can invest in equities via CFDs (Contract for difference). 100 shares at $100 per share = $10,000 investment with a 5% margin requirement only $500 is required as initial risk capital to hold the position. The futures market is also a cheap way to invest in commodities like Gold and Fixed income like US Treasuries allowing you hold a contract against the value of the underlying asset again allowing leverage to increase potential gains. A well managed hedge fund can produce double digit returns like Paul Tudor Jones’s fund that delivered a 62% annual return. As your fund gains in value the possibility exists to invest in physical assets like real estate and physical bullion. The key to point to remember is that anyone can become an investor with willingness and determination to succeed.