Tag Archives: raising capital

Raising Hedge Fund Capital is Not Easy

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I have written before that the biggest issue start-up and emerging hedge fund managers face is raising capital for their funds.  I seem to have the same conversation on a weekly basis – the “how to do I grow my fund” conversation.  Unfortunately I do not have the guaranteed step-by-step guide to raising boatloads of capital, but that is not to say that smaller managers cannot raise capital.  I have seen plenty of groups who have made it over the proverbial hump by working ridiculously hard.

The article below (written by Richard Wilson of Hedge Fund Blogger) discusses some ideas that managers will want to consider when developing a program to raise hedge fund capital.  Richard’s group provides consulting services and helps managers to raise money for their hedge funds.

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This is Bad News: There is NO Magic Bullet
Richard Wilson

The bad news is there is no magic bullet to raising capital. I spoke with at least a dozen managers this past week at our Hedge Fund Premium networking event in Chicago. Most were looking for capital raising help of some type and we discussed many roadblocks that managers are seeing between them and the AUM levels they are trying to achieve.

Our firm provides some capital raising tools, but I believe that daily action and discipline is the best thing that a fund can do to raise capital. They must take responsibility for marketing their fund and have someone reaching out to new investors on a daily basis, if they do not they will forever remain in the bottom 20% of the industry in terms of assets. Very few funds gain their initial assets through a super powerful third party marketing firms, third party marketers like to typically work with managers which have some AUM momentum or foundation underneath them.

To raise capital I believe that managers need to have superior tools and processes when compared to their competitors. This means superior investor cultivation processes in place, superior investor relationships management, superior marketing materials, superior outreach efforts, superior email marketing, and superior focus on investors which actually have the potential of making an investment. Each of those topics mentioned above could be discussed for a whole conference and all of these moving parts need to be in place to compete in today’s industry. While this does not mean you need to out-spend others you do need to strategically plan your marketing campaign.

There is a good quote that I heard which goes something like “If you want to have what others don’t you have to do what others won’t” In other words if you want to grow assets you must put in the extra work, planning, and strategy that others skip over.

Every morning I try to listen to a 45 minute custom MP3 audio session of business lessons, marketing tips and positive thinking notes. One great quote I hear every morning by our friend Brian Tracy, “Successful people dislike to do the same things that unsuccessful people dislike to do, but successful people get them done anyways because that is what they know is the price of success.” This is connected to an interview Brian conducts in which a multi-millionaire says that success is easy, “you must decide exactly what it is you want, and then pay the price to get to that point.”

All of this may sound wishy washy or non-exact but I think it is very important to realize that there is no one single magic bullet for raising capital. It takes hard work, trial and a superior effort on all fronts to stand out from your competition.

Read dozens of additional articles like this within our Marketing & Sales Guide.

– Richard

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about investment adviser registration with the SEC or state securities commission, please call Mr. Mallon directly at 415-296-8510.

Hedge Fund Capital – How to Raise Assets for a Hedge Fund

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The biggest issue for start up hedge funds (and also established hedge fund managers) is how to grow assets under management.  Growing a hedge fund’s capital base is very important because increased AUM mean both increased management fees and performance fees (assuming the fund has positive performance returns).   This article focuses on traditional avenues of raising capital for a hedge fund.

Raising Hedge Fund Capital – Friends and Family

Most hedge funds raise capital to start up through their friends and families.  Often this can be a significant sum, other times it can be relatively small.  I have seen some hedge funds start with as little as $500,000 and sometimes less.  Often, after a hedge fund has a few months of performance (assuming again positive performance) these friends and family members will invest more money.  Other friends and family members, who did not originally invest, may also decided to invest.  Family members of investors may also be persuaded to invest in the hedge fund.

Generally investments from friends and family are completed fairly quickly and through less formal conversations than from other types of investors.  However, the hedge fund manager must always make sure that the friends and family have the fund’s offering documents and have made the appropriate representations in the subscription documents.

After an initial investment from friends and family, it is important for a start up manager to focus on the trading as it is most important to have a good 6-12 month track record that you will be able to market to other potential investors.

Raising Hedge Fund Capital – High Net Worth Individual Investors

High net worth investors (generally qualified purchasers as well as some qualified clients and accredited investors) often invest in hedge funds.  High net worth investors will usually have legal and investing teams which will vet the managers and the strategy.  Usually there will at least be a minimum amount of due diligence requests on the manager and the fund.  Managers can be introduced to high net worth investors through their own networks or through other channels such as hedge fund conferences, hedge fund databases or through other means.

Raising Hedge Fund Capital – Institutional Investors

Institutional investors will occasionally invest in hedge funds with a track record shorter than one year.  Generally in these cases the hedge fund sticks out to them for various reasons.  Such reasons might be that the hedge fund performance was just spectacular, or the institutional investor likes the way the particular investment strategy fits within the institution’s allocation design, or the hedge fund manager may have a strong pedigree which appeals to the institutional investor.

Whatever the reason, getting an investment from an institutional investors is usually a longer and more in depth process than receiving money from friends and family or from a high net worth investor.  The hedge fund manager will need to first establish a meeting with the institutional investor.  Generally the meeting will be at the office of the institution and the manager will have a certain amount of time to give his pitch, usually through a pitchbook presentation.  Some managers of the institution will look carefully at these presentations; others will not even open the cover.  However, the hedge fund manager should be ready to answer any number of different questions from the institution regarding the program.  Such questions will likely cover the following topics: risk management procedures, expected performance in down markets, performance analytics, etc.  The hedge fund manager should act composed and answer each question directly and completely – this is the time for the manager to show his knowledge of the investment strategy and sell the strategy to others.

Either before or after the meeting with the institution, the hedge fund manager will likely be asked to complete some basic due diligence.  I’ve outlined a sample request in this article: Institutional Hedge Fund Due Diligence.  After the institution has interviewed and vetted a manager it may take some time before the institution actually invests in the fund.  This happens for a variety of reasons and the hedge fund manager is urged to stay patient during the process.

Non-tradtional forms of raising hedge fund capital

I will be discussing other ways to raise capital in subsequent articles.  Such non-traditional ways include: utilizing the services of a third party marketer, capital introduction services, hedge fund conferences, and hedge fund databases.

Legal Implications of Raising Capital for a Hedge Fund

As most hedge fund managers know, under the Regulation D offering rules managers cannot raise capital through any type of general advertising or solicitation.  This means that they cannot: buy advertising in any financial publications, advertise generally on the internet (but please see article on Hedge Fund Websites), cold call potential investors and or engage in other similar activities.  Additionally, hedge fund managers, and others raising money for hedge funds, must be aware of and abide by all broker-dealer regulations.  This is a very important issue, so please discuss it with your hedge fund attorney (please see Guide to Broker-Dealer Registration).

Please contact us if you have a story on raising capital for you hedge fund – we would like to hear your story and potentially profile your fund on our blog.  Other articles which are related to items in this article include: