Hedge Funds 101 for emerging managers (Grant Thornton)

April 2014

KEYWORDS: emerging managers, Dodd-Frank Act, startup capital, assets under management, hedge fund registration, SEC, Securities and Exchange Commission

Authors:

Yossi Jayinski

Organizations:
  • Grant Thornton

Summary:

Hedge funds were hit hard by the financial crisis, and many closed up shop1. The industry has since bounced back: Assets under management (AUM) at the end of 2013 rose to more than $2 trillion, and performance for the year was the best since 2010.2

The turnaround is of course welcome news for hedge fund startups. But launching and growing a new fund is as challenging as ever. Competition for capital is fierce, and many funds – particularly those just starting out – are more than willing to cut fees to attract money. In addition,  the majority of assets now come from institutions, which prefer well-established funds over newcomers lacking committed  capital and a long history of high returns. And all investors across the board are much more skittish about safeguarding their money, giving rise to a due diligence process that is increasingly quantitative and complex.

On the cost side of the ledger, a raft of new legislation, most notably the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has greatly increased compliance expenses. Managers that raise enough money for a full-fledged fund must now contend with the onerous requirements of SEC registration. At the same time, funds that remain outside the registration requirement are unlikely to attract the interest of institutional investors.

Despite the obstacles, a more settled economic climate and better industry conditions improve the odds for managers seeking to start their own funds.

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