You just saw a 90s movie showing hedge fund managers and investors living the American life of luxury and excess and now you want to get in on that piece of action. But, like most of us, you don’t know the first thing about the nuances of the financial world, not to mention the fact that you think (like us) a hedge fund is supposed to emulate a bushy hedge or it has something to do with Sonic the Hedgehog. Well, suppose you’ve gone to the lengths and breadths of all the financial websites, and the impossible has happened: you know what a hedge fund is and are positive that you can make it with a little help from your parents, friends and that one really rich guy who’s all about investing and ‘working hard, playing harder’. So now, you ask ‘How to start your own hedge fund’?

Lets get one thing clear; if these things were simple enough to be understood by the layman or the industry outsider, we’d all be spending our money on Bentleys and Lamborghinis, and not making do with what we have right now. That’s basically one of the perks of being in the industry and you, who has understood all that, can now reap the benefits of being one of them, earning like them, spending like them and partying like the hedge fund dudes. So, how to take that first step and start your own hedge fund?

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Before we delve into the arcane world of finance and funds and investments, we should first understand what in the world is actually a hedge fund. Is it really blue and moves really fast or is it just another boring, banal term for yet another shenanigan for the Wall Street guys to fill their pockets and accounts with money not-so hard earned? Let’s get into the basics of a hedge fund and we’ll deal with the how later on in this passage.

What is a Hedge Fund?

What we’ve been able to understand by specifically searching for ‘hedge fund easy definition’ is something along the lines of ‘a form of protected investment that is designed in a particular way to safeguard investment portfolios and investors from the fact that is market volatility and instability, to ensure positive returns during both up (bullish) and down (bearish) market.’

Understand anything? Neither did we, for the first couple of times. How is a hedge fund different from a really enthusiastic individual trying to make his/ her mark on the stock market? And then, after a couple of focused readings and a lecture from YouTube, it becomes clear. It is called a hedge fund and not just simple investing because it has the phrases ‘protection of investment portfolios’ and ‘generating revenue during both bearish and bullish market conditions’ in it. What are these phrases and how do they uniquely represent a hedge fund? Here’s the what’s and how’s,

A hedge fund is a protected investment, usually consisting of several individuals who have pooled their money in a single establishment, stock (also known as portfolio), or a big corporation whose investable assets have all been directed into one single source. So, in a way, a hedge fund is already pretty hefty and big in terms of capital (according to various sources, a hedge funds’ initial capital requirement is a million dollars).

It is protected by the fact that it does not put all of its eggs in one basket (that’s the most simplified explanation you can get anywhere), rather it pools all that money and invests it in chunks in different places, each one managed by a separate hedge fund manager. So, in the event of a company going down, its interests are protected by other companies, who haven’t perished yet. And since the money is pooled, nobody really feels the crunch. 

As for the second part of ‘generating revenue in both bearish and bullish markets’, it closely alludes to the first point of being protected; a hedge fund is characterized by a vast investment portfolio, enabling the hedge fund investors to earn dividends no matter what; if not from Company A, then from Company B. If not from Company C, then from Company D and so on. 

To summarize, a hedge fund consists of multiple investors or one really wealthy entity that invests a large amount in a diversified portfolio to ensure security and absolutely no fall in profits. That is actually pretty simple. 

How to Start your Own Hedge Fund?

Now that you know about the basics and what a hedge fund is all about, its time to get up to speed on how are you supposed to start one of your own. Be advised, if you do want to proceed ahead with the hedge fund, be prepared for a lot of bureaucratic processes and Feds sticking their noses in; they’re not going to like it if your home-grown hedge fund turns out be SEC-non-compliant. And to make matters just a little bit more difficult, it is actually easier to set up a company than a hedge fund. 

For starters, you will have to read and understand the laws governing hedge funds, called investment compliance laws, at both state and federal level. Depending on which state you want to establish it, you will have to tick a lot of boxes and deal with a lot of legal matters. It is recommended that you get an experienced hedge fund attorney on the case to smooth things out as much as can be done and also to handle all that paperwork which will overwhelm any newcomer. 

Once the fund has been set up, do not go all willy-nilly in it. Do some research, because hedge funds operate on a number of investment strategies to ensure protection and all-season returns. Get an experienced COO on the board and he/ she will be your guide towards the logical end. 

To raise capital, you can begin with your friends, family members and other like-minded individuals with a penchant for investing money and actually having the money to back it up. Use attraction strategies and word-of-mouth to spread the word around and make sure to gather some deep-pocketed investors. 

Once that has been done, simply register the hedge fund with the IRS and other federal authorities and under the tutelage of the experienced COO and upper-level staff, start by implementing different investment strategies, keeping in mind the absolute basics of a hedge fund. Voila! You now have your own hedge fund, and are now on your way to enjoy fast cars, luxurious boats and big houses and whatnot.

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In Short

Setting a hedge fund is not an easy practice. From compliance to state laws and federal regulations, to the tones of paperwork associated with a hedge fund, its is a complicated procedure, but one that is worth all that headache because of those sweet, sweet gains. The costs of these are even more obscene; expect to spend a couple of million dollars just in the first year of the hedge fund, on salaries and operating costs. Other than the legal and registration fees, this will be the only major expenses you’ll need to shell out millions for; the rest of the way will be intelligent investing and earnings from the dividends.