How to Start a Hedge Fund (Even With NO Experience)

Starting a Hedge Fund, especially a successful one, is one hell of a task. But what’s harder than that is finding a proper resource on the internet that actually tells you how to start a hedge fund, what essential things you’ll need, and what you need to do to get started, without all the smoke and mirrors.

To make this article possible, we’ve Christina Qi with us. She started her hedge fund when she was 22, and now she and her partners trade nearly $7.1 Billion per day at their hedge fund, Domeyard.

And if you’re thinking, she must be the daughter of a big wall street fund manager to achieve the success she has today, then you’d be surprised to know that her parents were immigrants from China and waited tables at a Chinese restaurant when she was growing up.

You’ll connect to her even more after knowing that she started her hedge fund with her two partners with just $1000 from her dorm room while they were still in college. 

Today, she will let you know how to start a hedge fund along with the most important things you’ll need in order to get up and running. So if you’re interested in learning all that, then you’re in for a treat.

How to Start a Hedge Fund in 6 Steps

1. Build Your Team

Starting a hedge fund is not a solo endeavor. You can’t possibly do it alone, even if you have all the money in the world. So having either cofounders or employees with you is absolutely critical to getting started.

Finding the right people who believe in your idea just as much as you is essential because that is one of the first validations you can possibly get in your business.

You’ll need people for all kinds of roles in your hedge fund, including a CEO, CTO, CFO, and all the other roles that you’d need in any other type of business. 

Hiring is also a massive challenge for a hedge fund, whether you’re doing it in the beginning or after the launch of the fund because you’ll need to find the perfect mix of experience and new minds in your business. 

2. Choose Your Hedge Fund’s Legal Structure 

You should be very careful while deciding your fund’s legal structure because it affects everything from the taxes you pay to the types of investors you attract to your personal liabilities. That’s why it is one of the most, if not the most, critical decisions you have to make. 

There are a lot of resources online that you can look for about the legal structuring of a company, however, be careful while you’re at it because most of the advice that you’ll find on the internet is obviously generic and may not suit your particular situation.

It is best to consult a good lawyer before making any decisions because a good lawyer will listen to your particular situation and will be able to tell you why a structure can be good or bad for your hedge fund. 

Another important thing that you’ll have to decide on is your fund’s fee structure. How much you wanna take home? In the hedge fund industry, the most common structure and what you’ll hear often is “2 and 20”, meaning 2% management fee and 20% performance fee or fund’s profits, if the fund performs well.

But that is not a hard and fast rule. Every hedge fund can choose a different structure and go with whatever they find suitable. For instance, Christina’s fund’s structure is very aggressive at 0 and 40, meaning no management fee but 40% performance fee. It is risky because, on a good year, you can take home a nice chunk of money, but on a bad year, you make zero dollars.

You should choose your fund’s fee structure according to your strategy, your asset under management, and the risk you’re willing to take. 

3. Raising capital

You just don’t need capital to run your fund or do trading, but also to pay your employees, pay for your office space, and cover all other expenses that you’ll incur in order to run your business.

Raising money is one of the hardest things in this business, especially if you don’t have a track record, years of experience, or good connections in the industry. Now you don’t have to break your heart because raising money is hard, but not impossible. 

The easiest way you can go at it is by building your track record first, so that people trust you with their money. Once you have a good track record, then you can go and start your own fund. 

There are also a lot of investors who purposely invest in what is called “emerging managers”, which are either less-experienced managers or newer managers coming aboard. This is exactly how Christina got started in the industry. 

4. Finding service providers 

The next step is finding your service providers. Service providers are a huge team of people that don’t work for you full-time as employees, but their services are necessary in order to smoothly run your hedge fund. 

What is meant by service providers is your lawyers, accountant, auditors, administrators, compliance people, etc. You can choose to hire all of them full time if you have the budget and your fund is big enough.

As a piece of advice to first-time founders, Christina says you should be very careful while choosing your service providers because it’s very hard in the later stages to make a switch.

Don’t just search on Google and go for the top results, don’t just go with the biggest brand name or the biggest household names. Think of it a little bit like dating, because whoever you choose, you’ll have to work with them for a long time. 

Also, a bad lawyer or a bad accountant can get your hedge fund in some serious legal troubles if they don’t do their job correctly, so be picky in your search for service providers.

Now the list of service providers will, of course, vary based on the country your fund is located in, the type of fund you’re running, the strategies you’re running, and the legal structure of your business.

5. Find your strategy

What is your trading strategy? Your trading strategy is like your investment thesis. It should clearly define your techniques, your goals, your expected returns backed with proper analysis and real-world testing of your strategies. 

Not only that, but it should also focus on your fund’s profitability as a business, your margin safety, and your plan B in case things don’t go your way. It is vital because your thesis is what you’ll be using to pitch potential investors.

Another important point to consider when you’re building your thesis is your unique selling point (USP). What makes you different than Goldman Sachs or Bridgewater Associates, or any other hedge funds or banks? 

According to Christina, just knowing your niche and where you sit in the market is critical to understand which strategy would work best for you. 

Also, knowing your weakness and strengths is another critical point. For example, your weakness might be that you’re young and don’t have decades of experience like your competitors in the industry. But your strength is that you know the latest technology and developments in finance. 

Knowing your strengths and weakness helps you identify your edge in the market, so you must do your own SWOT analysis before your build your strategy.

6. Infrastructure

By infrastructure, it doesn’t mean your business infrastructures, like your office space and internet connection, but your trading infrastructure. 

You need to have an infrastructure in place to collect and process all of the data that you’re getting from the market and convert them into a proper strategy, or signals, as we call them in the marketplace.

You also need to have a way of placing your trades, whether it’s through a broker or directly with the exchange. 

For example, Domeyard has built its own trading platform, where they get something called direct market access with the exchanges. Though Christina says no hedge funds really need to do that, they’ve done so at Domeyard because their strategies are designed in a way that they care a lot about speed and latency. But for your hedge fund, you can go with any broker you like.

So that is it for this one. If you’re interested in learning more about how to start a hedge fund, particularly about the mistakes to avoid doing when starting a hedge fund, then stay tuned because that is the next video coming on our YouTube channel in the how to start a hedge fund series.