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Have you ever thought about starting your own hedge fund?

Reported by:
Treasa Moran

On November 3rd at the Metropolitan Club, approximately 125 CFA Society of Chicago members and guests heard a distinguished panel of Wesley G. Nissen, Samuel S. Weiser and Jeffrey Izenman advise on starting a successful hedge fund.

Samuel S. Weiser of Citigroup's Prime Brokerage Division began with a business management and operational review. He stressed the importance of finding your "edge", which should be easily communicated. Investors need to understand your strategy, with its credibility enhanced if you have related asset management experience. Weiser recommended that developing the fund business plan requires time to make a compelling case. The plan should be comprehensive, addressing strategy, approach, personnel and financial projections. Risks, related to both operations and investments, should be carefully assessed. Above all, keep the plan simple. Finally, choose partners whose skills and strengths complement, as opposed to replicate, your talents.

Wesley G. Nissen, from the law offices of Winston & Strawn, LLP, conducted a mock interview of a potential start-up to highlight many conceivable business subtleties. From a regulatory standpoint, the landscape has become more restrictive. Effective February, 2006, hedge funds will need SEC registration if they have more than 14 investors and a lock-up period of under two years. Over the last several years, the costs of running a fund have escalated. $25 to $50 million in assets under management are now needed to profitably cover costs. Issues like the use of soft dollars, portability of prior performance history, potential commodity futures registration and conflicts of interest with proprietary trading may require attention. Wesley advised that, above all, you must really want to manage other people's money.

Jeffrey Izenman, an active seeder with BRI Partners, LLP, identified successful hedge fund start-up criteria. He reviewed capital raising options, typical terms and investment criteria. Except for superstar investors, most founders will raise capital from various strategic partners (one-off investors, passive/active seeders). Often it is most feasible to join an existing hedge fund platform. The best model has the organizer committing substantial personal capital. An agreement's terms will typically be two to four years for an active seeder and less for passive investors. Jeffrey agreed simplicity is golden and that competitive advantage lies in how you run your strategy. Real experience managing money is a must, so a track record is essential, even if via using family and friends' assets. With just one shot to make a first impression -- come fully prepared!