Starting a hedge fund? Here is something you should know before taking the plunge: Most managers nail the investment thesis but completely blow the budget.
Sure, you’ve got your “2 and 20” (2% management fee, 20% performance fee) all figured out. But consider what happens once those bills start rolling in if you’re unprepared.
That $25K legal budget becomes $75K real quickly once regulatory complexities hit. Compliance metastasizes from a line item into a monthly cash drain. Technology expenses mysteriously triple initial projections.
And that’s only the tip of the iceberg.
The reality is that seven major cost buckets separate successful fund launches from expensive mistakes. Miss even one in your planning, and you’ll face an uncomfortable conversation with potential investors about needing more runway. Or worse: shuttering before even raising your first dollar.
Cost 1: Legal Structuring and Fund Formation (U.S. + Offshore Options)
Starting a hedge fund means lawyers become your new best friends. Expensive ones, at that.
Legal structuring hits harder than most managers expect. Simple U.S.-only funds start around $15K-$50K, but complexity drives costs fast. Add a master-feeder structure, offshore Cayman entities, or custom side letters, and you’re looking at prices ballooning to $100K or more before you’ve written a single trade ticket.
Sponsor entities, management companies, fund LLCs, offering documents, regulatory analysis — each piece adds up. Cayman registration fees also pile on if you need offshore access.
The smart move? Stage your structure. Launch lean with a basic U.S. fund, then add feeders and offshore vehicles once you’ve proven the strategy works. Your future self will thank you when the legal bills don’t torpedo your launch capital.
Cost 2: Regulatory Authorizations and Ongoing Compliance
Legal structure gets you in the door, but regulatory compliance keeps the lights on.
Form PF amendments kick in on October 1, 2025, which means you need new data systems and reporting processes. Trading futures or commodities tacks on NFA membership fees — $750 yearly for CPO/CTA registration, plus other charges that pile up. U.K. managers got hit with 3.8% higher FCA fees for 2025-26, and EU operations face AIFMD II changes coming in April 2026.
See what we mean? You’ll need compliance help to size your filings correctly and pull data from your administrator automatically, and that never happens for free.
What you can do is set up ADV and Form PF automation early because doing it manually burns money and breeds mistakes. European marketing works better through NPPR instead of full EU authorization too. You can skip the depositary costs until you can genuinely scale.
Cost 3: Fund Administration and Investor Services
If you’re starting a small hedge fund, fund administration costs will hit you hardest.
You’ll pay 2-4 basis points plus monthly minimums for everything administrators handle — NAV calculations, investor onboarding, KYC checks, allocation tracking, and monthly statements. Consider also that you’ll pay the same fixed monthly minimum fee whether you manage $10 million or $100 million.
EU funds face extra depositary costs under AIFMD rules, and AIFMD II, coming in 2026, makes liquidity oversight even pricier. Your administrator runs the back-office machinery: waterfall calculations, carry tracking, and regulatory feeds to authorities.
Cut costs by dealing monthly instead of weekly and keeping share classes simple. Find an administrator with good APIs so less gets done manually. Pick wrong here and you’ll get expensive monthly surprises that quickly compound.
Cost 4: Audit and Tax
Audit fees become annual reality checks when starting a hedge fund.
Annual audits run $20K-$100K+, depending on your structure and strategy complexity. Simple single-fund setups stay on the lower end, while master-feeder structures and high-volume trading strategies push costs higher fast.
Regardless, you’ll need financial statements, tax filings, investor K-1s, and FATCA/CRS compliance. Institutional investors expect clean audited financials, no exceptions. Cayman funds face local audit requirements and regulator scrutiny too.
Control costs by aligning your administrator’s chart of accounts with what auditors need upfront. Keep share classes simple and avoid investor-level customizations that create extra work. Remember: Your auditor bills by the hour, so cleaner books mean lower fees. Complex share classes and custom investor terms add audit hours and directly translate to bigger bills.
Cost 5: Trading Infrastructure, Prime Brokerage, Execution, and Custody
If you’re starting a hedge fund, prime brokerage relationships are expensive necessities.
Your prime broker handles custody, execution, stock lending, and margin financing, but higher interest rates changed the whole financing game. Short rebates improved while borrowing costs jumped, which means you need to factor real financing expenses into your P&L projections instead of treating them as afterthoughts.
Derivatives strategies add another layer of complexity with CFTC/NFA registration requirements and ongoing compliance overhead. Every service your prime broker provides comes with fees that grow alongside your trading volume, from commissions and collateral management to operational controls.
Smart managers start with one strong prime relationship instead of spreading thin across multiple counterparties. You can introduce brokers later for broader market access, but focus first on keeping stock borrowing centralized and trade files clean to avoid costly settlement breaks that damage your prime relationship.
Cost 6: Technology, Market Data, and Cybersecurity
Technology costs triple faster than any other expense when starting a hedge fund.
Bloomberg terminals run $27K-$30K annually per seat before add-ons. Refinitiv Eikon costs $1.5K-$2.2K monthly, depending on your package. FactSet pricing hits the upper five to low six figures for multiple seats. And that’s just a taste of what market data feeds could run you before factoring in order management systems, portfolio management software, cloud hosting, and cybersecurity.
What’s more, pass-through expense models at major platforms can push total operating charges up to 7% of assets, which means technology vendors eat into your margins faster than you realize. You need secure communications, endpoint protection, disaster recovery testing, and SOC 2 compliance to satisfy institutional investors.
Manage your costs by choosing fewer vendors with deeper integrations rather than cobbling together multiple point solutions. Negotiate data entitlements tightly and use managed security services instead of building cybersecurity capabilities in-house.
Cost 7: Distribution, Investor Relations, and Protective Cover (Marketing, Placement, Insurance)
Finally, it costs money to raise money, and protection costs even more.
Third-party marketers typically take 20% of both management and performance fees, often demanding retainers upfront before they place a single dollar. Model those economics carefully against your target AUM and investor lockups because the math can get ugly fast.
Insurance premiums hit smaller funds hard too. E&O, D&O, and cyber coverage run five to low six figures annually, depending on your limits and claims history. Financial services placements got pricier after 2020, but institutional investors expect comprehensive coverage.
Investor relations also means websites, DDQ updates, investor portals, and monthly reporting templates that eat time and money. So, keep your IR infrastructure light with basic portals and standard DDQs until you reach real scale. Consider also milestone-based third-party agreements that tie payments to fundraising success instead of paying retainers for empty promises.
Don’t Be a Cautionary Tale: Get Your Budget Right From Day One
Starting a hedge fund means these seven cost buckets hit you whether you plan for them or not. Form PF changes arrive this October, reforms keep changing wherever you are in the world, and smart managers design their operations to handle regulatory curveballs without expensive emergency fixes down the road.
Michael Coglianese CPA, P.C., helps fund managers get the budget right from launch. We handle the audit, tax, and compliance work that keeps regulators satisfied while you focus on generating returns. Our team knows which service providers deliver value, how to structure efficiently, and where you can save money without creating problems later.
Take the first step in getting your hedge fund budget right. Contact us today and we’ll build a rightsized, regulator-ready plan.