A while back, you decided to treat investing as a game to be won, as you saw many parallels between this field and games like chess and poker.
With a great deal of study and plenty of painful lessons learned in the process of getting your hands dirty in the market, you were eventually able to achieve results that exceeded the S&P on a regular basis.
At this point, you’ve been openly musing about starting your own hedge fund, but you have no clue where to begin.
You are far from the first person to have these insecurities; the John Kleinheinz Hedge Fund had humble beginnings, but eventually, this Texas-based investor was able to use his theories surrounding the market and value investing principles to obtain double digit growth for his clients.
If you wish to put your financial know-how to work for others, this article will share with you basic steps you’ll need to take before opening for business.
What is a hedge fund?
You may not need to read this if you are seriously considering making this move in your life, but it is important to clearly define what you are trying to accomplish before sinking hard-earned time and money into this project.
In short, a hedge fund is a pool of capital designed to reduce risk while boosting returns that would be impossible to accomplish using conventional retail investing funds.
You need to be comfortable with a higher level of financial risk
The reason why hedge funds occupy a place of notoriety in today’s world is not just because they achieve prodigious returns, but they also have a habit of crashing and burning in spectacular fashion from time to time.
There is a saying in poker which states, “You can’t lose what you don’t put in the middle … but you can’t win much either”.
If you want to attract client investors to your hedge fund, you need to offer growth rates that are over and above what the S&P average provides, and you don’t get that by playing it safe.
There is a risk of ruin that is significantly higher when you run a hedge fund – this is a reality you need to be comfortable with if you wish to proceed with this ambition.
You need to have a keen financial mind
If you don’t have a cohesive investment strategy that has gotten you the results you will be marketing to your first prospects, good luck getting your fund off the ground.
Take a look at your gains to date and ask yourself how you got to where you’re at today. If you lucked your way to the gains you’ve gotten through a few choice picks, you can be sure that you will run the accounts of your first customers into the ground.
Established investors often have focuses which range from global macro to a market neutral approach – if you don’t know what either of those mean, hit the books and start studying.