This is a question we often hear when approached by aspiring Professional Money Managers, usually Traders with a decent track record who want to take their financial trading career to the next level.
The answer is not the same for everyone: it depends on a number of factors such as the target clients, markets in which the manager invests, capital available both to set up the business and for the actual investments, number of proven trading strategies, connections within the financial industry, know-how and previous experience in the investments business.
Starting a hedge fund is definitely something to seriously consider once you have all that it takes, as we are going to discuss in this article, but if you have little experience and/or too little capital then it is probably better to start with a PAMM account.
To set up a new hedge fund there are different solutions in terms of legal structure and jurisdiction (onshore/offshore), but just to give you a rough idea:
Making a quick and simple calculation you will understand that you will need an initial critical mass of something between $3m and $5m to cover the setup costs and keep the fees at competitive/reasonable levels.
Also bear in mind that in most cases the minimum amount of capital required from an Investor to subscribe to a Hedge Fund offer is $100,000. If this is an issue for you then there could be solutions (client pooling sometimes is allowed), yet the downside could be a potentially huge waste of time that could engulf your operations.
Where possible you should build a team, not necessarily big, it could be as small as 3-4 people, as long as you avoid the scenario where the Trader “speaks” with the clients: not only it would be a distraction for the Trader (who has to focus on the market), but it would increase the amount of psychological pressure he has to bear.
If you cannot put together all the pieces of this puzzle then you are better off with a PAMM account to start your career as an Investment Manager.
With either solution you can earn different types of fees (performance, maintenance, entry/exit), however a PAMM is a light, yet effective structure that lets you start with peace of mind as you don’t have to worry about covering the costs of a hedge fund.
The following table summarizes the reasons why a PAMM solution is an easier way to start up for many:
Given that you can get the benefits of a Hedge Fund structure with a simple PAMM, then why you should still consider setting up your own fund at some point?
Once your AUM (Assets Under Management) grow considerably (say over $20-30m) you will want to diversify your investment strategy to lower the risk. As everyone knows you should not keep all your eggs in one basket!
Other asset classes are: real estate, bonds, money market securities, physical metals and other commodities not traded on financial markets, artwork and other collectibles.
Additionally, you could invest in other funds: hedge funds, sicav, mutual funds, private equity funds, venture capital funds and so on.
While the Key to Markets PAMM does all the work for you automatically, to manage investments outside of your mt4 trading account you will absolutely need the services of a Professional Fund Administrator as well as a squad of accountants, auditors and lawyers.
This matter becomes even more serious when you want to market your fund to other fund managers (i.e. institutional investors) who could be attracted by your track record (a low drawdown above all).
You definitely want to get to that point as those are the investors with significant capital that can bring your business (hence your revenues) to the next level: the effort of serving institutional clients is better rewarded compared to dealing with the retail clients. For the latter you can always keep the PAMM running if you want to.
As explained above the best and easiest way to start your career as investment manager is to start a PAMM account and, with the help of Key To Markets, grow your knowledge and capital until you will be able to open your own hedge fund.
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