The costs and complexities have setting up a new fund are opaque to most individual investors.
This report by Bloomberg, in partnership with the Alternative Investment Management Association (AIMA), is one of the more comprehensive guides to the essential building blocks of starting a new fund.
There are 8 aspects of a new fund’s business plan to consider:
Graphics: ACM Research; Source: Bloomberg
As enigmatic (or glamorous) as investment/asset management might sound to outsiders, all emerging managers know that the initial sunk costs and recurring expenses for a new fund are daunting.
“It’s easy to spend in excess of USD1 mil to set the venture up before any revenue comes in the opposite way.”
Source: Hedge Fund Start-up Guide, Bloomberg
Managing “other people’s money” in a licensed, regulated environment is not easy – it requires plenty of capital and a seasoned team to scale the barriers to entry: monetary, regulatory, and commercial.
Source: ACM Research
No matter how awesome the investment strategy, the initial burn rate of a new fund (3-5 years) has an outsized impact on its survivorship.
When assessing a fund, most individual investors start and stop at assessing the viability of an investment strategy. Because the non-investment side of the business is not obvious to most investors. (It inevitability falls to regulators to pick up the slack to set and enforce a level of due diligence and compliance for all licensed funds.)
Informed institutional investors will go the extra mile, beyond investment strategy assessment, to conduct due diligence on the commercial viability of an entity including counter-party risks, core team expertise, operational and compliance review, etc.
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