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The course Hedge Funds Fundamentals and my experience like an owner of the hedge fund

03 April 2017

In February I attended Hedge Fund Fundamentals course again. Before launching Eganov Asset Management Stocks&Derivatives Strategies hedge fund I was one of the first students who took this course by George Ivanyan and Evgenia Sluchak. One of the guest speakers was Michael Boboshko. He is a spokesman for one of the most famous hedge-fund administrator Apex. The course was taught at New Economic School during two days.

The course Hedge Funds Fundamentals and my experience like an owner of the hedge fund

Why did I decide to repeat the course?

I decided to refresh my knowledge. The industry of hedge funds is huge and the most of the changes are hard to track on my own.

I wanted to know what has changed in the marketing of hedge funds. The marketing of hedge funds is strictly regulated by the legislations and rules of business turnover. In spite of new rules allowing the advertisement for hedge funds, I haven’t seen any ads for them.

I wanted to know the changes in the structure and classification of hedge funds.

How much does it cost to launch and maintain a hedge fund?

The costs for the launch and maintenance of a hedge fund depends on jurisdiction and type of fund. The most common of jurisdiction of 64% for registration of the hedge funds is in Cayman Islands. Today Cayman Islands have the best prices and services for the hedge funds.

Choosing  a type of hedge fund affects the costs of launch. By instance, the most simple hedge fund in Cayman Islands costs around $10-15 K USD. An european type of fund UCITS may cost more than $30 K USD.

Maintenance of hedge fund depends on jurisdiction, type of hedge fund, administrator and audit fees.

Administrator and audit fees depend on the level of the company, number of transactions in the hedge fund, and frequency with whom administrator makes statements. If the hedge fund has HFT (High Frequency Trading)  strategy, then the amount of transactions may be increased to more than 1000. And if the hedge fund has daily reports then the administrator’s fee will be more than the hedge fund’s fee which has to report monthly even if it has lots of number of transactions.

Using Eganov Asset Management Stocks&Derivatives Strategies hedge fund as example.

I chose a SP structure for my hedge fund. It means that my hedge fund is included in the platform with other hedge funds. Michael Boboshko used a metaphor in his lecture which I would like to use. SP or sub-fund is a rented apartment in an apartment house, where the administrator is an owner and a house manager.

The establishment  of the  sub-fund costs $21,000 in 2012. Now the costs for the launch are around $30,000 and the minimum assets under management  are $3 mln.

Monthly costs of my hedge fund include:

  • Administrator fee Apex - $2,400
  • Audit fee - $833.33
  • FATCA fee - $333.34

Totally my hedge fund is paid $3,567 monthly or $42,800 annually. Every year I pay an additional government fee for the management company of my hedge fund. The government fee includes $8,526 for the company and $854 for the director in CIMA. Total annual fee for the management of  a company in Cayman Islands is around $9,380. Therefore,  annual costs  of the maintenance of one of the cheapest hedge funds is $52,180.

My recommendations

From year to year legislation for hedge funds becomes more transparent for regulation. Since last year, everyone had to to report to FATCA. If you decide to launch a hedge fund as a business, and you start  with amount around $500K then you have to be ready that the cost will cut the big pie of your annual return. Therefore, your strategy for your hedge fund has to be super-profitable of more than 30% of  annual return. Or you can create a hedge fund like a  business with amount  of $3 mln because there are not super-profitable strategies in a long- term. You need to have 3 years and more until you can start to attract investors to cover your costs. Investors don’t invest in hedge funds with unknown administrators and audit companies. Investors will not invest money if the hedge fund managers don’t invest  themselves in their hedge funds. Don’t rely on investors who promise you to invest money after you launch your hedge fund. The registration of a hedge fund takes from 6 to 9 months. For this time the investors’ plans can change but you already invested money for the launch of the hedge fund. Therefore, it is  better to register your hedge fund by dividing costs of launching with the investors if they are really ready to invest money in your strategies.

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