There are few ventures as lucrative as hedge funds, and everybody seems to want in on the action. Indeed in 2007 alone, a reported 1,152 new hedge funds opened for business. With the potential for making big profits and earning massive paydays, this is not entirely surprising. The interesting thing is that for all the complexity of the work they do, it is surprisingly straightforward to set up a hedge fund-if you know how. If you happen to have your eyes set on London, this article outlines 10 easy steps on how to set up a hedge fund in London.
Pick a Name
First things first, pick a name. You could choose a posh part of London for inspiration-for example, Thames River Capital. Just remember to keep it short. Length is not viewed upon as a sign of quality. You could also opt for a more aggressive name like Tiger Capital or Centaurus. It’s your choice, get creative.
Get a Brass Plaque in a Tax Haven
The Caymans and Bermuda are popular locations for legally registering tax funds, but Luxemburg and Ireland are also options. This is to avoid regulatory hurdles as well as the taxman. Theoretically, to set up a hedge fund in London it would have to be registered with the Financial Services Authority but never happens. “Nobody ever registers hedge funds in the UK. If somebody did, we’d be scratching our heads over how to deal with it. We’d have to devise something,” according to an FSA spokeswoman.
Define Your Fees
Hedge funds have an interesting standard fee structure, often defined as “two and 20”. This structure means you keep 2% of the client’s money, and then 20% of and then 20% of any appreciation on the hedge fund’s value. So, for example if your fund raises $1bn from its investors and achieves 30% appreciation in value over a year, the fund’s management earns $78.8 million.
This is the hardest part of setting up. For a hedge fund to have any credibility, it needs at least 50 million pounds in its coffers. In the UK, hedge funds are not allowed to advertise directly to the public, so negotiations and capital acquisition is done behind closed doors. The process is easier if you have rich friends who trust you or are well connected in the financial community. Good relations with the financial community are essential.
Rent Some Office Space
If you want to set up a hedge fund in London, then Mayfair is a good spot to set up shop. Rents can go as high as 90 pounds per sq ft which translates to about 180,000 pounds a year. In general hedges don’t worry about price anyway due to all the money they are making. The typical hedge fund office is as posh as it gets.
A hedge fund is only as good as those who work there. For the back office and accounting functions, you can easily outsource to any of the many firms that exist to cater to hedge funds. Getting the right fund manager is very important but not that difficult given the financial status of London: there is lots of experienced talent milling about for you to choose from.
Choose an Approach
Hedge funds are basically of two types: Quants or Fundamental. Quants are more high-tech and use complex software to follow normally imperceptible trends to trade at lightning speed. These software programs follow several variables such as a company’s price history and earning’s ratio in the decision process. Fundamental hedge funds are more traditional in their approach, spending time to research the prospects of commodities, currencies and companies. Staff of such hedge funds are normally present during shareholder’s meetings and talk frequently with corporate management. Both approaches have their merits and demerits.
Pick Your Strategy
There are several strategies which a hedge fund can adopt. It could go the classic route of becoming a “long/short”, taking straightforward position to bet on different shares to either go up or down. But there are other strategies to choose from, for example you could set up a “convertible arbitrage” fund, a “distressed debt” fund, or a “global macro” among others.
Working in finance can be pretty stressful and often takes a toll on employees. Many hedge funds combat this by setting up accessories to prevent burnout like game rooms, basketball courts, waterfalls and the like. You can do this too after setting up your hedge fund and the money starts rolling in.
Hope for the Best
1 in 5 hedge funds fail within the first year according to reports on the industry. This does not have to be you however. Now that you have set up your hedge fund in London, buckle down for the ride and hope for the best, putting all your skills and know-how to good use. The rewards will be massive should you make it to the other side.
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