1. Wrong Team
Finding vendors that specialize in fund launches is critical. First, you should locate an attorney that specializes in the type of fund you intend to launch (e.g., hedge, futures, crypto, etc.) In addition to helping launch your fund, your legal counsel will provide you with access to other key vendors, such as auditors, fund administrators, banks, and brokers.
2. No Track Record
Sophisticated investors generally require a 3+ year track record. Other investors generally expect at least some real trading in the strategy (i.e., no paper or hypothetical trading results). Thus, if you haven’t done so already, open a brokerage account now and get some real trading results. The amount invested is irrelevant.
3. No Term Sheet
Using a term sheet before launching a fund is key. A term sheet allows you to ascertain investor interest, as well as their particular requirements. This saves you time and money, because then you can establish the exact structure and terms your investors want.
4. No Time
Don’t wait until the last minute to get the ball rolling on the fund launch process. It generally takes about 3-6 months to launch a fund, so the sooner you start, the sooner you can take in investor money.
5. Too Many Products
Each product you want to trade comes with its own regulatory requirements. For instance, if you want to trade securities and futures, then both securities and futures laws apply. Less regulation over your business is better, if possible.
6. Too Many Investors
Due to complex laws in every jurisdiction, it’s typically better to narrow the jurisdiction of your target investors. For instance, if you are located in the U.S. and primarily have U.S. prospects, it’s likely best to start off with a U.S. fund. You can always create a separate fund for non-U.S. investors when desired.
7. Inability to Advertise
Emerging managers are generally best off relying on the advertising rule that allows them to publicly market their fund, although accredited investor verification is required.
8. Fighting the Law
If you thought you found a clever way around the law, think again. Operating a hedge fund involves strict legal requirements that must be adhered to. For instance, if you fail to register with the appropriate agencies, you could be deemed to be operating an unregistered entity, which could result in the fund’s shutdown, the return of investor capital, penalties, industry bans, etc. Unless you have a very deep pocketbook, it’s generally recommended not to fight the law (even if you have legitimate reasons for wanting to do so).
Investors tend to be skeptical of funds that seek to deviate from standard terms and structuring. Investors tend to like what they are already familiar with. They also want to be able to easily compare fund investment opportunities (e.g., apples to apples). Thus, the harder it is to compare other funds to your fund (e.g., apples to an orange), the more likely investors will pass on your fund.
10. Low Minimums
Low minimums result in more small-time investors. Small-time investors tend to require more hand-holding and are typically the first to cry and sue you when anything goes wrong with their investment. Thus, low minimums tend to equal more headaches.
We hope you heed these words of wisdom gained over years of launching funds.
If you want help launching a hedge, futures or cryptocurrency fund, send me an email at