Question: How much does it cost to establish a hedge fund?
Answer: The costs of starting a hedge fund can vary considerably depending on the manager and the manager’s circumstances. A start up hedge fund manager will need to consider the hedge fund start up costs which will include legal costs, administration costs and set up fees, bank fees, prime brokerage fees, rent, etc. This article will detail hedge fund legal fees.
Hedge Fund Formation Legal Fees
The central legal fees for a start up hedge fund manager are the costs associated with preparing the offering documents for the hedge fund. Most law firms who provide these services will charge on a flat fee basis, depending on the novelty and scope of the project. The cost breakdown is, generally, as follows:
Large brand name New York based law firm: $35,000 – $75,000
Midsize law firm with known hedge fund practice: $25,000-$45,000
Small or boutique hedge fund law firm: $15,000-$30,000
The above are very large fee ranges, but for managers with very basic hedge fund strategies (say a long-short large cap investment strategy) you are looking at the lower end of the fee range. If the strategy is more esoteric or if there are many structural issues (especially liquidity and valuation issues), then the costs will be more. Additionally, if the strategy has certain ERISA or tax issues then the cost is going to be more.
The costs above generally do not include filing fees for entity incorporation, fees for investment advisor registration, or any blue sky filing fees.
Please note that you may find groups out there which provide hedge fund offering documents for lower prices. As when selecting any attorney, price should not be the only determining factor. There are also offering document software sources out there which purport to create offering documents for your fund for under $5,000 – do not use such services. The legal documents provided by hedge fund lawyers are designed to protect you as the manager and any off the shelf solution is not going to be able to provide the customized legal advice you will need to be properly protected. I have personally seen some of these documents and they are woefully inadequate.