Hedge Fund Launches – Top 10 Mistakes

Insights Hedge Fund Launches – Top 10 Mistakes Nicole Kalajian · December 12, 2023

Avoid these top 10 mistakes to successfully launch your fund:

  1. Wrong Team. Finding vendors that specialize in fund launches is critical. First, you should locate an attorney that specializes in the type of fund you intend to launch (g., hedge, futures, crypto, etc.)  In addition to helping launch your fund, your legal counsel will provide you with access to other key vendors, such as auditors, fund administrators, banks, and brokers.
  2. No Track Record. Sophisticated investors generally require a 3+ year track record. Other investors generally expect at least some real trading in the strategy (e., no paper or hypothetical trading results). Thus, if you haven’t done so already, open a brokerage account now and get some real trading results.  The amount invested is irrelevant.
  3. No Term Sheet. Using a term sheet before launching a fund is key. A term sheet allows you to ascertain investor interest, as well as their particular requirements. This saves you time and money, because then you can establish the exact structure and terms your investors want.
  4. No Time. Don’t wait until the last minute to get the ball rolling on the fund launch process. It generally takes about 3-6 months to launch a fund, so the sooner you start, the sooner you can take in investor money.
  5. Too Many Products. Each product you want to trade comes with its own regulatory requirements. For instance, if you want to trade securities and futures, then both securities and futures laws apply. Less regulation over your business is better, if possible.
  6. Too Many Investors. Due to complex laws in every jurisdiction, it’s typically better to narrow the jurisdiction of your target investors. For instance, if you are located in the U.S. and primarily have U.S. prospects, it’s likely best to start off with a U.S. fund. You can always create a separate fund for non-U.S. investors when desired.
  7. Inability to Advertise. Emerging managers are generally best off relying on the advertising rule that allows them to publicly market their fund, although accredited investor verification is required.
  8. Fighting the Law. If you thought you found a clever way around the law, think again. Operating a hedge fund involves strict legal requirements that must be adhered to. For instance, if you fail to register with the appropriate agencies, you could be deemed to be operating an unregistered entity, which could result in the fund’s shutdown, the return of investor capital, penalties, industry bans, etc. Unless you have a very deep pocketbook, it’s generally recommended not to fight the law (even if you have legitimate reasons for wanting to do so).
  9. Non-Standard. Investors tend to be skeptical of funds that seek to deviate from standard terms and structuring. Investors tend to like what they are already familiar with. They also want to be able to easily compare fund investment opportunities (g., apples to apples). Thus, the harder it is to compare other funds to your fund (e.g., apples to an orange), the more likely investors will pass on your fund.
  10. Low Minimums. Low minimums result in more small-time investors. Small-time investors tend to require more hand-holding and are typically the first to cry and sue you when anything goes wrong with their investment. Thus, low minimums tend to equal more headaches.

We hope you heed these words of wisdom gained over years of launching funds.

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This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates. Prior results referred to in these materials do not guarantee or suggest a similar result in other matters.


About the Authors:

Nicole Kalajian focuses her practice on investment management. Ms. Kalajian represents securities and commodities professionals in a variety of regulatory, compliance and corporate matters. She has extensive experience advising private fund clients, including hedge funds, commodity pools, cryptocurrency funds, fund of funds, socially responsible investment vehicles, venture capital funds, private equity funds and real estate funds. Ms. Kalajian also provides legal and structuring guidance concerning master-feeder structures, domestic and foreign funds, international offerings, separately managed accounts, and robo-adviser platforms. Read more here.

Mike Coglianese is the founder and principal of MICHAEL COGLIANESE CPA PC. A boutique CPA firm which has been providing the futures and hedge fund industry with audits, accounting, compliance, and tax preparation for 30 years. Prior to forming his CPA firm he worked at National Futures Association (NFA) in the compliance department. At NFA he was responsible for compliance and financial audits, investigations, and financial analysis. Read more here.