How to Start a Hedge Fund/Private Equity Firm

Starting a hedge fund is a complex task that requires great amounts of both knowledge and resources, as well as dealing with various service providers. The most important resources you will need include a fund administrator, custodians/banks, a lawyer, a tax auditor, internal systems technology, and of course, investors.

If you’re going to start a hedge fund, you’ll need a lawyer to ensure everything is set up according to code. This includes writing legal documents such as the hedge fund’s offering documents, establishing intellectual property, and ensuring regulatory compliance & securities regulation. Lawyers are necessary not only at the start, for as your hedge fund grows, legal disputes become an inevitability. Certain investors may even require side letter agreements, as they may want their money invested only in particular industries or with certain techniques.

The fund administrator is one of the most important positions in a hedge fund, filling both accounting and gatekeeper roles. Moreover, having a reputable fund admin gives confidence to investors. They must do the accounting for the portfolio investments. This includes NAV calculations, financial reporting, reconciliation of various statements, and returns & expenses calculations. The fund administrator also represents the hedge fund’s investors. Lastly, the fund administrator performs waterfall calculations, though they must be approved by the Hedge Fund Manager and after such reviewal the fund administrator issues monthly or quarterly statements to the investors. However, this can be made much easier with a waterfall calculator from an investor management system like Perfona.

Selecting a reputable auditor is paramount. The auditor audits financial statements and schedule of investments at the end of the year and gives an opinion as necessary. Such audit gives investors confidence that the hedge fund manager’s activities are prudent and the investor’s capital is being handled in accordance with the fund memorandum. The auditor most of the time also acts as a tax preparer and generates K1 for all the investors in the fund while ensuring that taxable income is allocated in a fair manner across investors.

Once you have those necessities, it is important to consider which investment management software you will use. The right portfolio accounting system can make or break your hedge fund. You want to pick the best portfolio management app for your firm. Make a list of the projects you wish to undertake and compare it to the features of an investment reporting software. Perfona’s features include:

Portfolio accounting for IBOR and shadow recs
Investor management and CRM
Order management
Data warehouse & reconciler
Customized reporting
Workflow automation

Having a fund accounting system is not mandatory in the same way all of the other aforementioned aspects are such that a hedge fund can physically and legally function without one. However, it’s a good idea because it will significantly reduce your costs. The alternative is manual calculations prone to error that take significantly longer to make. It can also be beneficial to choose a system that has no in-house IT requirement that’s available through a web browser for any operating device, such as Perfona. Perhaps most importantly, having any portfolio management system will make your firm look much more appealing to investors. It gives them the impression that you have all your bases covered and you’re not going to make any mistakes.

There is an abundance of legal/accounting/tech firms that specialize in finance across the country. You can choose a large well-known firm if you value being able to tell your investors that you used a recognizable organization, but don’t mind paying for the privilege or lack of individual attention and flexibility. Or you can use a smaller company like OpEff Technologies that may be more flexible to your individual needs that is able to offer you custom features or services, whereas a large company will rarely offer anything outside of one of their packages. Moreover, smaller businesses will be able to provide these services at much more affordable prices.

Running a hedge fund contains many complex components and even more risks, but having a software for investment management can make it easier, by having an internal book of records that will give you results on demand without having to wait for the fund admin.