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Hedge Funds:

Should You Start One?

If you think that hedge funds are just for billionaires and their offshore accounts, think again. It turns out that these legal financial structures are a wonderful way for you to personally start a business and make large profits. 

A hedge fund is essentially an exclusive mutual fund. However, unlike traditional stock investing, the owners have a “system” or a “mechanism” that they use to grow money faster than the rest of the market. 

The goal of the hedge fund manager is to give clients market-beating returns. That’s what makes it worthwhile investing in the hedge fund instead of just buying an index ETF. 

So, should you start a hedge fund? Let’s find out. 

Yes, If You Have A Unique Idea

Just copying another hedge fund’s strategy to generate wealth for clients doesn’t usually work. They’ve usually cornered the market and honed their method. Any copying will simply whittle away returns and lead to lackluster long-term performance. 

Instead, to make money, you’ll need to have a completely unique idea – something that people haven’t tried before.

There are all sorts of examples of investors doing this throughout history. Their genius is in coming up with a scheme that nobody’s tried before and running with it to get the results that they want. 

George Soros – the man who took on the Bank of England – is famous for his investing strategy called reflexivity. It was a behavioral insight that he had in the 1970s, and it has been serving him well ever since. 

Yes, If You Make The Legal Arrangements

The average investor is not allowed to set up a hedge fund and begin operating. Instead, you need to make the necessary legal arrangements before the authorities will let you go ahead. 

First, conduct an LEI number search. This will introduce you to some of the international standards associated with buying and selling financial securities. If you operate a hedge fund, you’ll need to get comfortable with moving funds in and out of currencies. 

Next, make sure that you conduct the proper registrations with local financial bodies. These will vary according to the country in which you live. You’ll need to submit various forms, for instance, to the SEC if you live in the US> 

Yes, If You Have A Compelling Fee Structure

Relatively few investors will be willing to pay you a flat million dollars a year to invest their money (unless you happen to be really good). Instead, they’ll expect you to employ a fee structure that offers the right incentives. 

The industry standard is a 2 percent management fee and then a 20 percent performance fee. In other words, you take 2 percent of the investor’s funds deposited with you as a fee and then 20 percent of any extra gains that you make on their behalf.

Things are changing, though. Investors are looking for lower management fees, but are often willing to pay more for high performers (because the long-term gains are so extraordinary). 

Also, think about your minimum commitment. Many hedge funds start at $2 million and then go from there.  

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