Contrary to popular belief, you don't need a billion dollars to get a hedge fund up and running.
According to Daniel Strachman, a financial expert who serves as the Director of Research and Strategy for the GAIM Conference Series [Informa plc
(INF.L)], you can start with a relatively small amount of money.
"It's reasonable to think that a group of people could get together and launch a fund for under a million dollars," Strachman told StreetID. "You could hire a lawyer, hire an accountant, open a couple brokerage accounts, and get a fund up and running from an out-of-pocket expense of just north of $100,000."
That, however, is just the beginning. "In terms of launching a fund, I think you need to launch at a minimum between $10 million and $20 million to have critical mass," said Strachman.
While some have questioned the value of smaller hedge funds, Strachman believes that products are launched and created "because the market demands them."
"That's what makes our market the most interesting market in the world," he said. "We're able to create products and build liquidity and provide services to meet the demands of investors. I don't think it's a failure if someone launches a fund of $5 million and grows it to $50 million. That's a nice business. It may never be a billion-dollar fund. But okay, there's room for everybody. There's an opportunity for everybody to be in the market.
"I think the issue now is that with the JOBS Act and other rules that have come out, there's more of a framework for operating the business. I think that's what makes the business so interesting."
Strachman disagrees with those who say it's a mistake to launch a small hedge fund.
"Everybody would love to have money from the large endowments, foundations, and pension plans," he said. "But it's not realistic to say that if you got $5 million or $10 million you're gonna get money from a large pension plan."
However, Strachman said that it is
realistic for hedge fund managers to attempt to grow a $10 million or $20 million fund into one that holds a few hundred million worth of assets, "and then take a $100 million business and grow it to a half-billion-dollar business or a billion-dollar business."
"But it doesn't happen overnight for most," Strachman added. "It may not ever happen for some. But it's reasonable to think that over a period of time, if you build the business effectively by doing what you say you're gonna do in the market -- you're gonna implement your strategy, the strategy is gonna work -- it's reasonable that you will grow your business."
Whatever you do, don't get your hopes up too high, too fast. "Is it reasonable to think that a guy with $5 million will grow to $30 billion?" Strachman questioned. "Probably not. But it is realistic to think that a guy with $5 million could have incremental growth to $20 million, to $50 million, to $100 million, to $500 million, to a billion, etc."
That growth could take five to 10 years, Strachman said. "But that's the price of being an entrepreneur," he added. "That's what you're trying to do -- you're trying to build a business. I think it's unreasonable for people to think, 'Well, I have a new fund, I gotta get in front of all these big players.' I'm not sure that's a good use of anyone's time."
To really succeed, Strachman said that you have to define your marketplace. "You need to figure out what you need to access your marketplace and put in a good marketing strategy to communicate to the marketplace," he explained. "If you're a $20 million fund, you probably have no business calling up pension plans. But you should be calling on high net worth investors, family offices, maybe some small endowments."
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