How to start a hedge fund as an investment banker? The answer is complicated. While you may be in a good position to do so depending on your career and experience, setting up a hedge fund is a time-consuming and sometimes arduous task that requires a great deal of patience, skill, and funding.
That said, perhaps the most important part of being successful is conducting thorough research to determine exactly what it takes to start a hedge fund. Here’s our ten-step guide to get you started.
1. Get approval from your local financial regulator
Before you can set up your hedge fund business, you will need to obtain approval from the relevant authority or authorities that govern financial conduct in your area. In most countries, hedge funds are highly regulated – for example, the Financial Conduct Authority (FCA) in the UK cracked down on hedge funds following the financial crisis of the late 2000s.
In the EU, the Alternative Investment Fund Managers Directive (AIFMD) was launched in 2011 to ensure that hedge fund managers are transparent about their activities and adhere to strict regulatory rules. As an EU directive, the AIFMD brought the UK’s alternative investment sector into line with EU law, but since Brexit there has been some uncertainty as to whether the UK will retain this legislation or adopt its own version.
2. Leverage your network
You may have built a network during your employment at an investment bank, now is the time to use it. Reach out to friends and colleagues with investment experience in areas such as managed funds, venture capital or private equity, as they may be able to offer you valuable hedge fund advice.
3. Determine how you will raise your capital
Will you raise funds through hedge fund seeders, endowments, or your own savings? Maybe a combination of all three?
To convince investors that your investment strategy is worth testing, you might consider hiring a marketing expert to help you promote your business and strategy to your target market if that’s the case. is not your forte.
4. Stay up to date with cybersecurity threats
Ensuring your cybersecurity is airtight is an important part of maintaining your reputation and staying compliant with regulations.
The Hedge Fund Journal lists five “Digital Crown Jewels” that could be at risk from cyberattacks and expose your business to reputational/title risk, regulatory violations, business damage, fund risk and/or to a loss of investor confidence. These crown jewels are your: client data, proprietary algorithms/strategies, trading portfolio, ongoing ability to execute trades, and public/client website connection.
5. Prepare for the regulatory exam
Hedge fund compliance is complex anywhere, down to the wording you use to describe or market your fund. For example, the FCA said managers who describe their funds as “sustainable” should ensure the language is “concise and accessible” for consumers. This goes hand in hand with stipulations that other information for institutional investors must be clear and detailed.
Hedge fund managers operating in the UK will also be subject to anti-money laundering regulation – in particular the Money Laundering Regulation Act 2017, which was updated in January 2020 to incorporate the standards set by the Financial Action Task Force and the EU’s 5th Anti-Money Laundering Task Force. Money Laundering Directive.
In EU member states, hedge funds must be authorized by the competent authority of their home member state. AIFMs can ‘passport’ their services across the EU with one authorisation, and may be permitted to do so to non-EU AIF AIFMs, subject to AIFMD conditions (3).
6. Lay the legal foundations
As you will be operating in a highly regulated environment, there are many legal complexities to deal with, in addition to taking care of your hedge fund’s risk management. There are platforms that facilitate relationships between funds, investors and service providers, including Altallo, one of our partners. You can find administrative, legal, commercial, auditing and other services on this platform.
Depending on your jurisdiction, you may need to prepare a key information document if you sell products to EU retail investors. Packaged retail and insurance-based investment products (PRIIPs) require investment managers to make these documents available to EU-based retail investors in good time before they invest.
7. Choose your location carefully
The jurisdiction in which your hedge fund operates matters – you will need access to investment professionals, a good pool of talent, an understanding of the local market and applicable regulations.
8. Build a great team
Ideally, you want a diverse team with experience managing hedge funds. For example, if you were to hire a marketing manager, that person would preferably have significant experience marketing investment products to institutional investors and building lasting business relationships.
9. Create a Cohesive and Consistent Strategy
Whether you’re creating an ESG investment strategy, speculating on merger arbitrage, or investing in stocks and ETFs, your investors will want to see that you’re confident in your chosen strategy — and have a solid plan with data. to back it up.
10. Partner with experts
Advance your business by partnering with a trusted prime broker, like IG Prime. We rely on state-of-the-art technology and offer exceptional execution, custody, liquidity and risk management services.
The complexities of opening a hedge fund as an investment banker are many, but as long as you conduct thorough research and put your financial services experience into practice, you have a good chance of succeeding.