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10 Tips to Raise Funds for Hedge Fund Start-ups

Analysts at Financial Research Analyst estimated that 230 hedge funds started in Q4 2009 and even more in 2010.  For all these start-ups, fund-raising has been a critical part of getting the fund off the ground.

In this blog, I am sharing 10 tips when you are going out there promoting your fund:

1. Make it simple. 
You have probably thought about your investment strategy inside out before the launch, but imagine how it is like for someone who’s hearing this for the first time.  Have a dry run on someone you trust, your accountant, attorney or broker.  See if they understand what you are talking about.

2. Be prepared.
Provide 2-3 pages of executive summary including backgrounds of the managers and key personnel, 1 page performance summary with risk analysis,  and summary of offering memo covering key concepts including asset valuation, fees structure and redemption restrictions.

3. Explain what happened to your last fund.
People are more interested in experienced managers.  Be honest about your role in the last fund, who the decision maker was,  and the reason why it ended.

4. Understand your audience.
People are more comfortable working with individuals alike.  If you are approaching institutional market, operate as they do.  Be organized, transparent and honest.

5. Build your track record.
Start your fund when the market opportunity is there.  Don’t wait until you get that $100 million in the door.  Let the performance help you do the talking.

6. Befriend with other hedge fund managers.
Yes, they are your competitors, but some of them also have huge amounts of free cash flow and are looking for ways to re-invest within strategies they understand and do not directly compete with products that they plan to create on their own.

7. Explain the good returns.
You are probably very proud of your fund’s performance.  Be aware that it may be a red flag for potential investors: is the portfolio properly valued?  Am I looking at another Ponzi scheme?
If you consistently beat the market, you will face endless questions about whether or not you are a fraud.

8. Don’t try doing everything yourself.
The fact is, you can probably do everything yourself.  But is it worth it?  Successful trading is all about focus, discipline and concentration.   The performance is what the investors are paying you for.

9. Acknowledge and address the risk factors.
Investors have an uncanny ability to see a risk a mile away and expect the fund manager to show a high degree of awareness.  A manager who fails to identify and address the risks will be perceived by the investors as either naive, stupid or dishonest and will kill any chance of a deal.

10. Be patient.
Everything takes much more time in the real business world comparing to the trading world.  Take your time to nurture the relationship with your potential investors.   Results will come.

Any other thoughts and ideas? Feel free to comment.

* Special thanks to Diane Schrader, Chair of Northern California Chapter at 100 Women in Hedge Funds, who kindly shared her notes from the organization’s February 2010 event “How Do Managers Raise Capital in Challenging Times – the LP response”.