The growth of hedge funds is set for a record year

Date: Tuesday, November 27, 2012
Author: Jeffery Storm, Global HFA

A recent CNBC segment “Why More bankers May Be Starting Hedge Funds” Global HFA a hedge fund consulting company has a few points to add. The growth of new start up hedge funds is growing faster than ever in its history dating back over 60 years. The amount of new inquiries to start hedge funds, private equity funds and real estate funds are hitting record levels due to a variety of reasons.

Andrew Schneider the President and CEO of Global HFA has helped over 500 funds launch and has several comments to explain why there are a large growth of start up funds. “There are a few reasons why hedge fund managers are leaving there current firms and starting new funds” states industry expert Andrew Schneider.

With the Dodd-Frank bill being passed the Volcker rule changes the way banks can run prop divisions. These divisions
have traditionally been one of the most profitable components of the banks. Most banks are either spinning them off or shutting them down. Due to this most of the new start ups are more experienced traders with larger AUM when they launch. This is different from the last few years where most start up funds had small amounts of AUM.

In addition the Jobs Act passed by president Obama this year allows hedge funds to advertise for the first time in almost 80 years which gives a big advantage to start up funds who traditionally have a tough time raising money when they first start which cause most to go out of business. According to Global HFA “50% of new funds close in the first year and 70% in 3 years” states Andrew Schneider Now funds have a much more competitive chance of raising money because of the restrictions of advertising being lifted.

Hedge Funds since the launch of the first one by Alfred Winslow Jones a writer for fortune magazine started his in 1949 most funds traditionally traded equities and options occasionally other products were included but not until about ten years ago have we seen a huge growth in the type of securities that are traded in hedge funds. Schneider states “it is very rare to see an all equity fund now most new funds are trading futures, forex, credit products, international securities, real estate, private equity, and other non traditional securities.”

Popular strategies like Merger Arbitrage, Stat Arb, and Long/Short are a few that have been replaced with newer trading strategies such as forex, futures , and more accoteric strategies. “Global HFA gets almost 3 inquiries a day for start ups and one out of three in the past 3 years have been either forex and/or futures” adds Schneider. The market has changed meaning fund managers have to adapt to so they can find inefficiencies and be able to make returns for there investors.

Finally, the barrier to entry is very easy. To start a hedge fund the cost is very minimal and depending on which state you live some require very little regulation. “This is a double edge sword states Schneider because a fund can be set up for under 20k this attracts a lot of unqualified people managing money. The flip side is this makes the industry more entreoprenaul and competitive which is good for the industry as a whole” states Schneider. The average fund use to start out with around 100 mil now 5-10 mil is considered a good start.

According to Global HFA even though a lot of new managers will be starting funds make sure to do your due diligence
There are several things you want to look for such as the fund managers background, where the assets are being held, does the fund use a third party administrator and who is doing the audit. You can check with the SEC website for help as or contact an attorney with any questions.

Global HFA offers free consultations if you are interested in starting a fund please visit www.globalhfa.com or email Andrew@globalhfa.com for any questions you may have.

Jeffery Storm
Assistant Editor for Global HFA