Launching a hedge fund requires significant upfront investment. However for emerging managers with limited capital, it is possible to start a small hedge fund by keeping costs low, leveraging technology, and following lean startup principles. This comprehensive guide covers how to start a hedge fund with little money.
What is the Minimum Amount to Start a Hedge Fund?
There is no official minimum, but realistically it takes at least $1-2 million to properly start and operate a hedge fund. Key startup costs include:
- Incorporation, legal, and regulatory fees
- Renting office space and acquiring equipment
- Hiring employees and payroll expenses
- Technology, data, and software subscriptions
- Marketing and investor relations budgets
- Working/seed capital to begin trading
While some hedge funds like Millennium, Citadel and Point72 today manage over $10 billion in assets, many top performers began modestly with just tens of millions under management.
With careful cost control and lean operations, $1 million can be sufficient to start a basic single-manager hedge fund focused on a specific niche strategy. However, more capital typically provides flexibility to attract talent, build robust infrastructure, and scale assets.
Can I Start a Hedge Fund With My Own Money?
Yes, it is possible to launch a hedge fund using primarily your own savings or investments as starting capital. Many successful managers like Ray Dalio and Paul Tudor Jones self-funded their early hedge funds. They slowly attracted outside money as they built track records.
The downside to self-funding is you also personally bear all the early risk. Any trading losses or operating expenses come directly out of your own pocket rather than being shared with investors. But relying on your own capital removes fundraising pressures and provides full control in the startup stages.
Personal capital can be supplemented by capital from family members or a few close friends willing to provide seed funding with similar risk tolerance. Many top hedge funds today still include their founders’ personal money invested alongside client capital. But self-funding requires having millions in available savings – most aspiring managers do not have that level of capital on hand so must raise external startup funds.
Key Costs When Launching a New Hedge Fund
Major costs involved in starting a hedge fund include:
Incorporation, Legal, Regulatory – Forming a limited partnership or LLC, drafting partnership agreements, seeking tax and regulatory approvals. Legal fees can reach $100,000+.
Rent – Office space in prime locations like New York, London or Hong Kong carries steep rents. A basic space can still run $25,000 per month.
Technology – Trading software, market data feeds, risk analytics, order management system, CRM, computers, servers. Quickly sums to over $100,000 annually.
Employees – Portfolio managers, analysts, and back office support staff require competitive compensation of $100,000-$250,000 each.
Marketing – Investor conferences, website development, promotional materials, travel expenses. Budget at least $75,000.
Working Capital – Seed capital to fund initial trading and operations before raising external capital. Typically $1 million minimum.
Opening a fully built-out hedge fund with specialized teams and infrastructure easily costs $5 million-plus in the first year. Subsequent years also run several million dollars annually. Minimizing any of these expense categories sacrifices quality but can reduce initial outlay.
How Do Small Hedge Funds Raise Startup Capital?
With limited personal capital, emerging managers need to raise external funding to launch their hedge fund. This presents a major challenge because with no experience and track record, it is difficult to get commitments. Potential startup funding sources include:
Friends and Family – Can provide tens of thousands in seed capital, but unlikely to fully fund a new hedge fund. Need to be accredited investors.
Angel Investors – Wealthy individuals who provide seed funding to startups. Useful for $250,000 – $1 million+ capital.
Fund of Funds – A fund that invests into hedge funds. Some specifically seed new managers with $5 million on average.
Proprietary Trading Firms – May incubate talented traders to develop track records before jointly launching a hedge fund.
Online Fundraising – Platforms like iCap Equity Crowdfunding enable raising small amounts from accredited investors.
Tapping personal connections, angel investors, seed fund of funds, or trading firms willing to provide startup capital are the most realistic options for underfunded emerging managers. Creative approaches can help attract early capital.
8 Tips for Starting a Hedge Fund With Little Money
Here are 8 practical tips for minimizing costs and starting a hedge fund with limited capital:
1. Institute Lean Startup Principles
Adopt lean startup principles by validating your core investment strategy early with real money before building full infrastructure. Keep operations nimble and fixed costs variable at first.
2. Seek Free or Discounted Services
Explore if any legal firms, prime brokers, or technology providers offer pro bono or discounted services for very early stage hedge funds to get up and running.
3. Hire Junior Staff
Consider hiring analysts or junior portfolio managers straight out of school or training programs. Their compensation expectations are lower.
4. Use a Regulated Third Party
Outsource core back office functions like accounting, compliance, trading, and operations to an established platform to avoid large fixed costs.
5. Sublease Shared Office Space
Rather than expensive prime locations, sublease desks in shared hedge fund offices outside city centers, at least initially until more profitable.
6. Leverage Technology
Cloud computing and software-as-a-service models reduce the need for proprietary technology infrastructure with large fixed expenses.
7. Start as Home Office
Operating virtually from a home office obviously minimizes real estate costs in the early stages of a fund before needing to house employees in commercial space.
8. Slowly Scale Fund and Team
Prudently scale up the fund strategy and hire specialized staff only as warranted by asset and revenue growth rather than building out fully on day one.
By creatively minimizing fixed costs, tapping discounted services, leveraging technology, and slowly scaling up operations, it is certainly possible to start a hedge fund with $1 million or less and incrementally grow from there. But easiest path is to raise at least $5 million from professional seed investors or your own savings.
Case Study: Launching a Hedge Fund for Under $1 Million
John, an experienced hedge fund trader, was interested in starting his own long/short equity hedge fund focused on the technology sector. However, he had limited personal capital and knew raising sufficient seed funding would prove challenging without a track record.
Here is how he successfully started his tech hedge fund for under $1 million in costs:
- Negotiated free legal services and reduced prime broker fees in exchange for equity stakes and guaranteed allocation after building assets. Saved over $75,000.
- Convince a former colleague to join as junior portfolio manager with profit share for lower base salary.
- Subleased a small, inexpensive workspace within a shared hedge fund office outside NYC center.
- Used cloud-based software for operations, analytics, trading vs paying for customized platforms.
- Built a basic website and marketed through organic search and LinkedIn network at nominal cost.
- Contributed $250,000 in personal capital as working funds for initial tech stock trades to prove strategy with real money.
- Raised $500,000 via an online crowdfunding platform from 15 accredited investors at capped expenses.
With lean startup practices, John kept total expenses under $1 million to launch his tech hedge fund before having enough assets to justify higher costs. Within two years, the fund delivered a solid track record and crossed $50 million in AUM through organic fundraising.
Launching a hedge fund requires substantial upfront investment, with typical startup costs exceeding $5 million for new managers building out full teams and infrastructure. However, by implementing lean startup principles, minimizing fixed expenses, leveraging technology, hiring more junior staff, and securing discounted services, it is possible to carefully start a basic single-manager hedge fund with $1 million or less. This allows an emerging manager to initially prove their investment strategy on a small scale before scaling up. But the easiest path is to raise a larger seed round from professional investors rather than solely self-funding a new hedge fund. With creativity and discipline, the lack of a large personal fortune does not preclude talented investors from pursuing the hedge fund startup path.
Frequently Asked Questions About Starting a Hedge Fund
What are the major costs involved with launching a hedge fund?
Major startup costs include legal/regulatory, office rent, hiring staff, trading technology, market data, marketing, and seed working capital. Full build-outs easily exceed $5 million but disciplined founders can get up and running for $1-2 million.
What are ways to minimize the costs of starting a new hedge fund?
Strategies include leveraging free/discounted services, hiring more junior staff, subleasing office space, using cloud computing, slowing growth plans, and implementing lean startup principles to keep expenses variable and scaled to revenue.
How many assets under management do you need to start a hedge fund?
There is no official minimum AUM, but realistically $10 million provides a sound base to operate a hedge fund with outside investor money versus just personal capital. Many successful managers started with just $1-2 million AUM, however.
Should I self-fund my new hedge fund or raise outside capital?
Self-funding with personal savings avoids fundraising challenges but concentrates all the early risk on you as the founder. Raising external seed capital from professional investors or a fund of funds platform spreads the risk but usually requires proven experience. A mix of both is common.
What are ways to raise seed capital to start a hedge fund?
Typical sources of startup capital include angel investors, friends and family, seed fund of funds, trading firm incubators willing to allocate proprietary capital, and online fundraising platforms. Tapping your own savings to self-fund a sizable portion is also an option.
In another related article, How to Become a Hedge Fund Manager: Skills, Education and Career Path