Raise Capital for a Hedge Fund

If you thought raising capital was easy, think again, because if you have to raise capital for hedge funds, you would say it’s difficult. When start-up entrepreneurs state that the task of raising capital for hedge funds is the most arduous part of a hedge fund – they mean it. Starting a hedge fund requires a solid foundation, a sound theory, and superlative skills. So here are a few pointers on how to raise capital for hedge funds.  

RAISE CAPITAL FOR HEDGE FUND – WHAT IS HEDGE FUND

By definition, a flexible investment company for a relatively small group of investors (usually the minimum investment is $1 million) that use high-risk techniques – something that are not allowed for mutual funds, such as short-selling and heavy leveraging – are hedge funds. In the late 1940s, the practice of hedge funds came up with an aim to modify markets or industries. And since then, raising capital for hedge funds has developed from being a single entity thing to a group effort at a high value, high risk level of business investment.

RAISE CAPITAL FOR HEDGE FUND – POINTS TO REMEMBER

Before you get to raising capital for hedge funds, it is important you keep the following points in mind. Investing in hedge funds is linked to certain risks but at the same time it is also associated with rewards. Hedge funds amplify profits as well as losses, so while short selling opens up new investment opportunities, the riskier investments typically provide higher returns. While investing in hedge funds secrecy of strategy is of utmost importance since that prevents imitation by competitors. Also since hedge funds are unregulated, they reduce costs and allow the investor more freedom to make decisions on a purely commercial basis.

RAISE CAPITAL FOR HEDGE FUND – SOURCES

In order to raise capital for hedge funds, you should gear up to have multiple high-value investments as opposed to single fund investment, because that reduces the risk of losses in the market. To raise capital for hedge funds, you could choose from several sources. But since hedge funds are all about relatively large amount of money, the funding process is rather difficult, and funds for start-up hedge funds, all the more excruciating.

Option one on how to raise capital for hedge funds is using your own savings. When you have money of your own, why look at external sources? If you have set aside money, why borrow? But before you opt for this, make sure you have a good talk with subject matter experts, look into the long-term consequences, and then decide. You could have savings, mutual funds, life insurance, stocks, pension plans or real estate, so when you use the funds for your business venture you will need to understand which of the options have scope of bringing in better returns on investment.

When your own funding is not an option, there is another great option for how to raise capital to start a business – friends and family. Though it may seem shameful to ask them for capital, it seems to be quite a popular option because according to a survey it is the option of choice for 30% of entrepreneurs who are wondering how to raise capital to start a business. If you decide to go this way, you must have your attorney draw up a business contract because though you approach people you know for funds in an informal, non-business way, business is best done transparent. Ensuring that you will keep up your part of the agreement is the most professional way to do business. If you are borrowing from people you know, instead of asking them to invest, it’s best to put the terms in writing to avoid a strain on your relationship.

Finding high net worth individuals to invest in your hedge fund would be like a dream come true. But if you do, you are in luck. Because having an investor who is capable to infuse large amounts of money and will to take risks with money, all while helping you raise capital for hedge fund and profiting is great!

Venture capitalists who have access to a large pool of capital, accumulated from a variety of sources are a good option to raise capital for hedge fund. As people who are in the business of investing, they are open to speculation, high risks, new ideas, and the likes. Make sure you find a venture capital firm that has a similar risk-taking appetite as yours. Ensure that you have a risk management plan, the foresight to predict your strategy, and do consider all possible contingencies. And remember, venture capitalists invest in people, not just hedge funds.

When it comes to brokers who deal in circulation of funds between investors and entrepreneurs, your issue on how to raise capital to start a business is very much a piece of cake. Money brokers act as a bridge in financing and can almost always guarantee that you get the amount of money you want/need, for a percentage of the gross amount that is their fee. The retainer fee is always paid up-front, so be ready for that.

And while approaching your investors, make sure you develop your pitch.  Put together a presentation about your fund and strategy, keeping your investors in mind, be it high net worth investors or institutional investors.

RAISE CAPITAL FOR HEDGE FUND – PROBLEMS FACED

Yes, the process of raising capital for hedge fund is infested with problems. So if you are thinking how to raise capital for hedge funds, it’s time to ask yourself some questions. Do people put in their hard earned money with into an investment that is backed by theoretical results? Can you assure returns in hedge fund even before investment? If your hedge fund strategy works, is talking about it a smart thing to do? When you get success in hedge funds, you attract attention, but do you necessarily attract investment capital? With a great track record, do you assure further success in the market? Will profits persuade you to invest your own capital?  Does a great record in hedge funds demonstrate my superior strategy and skill? If you are already in the business to raise capital for hedge funds, you would know that the answer to most of the questions is not prima facie, in the affirmative.