Six major costs of starting a hedge fund

By Michael Coglianese, principal of Michael Coglianese CPA,Chicago.

Michael Coglianese Beyond designing an investment strategy is the important task of setting up your firm infrastructure, and that includes how to budget the costs of starting your hedge fund. To outline cost estimates of what it takes to start a hedge fund, here are six of the major start up services using a hypothetical hedge fund:

Great Example Capital Management, LP has been prop trading for the past three years and is in its first year operating as a hedge fund. The company has 10 investors, $5 million in assets under management, and has a fully automated strategy. Initially, the firm will consist of only its managing principal.

1. Legal costs

Year 1 estimate: $15K-$50K

First, you'll need to do to is create the fund's legal structure, including setting up your limited partnership and any other additional entities required. Consider where you'll incorporate your fund, i.e. in your home state, Delaware registered, or offshore in say, the BVI or Caymans–your legal council will advise you on the best fit for your strategy.

The costs of setting up a hedge fund can vary from approximately $15,000 to $50,000, and likely more if you use a "silk stocking" law firm. The biggest cost variable in the setup process is if the manager wants to go with a master-feeder fund structure. Doing the master feeder fund structure means adding two to three more entities, and with the additional entities customarily formed offshore.

Formation offshore generally is more costly than forming a US entity. It also usually means paying director fees along with fund administration and an audit for each entity. So, compared to a simple......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.