How to Start a Hedge Fund

Financial regulatory reform cramping your style? Go rogue with VF.coms step-bystep action plan.
BY KEENAN MAYO PHOTO ILLUSTRATION BY HAMISH ROBERTSON WEB EXCLUSIVE SEPTEMBER 28, 2010

If youve spent the last 5, 10, or 20 years enjoying the fruits of a blissfully unregulated financial system that created wealth for its adepts but nothing for the American people, then surely youre steamed at the big regulatory overhaul that passed in Congress this summer. But theres still something you can do: move over from the stringently monitored world of banking to the somewhat less monitored world of hedge funds. We spoke to an actual big-shot hedge-fund manager to pick up tips on how you too can start the rogue finance shop of your dreams. Step 1: Create a hedge-fund team! The bare essentials to get your new fund going: two junior analysts, a junior trader, and a chief financial officer. When you spin off from your current bank, its crucial to steal away some crack subordinates. A big selling point to potential investors is that you have a well-oiled, cohesive unit with a history of crushing it.

Actual big-shot hedge-fund managers tip: Choose people who have a nose for ferreting out opportunities, but who are not willing to cut your guts out and try to replace you. You need junior-level people. Step 2. Name your fund! Lets face it: aggressive, testosterone-redolent names (e.g., Hungry Wolf Capital, Thor Hammer Fund, Tomahawk Capital Management) are as pass as Meatpacking District mega-restaurants and conspicuous luxury boxes at the stadium. Come off as attuned to the times with something gentle and/or arboreal (e.g., Sassafras Group, Bending Birch Asset Management, Larchwood Partners). Actual big-shot hedge-fund managers tip: The goal is to project sturdiness without rapaciousness. You dont want to be Three-Headed-Dog-Guarding-the-Gates-ofHades Capital. And you dont want to use your own name. Typically, guys use streets and towns from their childhoods. Or a tree, to convey strength and deep roots. Step 3. Hire a law firm! Youll need a good firm to incorporate your fundfirst in Delaware, and then offshore in either the Caymans or the British Virgin Islands. But beware of big, sprawling, white-shoe corporate law firms that overcharge. Instead, go with the specialists who do this thing all the time. Actual big-shot hedge-fund managers tip: The Coke and Pepsi of the business are Schulte, Roth & Zabel and Akin, Gump, Strauss, Hauer & Feld. Avoid the high-tone and really big firms. They are too expensive and they dont know what theyre talking about with funds. Theyre too busy billing Pfizer millions upon millions to file their 10-K forms. Step 4. Get that anchor capital! You need your first assets under management (A.U.M.) to get your fund off the ground. But you most likely dont have deep pockets yourself, and that damned Madoff has discredited the formerly effective inscrutable-Zen-warrior passiveaggressive approach to investor solicitation. So your best bet is to find a seeder to put up the anchor capital. Warning: This can be excruciating. Actual big-shot hedge-fund managers tip: The nasty world of seed investing is one step up from human trafficking. They try to own a piece of you: Ill give you $25 million, but I own 40 percent of your company. Its similar to the pimp-and-ho model: they put the money into you, and youve gotta go work the street. One of the best seeders is a company called Reservoir. Step 5. Get a prime broker! When you buy a stock, that transaction needs to be recorded somewhere. Your prime broker is like your custodian. It clears your trades for you. Walk around to Goldman Sachs, Morgan Stanley, or Deutsche Bankor maybe Bank of America. Actual big-shot hedge-fund managers tip: Probably Goldman is still the best. Remember: When you start, youre walking upright but weighed down by the seeder, the prime broker, and your own teamtheyll all want equity, of courseand its a real slog. But once youve got your seed and your documents in order, youre ready for business. Step 6. Check into your very own hedge-fund hotel! Even though youre going rogue, you still need a proper office to look respectable and legit. And guess what? The very same investment houses that serve as prime brokers

almost invariably have unused office suiteshedge-fund hotelsthat are just waiting to have their reception areas emblazoned with your funds logo. Actual big-shot hedge-fund managers tip: They might provide you with low-cost rent. There are lots of little hedge funds trying to make their start, and the brokers will agree to a month-to-month lease. Step 7. Hire a good P.R. person! Its a long road to your first billion. But when you get there, watch your back! Actual big-shot hedge-fund managers tip: When you have over a billion dollars at least, thats when people start shooting at you. Theres so much Schadenfreude out there that youll need Schadenfreude-defense. But rememberthats way down the line. Once youve successfully navigated all these steps, celebrate in pre-2008 style: build a Suffolk County house that eats up 90 percent of your lots footprint; marry that yoga instructor; or, best yet, exploit every campaign-finance loophole to underwrite a slate of candidates who will repeal the Obama-nomics overhaul bill of 2010.