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The Ocean-Ready Hedge Fund Business Model

Many emerging managers and hedge fund startups mistakenly believe that just because they have a great strategy investors will eventually flock to their hedge fund.  Hedge fund investors like to see that you have a strong hedge fund business model and that you are of institutional quality.  In the following video, I provide some tips and strategies for getting your hedge fund ocean-ready.

Video Transcript/SummaryThe strategies and tips provided within this video module include:

  1. If you go out to meet investors too quickly, you could do a lot of damage to your hedge fund.
  2. Some funds are too eager to raise capital and present their fund at a point when the fund is not yet at 100% and you risk losing that investor forever.
  3. You want to have all your marketing materials and your investment strategy prepared and well-polished.
  4. It’s ideal to have a lot of investors and consultants that will give you some advice early on in your fund’s lifetime and many managers try to launch so fast that they have not developed these relationships.

Transcript for Ocean-Ready Hedge Fund Business Model

Hello, this is Richard Wilson and today I’m going to talk to you from here in Nice, France about making your hedge fund business seaworthy or ocean-ready. Well, I’ve been learning more about sailing in these past few years while raising capital and working in a hedge fund industry. And I think one truth about a hedge fund industry is that if you launch your hedge too quickly and you go out and meet with investors too quickly and too many different types of investors too quickly, you’re going to get recorded in different institutional databases as being unprofessional, as not having a clear investment process. You’re going to do a lot of damage.

I even spoke with somebody at the game 2011 conference last week about this. And they said that they only represent and they only raise capital for fund managers within in their first 6 months of launching their fund, because otherwise they’ve probably already done so much damage for themselves in the industry, that’s a waste of their time but you can work with them. I think that’s a little bit extreme but I think the advice goes along with what I’m trying to tell you right now is that when you’re sailing in a bay as many sailboats do here around Nice, you can have some things that aren’t totally working well in your boat.

Your rigs cannot be set up right, your ropes could be loose, maybe a couple of your sails are in bad shape, maybe the things on the walls of your sailboat inside the boat aren’t really secured. But if you go out in the ocean you really need to be kind of sea-ready or ocean-ready or seaworthy. In other words, if you get in a storm or if you go over a bunch of swells you don’t want things flying around inside the cabin of your boat. If you need to have your main sail work because your engine dies, you really need that main sail to work. You can’t really rely upon, you got a coast guard in the bay that he’d come, tow you over 50 feet to your dock. It’s much more serious when you’re out in the ocean.

So it’s really a great analogy for running, starting and growing your hedge fund because before you go out and meet with very important investors, you don’t or you have a great relationship with, you really want to have everything walked down and in place. You want to have your marketing materials, kind of in grade A shape, institutional quality, everything that you’ve shown an investor you want to have looked at 5 times by people in your team, do the fifth draft, have it compliance approved. If somebody is going to ask you for a standard DDQ or a question that comes in a standard DDQ you should be able to answer within one business day, not a week or two.

Everything you do in your business should be well-polished by the time you’re meeting with new investors. Hopefully when you launch your fund you’re able to balance ideas off of consultants, advisors, service providers and some investors you already have good relationships with, then that’s how you get the important feedback and really figure out what’s your checklist, what’s those 20 or 30 things that you are kind of seaworthy before you go out and start meeting with investors face-to-face about your fund.

And this is something that I think is a common mistake to make. People want to get out there and raise capital really quickly, you know speed an implementation, just get out there and meet with investors and get great feedback, but really you need to be very cognizant of the fact that if you do that too early and too fast, you’re really going to hurt yourself and you could sink your boat very on in the process, whereas if you just take that first valuable piece of the feedback from your investors, really use it, implement it, and evolve your fund at higher levels before taking it out to 300 different investors, you’re going to be much better off in the long run.

So I hope you enjoyed this video. It’s Richard Wilson coming to you from Nice, France and we’ll see you again soon.

Before you go out and try to meet with investors to present your fund it is important that you have your hedge fund business model well-established and storm-tested so that it can stand up to inspections by hedge fund investors. 

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