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Are you an experienced financial advisor looking to strike out on your own? Are you willing to take risks and earn profits for yourself and your investors? Launching your own hedge fund could be the right venture for you.
Read this guide to learn more about all the licences, business structures and legal documents you'll need to get started.
A hedge fund is a managed pool of invested money. They are designed to protect, or "hedge", investments from market uncertainty, whilst generating healthy profits. Starting a hedge fund requires an expert understanding of finance and economics.
You must have an Australian Financial Service (AFS) licence before starting a hedge fund in Australia. An AFS is a legal licence issued by the Australian Securities and Investments Commission (ASIC).
To obtain the licence, you must:
You will need to choose a business structure before you start your hedge fund. There are two common business structures for hedge funds in Australia, these include:
Hedge funds are commonly structured as a trust due to tax benefits. A trust is handled as a "flow-through" entity for tax purposes by the authorities. This means that income is transferred directly to the investors.
Therefore, instead of the hedge fund itself being taxed, the individual investors are taxed as part of their income tax. This avoids double taxation of the trustees. A company, on the other hand, is subject to both corporate and income tax.
For all Australian business structures, you will need to apply for an Australian Business Number (ABN). You'll also require a registered business name and a tax file number (TFN).
Which legal documents you need will depend on the specific hedge fund you decide to start. Some of the legal documents you may need include:
Your hedge fund must comply with national laws and regulations. A lawyer can draft or review your documents or other aspects of establishing the fund.
You can find investment lawyers at Lawpath. Simply sign up, request free quotes and choose your best fit.
Raising capital is one of the biggest challenges of starting a hedge fund. Although there's no minimum requirement for getting started, it's advised that you raise between $7 to $25 million before starting. If you want to be recognised by institutional investors, you'll need at least $130 million.
There are different ways of raising capital for your hedge fund, including:
The typical fee arrangement in the hedge fund industry is the "two-and-twenty" structure. This means that clients are charged 2% of invested assets for an annual management fee. This fee is irrespective of the performance of the investments.
On top of the 2% fee, an incentive fee of 20% of profits is charged. The incentive fee is typically paid if an agreed level of profits is achieved.
What is an example of a hedge fund?
Founded in 1994, Platinum Asset Management is one of Australia's traditional hedge funds. Others are K2 Asset Management and Blue Sky.
How much does a hedge fund manager make?
The average income for fund managers in Australia is $134,881. However, hedge fund managers can make a lot more in bonuses.
Can I start a hedge fund with my own money?
You can invest your own money into your hedge fund. Many investors are known to only invest in hedge funds when the manager has money invested themselves. However, the startup costs involved with launching a hedge fund are very high. It's generally advised that a hedge fund raises a minimum of $7 million in seed capital before starting. To pay for the running costs and to attract other investors, hedge funds generally require a minimum of $100 million in seed capital.
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