How to Start a Hedge Fund

Financial regulatory reform cramping your style? Go rogue with VF.com’s

step-by-step action plan.
BY KEENAN MAYO•
PHOTO ILLUSTRATION BY HAMISH ROBERTSON

WEB EXCLUSIVE SEPTEMBER 28, 2010

If you’ve 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 you’re steamed at the big regulatory
overhaul that passed in Congress this summer. But there’s 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, it’s 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 manager’s 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!

Let’s face it: aggressive, testosterone-redolent names (e.g., Hungry Wolf
Capital, Thor Hammer Fund, Tomahawk Capital Management) are as passé
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 manager’s tip: “The goal is to project
sturdiness without rapaciousness. You don’t want to be Three-Headed-Dog-
Guarding-the-Gates-of-Hades Capital. And you don’t 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!

You’ll need a good firm to incorporate your fund—first 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 manager’s 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
don’t know what they’re talking about with funds. They’re 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 don’t have deep pockets yourself, and that
damned Madoff has discredited the formerly effective inscrutable-Zen-
warrior passive-aggressive 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 manager’s tip: “The nasty world of seed
investing is one step up from human trafficking. They try to own a piece of
you: ‘I’ll give you $25 million, but I own 40 percent of your company.’ It’s
similar to the ‘pimp-and-ho’ model: they put the money into you, and you’ve
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 Bank—or maybe
Bank of America.
Actual big-shot hedge-fund manager’s tip: “Probably Goldman is still the
best. Remember: When you start, you’re walking upright but weighed down
by the seeder, the prime broker, and your own team—they’ll all want equity,
of course—and it’s a real slog. But once you’ve got your seed and your
documents in order, you’re ready for business.”

Step 6. Check into your very own hedge-fund hotel!

Even though you’re 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 suites—
“hedge-fund hotels”—that are just waiting to have their reception areas
emblazoned with your fund’s logo.
Actual big-shot hedge-fund manager’s 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!

It’s a long road to your first billion. But when you get there, watch your
back!
Actual big-shot hedge-fund manager’s tip: “When you have over a billion
dollars at least, that’s when people start shooting at you. There’s so much
Schadenfreude out there that you’ll need Schadenfreude-defense. But
remember—that’s way down the line.”

Once you’ve successfully navigated all these steps, celebrate in pre-2008

style: build a Suffolk County house that eats up 90 percent of your lot’s
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.
Photo illustration incorporates artwork by ROJOdesigns (wheelbarrow of money).

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