If you intend starting this type of business, it is advisable to first look at the existing laws and zonal regulations in the city or state you reside in to know what is expected of you. You would need to pay a visit to the regulatory bodies in your state to know what you need to do before you can legally open a hedge fund business in South Africa. You can start your hedge fund business from a small town in South Africa and if you are good at what you do, it won’t be too long before your brand becomes nationally recognized.
20 Steps on How to Start a Hedge Fund Business in South Africa
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Understand the Industry
The concept and term ‘Hedge Fund’ was created by Alfred Jones in 1949. He founded A.W. Jones, which is a partnership of four friends, and through this investment vehicle, they were able to invest one hundred thousand U.S. dollars ($100,000) in the stock market.
They employed both long and short positions. The bottom line is that they were able to generate 17.3 percent returns during the first year of investment and that was enough to set the ball rolling for their hedge fund investment. History has it that hedging out unwanted risk has been a common business activity in the financial markets for centuries.
Which is why as far back as the 18th centuries, commodity manufacturers and merchants have started using forward contracts to protect themselves against future changes in commodity prices— they do it to hedge out the risk of adverse market fluctuations beyond their control. Forward contracts are still pretty much traded to this day in the futures/commodities market.
Hedge Funds Investment is not open for all because it requires large capital to invest with. The amount required to invest in hedge funds could range from 1 Million US Dollars to even multiple Millions of Dollars. Each Hedge fund manager has their requirements, so ensure that you save up large amount of cash that can meet the investment requirement of the average hedge funds you can find.
Hedge fund firms are known to generate income by charging both a management fee and a performance fee from their clients. On the average, hedge fund firms charge between 1 percent and 2 percent of assets under their management annually and the performance fee is about 20% of gross profits returned by the fund which is usually based on certain constraints.
There are several hedge fund firms in South Africa but that does not in any way place a cap on the industry. If you have studied the industry, you have vast and unique investment strategies, then you can come into the industry and make profits.
Despite the high volatility of the market, investors still choose to invest in hedge funds because of the huge returns on their investment if they get it right. Hedge funds are known to provide access to a wide range of investment styles, strategies and hedge fund managers for one easy-to-administer investment. Hedge fund provides more predictable returns (depending on the objectives of the fund), than traditional investment funds and it provides effective diversification for investment portfolios.
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Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
Hedge funds is simply an investment medium that enables big time accredited investors or well established institutions pool cash or capital together to invest in securities and any other investment opportunity that requires large initial capital to invest in. The fact that hedge funds requires large capital makes it easier for only the rich and accredited investors to cash in on it. Hedge funds are only open to limited partners with the required cash for investing in capital intensive business portfolios.
If you have the required cash and the right investment philosophy, then you should source for like minds who are already into hedge funds.
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Decide Which Niche to Concentrate On
There are no niches in the hedge fund industry, but that does not in any way stop hedge fund manager from adopting strategies that will help them perform excellently in the market. The truth is that if you fail to perform as a hedge fund manager, you will be out of the market; you just have to keep performing year in and year out if you want to be relevant as a hedge fund manager.
Be that as it may, here are some of the areas a hedge fund manager can focus his or her strength and investment strategies on;
- Global Macro/CTA
- Commodities
- Seeder/Accelerator Funds
- Emerging and Mid-Sized Manager Focus
- Aggressive Growth
- Distressed Securities
- Emerging Markets
- Funds of Hedge Funds
- Income
- Macro
- Market Neutral – Arbitrage
- Market Neutral – Securities Hedging
- Market Timing
- Opportunistic
- Multi Strategy
- Short Selling
- Special Situations.
The Level of Competition in the Private Equity, Hedge Funds & Investment Vehicles Industry
The competition that exists in the hedge fund business goes beyond competitions with other hedge fund firms; you will be expected to compete with private equity firms, and other investment vehicles. So, it will be right to say the competition in the hedge fund business is tough.
The truth is that despite the fact that hedge funds gives huge returns on investment, it is indeed risky venture. If you drive through the street of Johannesburg, you will come across several hedge fund firms; that goes to show you that there are competition in the industry. For you to survival as a hedge fund firm, you should be able to come up with workable investment strategies; strategies that will help you attract the required cash / capital and above all you should be a good risk manager.
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Know Your Major Competitors in the Private Equity, Hedge Funds & Investment Vehicles Industry
Here are some of the most popular hedge fund companies in South Africa;
- Avior Research (Pty) Ltd.
- B&P Group Financial Services (Pty) Limited
- Barnard Jacobs Mellet Holdings Limited
- Legae Securities (Pty) Ltd, Research Division
- RMI Investment Managers
- Rockwood Private Equity
- Trinitas Private Equity
- Aka Capital
- Laurium Capital
- Ethos Private Equity (“Ethos”)
Economic Analysis
If you are looking towards successfully launching a business and maximizing profits, then you need to ensure that you get your economic and cost analysis right and try as much as possible to adopt best practices in the industry you choose to build a business in.
Hedge fund firms employ strategies that can help them reduce market risk by shorting equities or through the use of derivatives. Which is why many hedge fund strategies, mostly arbitrage strategies, are limited as to how much capital they can successfully employ before returns starts diminishing. Little wonder most successful hedge fund managers place limit on the amount of capital they will accept per time.
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Decide Whether to Buy a Franchise or Start from Scratch
If you are looking towards starting a hedge funds firm, then you have just one option; to start from the scratch. Investors invest in a hedge fund firm because they are comfortable with the hedge fund manager and not just the brand. So even if you operate under the top hedge brand, you must be able to prove that you are a good manager before you can attract investors.
In essence, you will go through the processes of incorporating your hedge fund firm, acquiring the relevant certifications and business license before you can be allowed to operate a hedge fund firm anywhere in the world and not just in South Africa.
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Know the Possible Threats and Challenges You Will Face
Hedge funds involve a large amount of cash and it is known to be a very high risk venture, hence whoever chooses to manage it must not just have solid investment background, but must also know how to handle risks. The truth is that if you are not grounded in risk management, you may likely throw away peoples’ monies and investment. That is why it’s often said that you don’t learn the ropes with hedge funds; rookies hardly survive managing hedging funds without first cutting their teeth elsewhere.
Just as in any other business and investment vehicles, economic downturn, unstable financial market and unfavorable government economic policies can hamper the growth and profitability of hedge funds.
Please note that in times of unprecedented market fall as we’ve recently experienced, several hedge funds in South Africa held their own. They were diversified through their portfolio construction and investment strategy.
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Choose the Most Suitable Legal Entity
Hedge fund firm is indeed a serious business so the legal entity you choose will go a long way to determine how big you want the business to grow. No doubt choosing a legal entity for a hedge fund business can be a bit challenging. When it comes to choosing a legal entity for your hedge fund firm you have the option of choosing from a general partnership, a limited partnership, an LLC, a “C” corporation, or a “S” corporation.
It is important to clearly state that these legal structures have their own advantages and disadvantages; which is why you must weigh your options properly before making your choice on the legal structure to build your hedge fund firm on.
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Choose a Catchy Business Name
When it comes to choosing a name for your business, you should be creative because whatever name you choose for your business will go a long way to create a perception of what the business represents. It is the norm for people to follow the trend in the industry they intend operating from when naming their business.
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Discuss with an Agent to Know the Best Insurance Policies for You
In South Africa and in most countries of the world, you can’t operate a business without having some of the basic insurance policies that are required by the industry you want to operate from. Thus, it is imperative to create a budget for insurance and perhaps consult an insurance broker to guide you in choosing the best and most appropriate insurance policies for your business.
Here are some of the basic insurance policies that you should consider purchasing if you want to start your own hedge fund business in South Africa;
- General insurance
- Health insurance
- Liability insurance
- Risk Insurance
- Credit insurance
- Deposit insurance
- Financial reinsurance
- Lenders mortgage insurance
- Workers compensation
- Building/Property insurance
- Overhead expense disability insurance
- Business owner’s policy group insurance
- Payment protection insurance
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Protect your Intellectual Property With Trademark, Copyrights, Patents
If you are considering starting your own hedge fund business, usually you may not have any need to file for intellectual property protection/trademark. This is so because the nature of the business makes it possible for you to successful run the business without having any cause to challenge anybody in court for illegally making use of your company’s intellectual properties.
- Get the Necessary Professional Certification
Hedge fund investment requires the services of core investment professionals. As a matter of fact, before any investor can commit their hard earned money under your care, they usually would want to know the profile of the hedge fund manager. Here are some of the certifications you would need to acquire if you want to operate a hedge fund firm;
- Certified Hedge Fund Processional (CHP)
- The Certified Hedge Fund Compliance Expert (CHFCE)
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Get the Necessary Legal Documents You Need to Operate
It is a fact that you cannot successfully run any business in South Africa without the proper documentations. If you do, it won’t be too long before the long hands of the law catches up with you. These are some of the basic legal documents that you are expected to have in place if you want to legally run your own business in South Africa;
- DBA
- EIN
- Business and liability insurance
- Federal Tax Payer’s ID
- State Permit
- Certificate of Incorporation
- Business License
- Business Plan
- Employment Agreement (offer letters)
- Operating Agreement for LLCs
- Insurance Policy
- Online Terms of Use (if you have a website)
- Online Privacy Policy Document (basically for online payment portal)
- Company Bylaws
- Apostille (for those who intend operating beyond South Africa)
- Memorandum of Understanding (MoU)
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Raise the Needed Startup Capital
Aside from the required capitalization and pool – funds to invest with, starting a hedge fund firm can be cost effective. Securing a standard office in a good business district, equipping the office and paying your employees are part of what will consume a large chunk of your startup capital.
When it comes to financing a business, one of the first things you should consider is to write a good business plan. If you have a good and workable business plan document in place, you may not have to labor yourself before convincing your bank, investors and your friends to invest in your business.
Here are some of the options you can explore when sourcing for startup capital for your hedge fund firm;
- Raising money from personal savings and sale of personal stocks and properties
- Raising money from investors and business partners
- Sell shares to interested investors
- Source for soft loans from your family members and your friends.
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Choose a Suitable Location for your Business
Most financial services type of businesses requires that you see physically with your clients hence it must be located in good location; a location that is prone to both human and vehicular traffic and a location that is at the epicenter of a business district if indeed you want to attend to loads of clients.
The fact that you can operate your hedge fund firm from any part of the world does not mean that location has little influence on the success of the business. If you have taken your time to study hedge fund firms, you will realize that these businesses are willing to pay expensive rents in order to stay in a busy business district; a place where business and financial activities are at its peak.
It cannot be overemphasized that the location you choose to open your hedge fund firm is key to the success of the business, hence entrepreneurs are willing to rent or lease a facility in a visible location; a location where the demography consists of people and businesses who have funds to invest. If you make the mistake of renting or leasing a facility in a not too visible or hidden location simply because it is cheap, then you must be prepared to spend more in promoting the business.
It is important to note that a business facility in good location does not come cheap hence you should be able to allocate enough fund for leasing/renting in your budget. If you are new to the dynamics of choosing a location for your business, then you should feel free to talk to a business consultant or a realtor who can help you out.
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Hire Employees for your Technical and Manpower Needs
There are no special technology or equipment needed to run this type of business except for customized software et al. When it comes to choosing between renting and leasing an office space, the size of the organization you want to build, and your entire budget for the business should influence your choice. If you are looking towards running a standard hedge fund firm, then you should consider the option of leasing a facility for your office.
If you are looking towards starting your hedge fund firm you should be ready to hire only the best hands that you can find in the industry. One thing about hedge fund is that, it is your performance that will determine the pool of cash that will be under your management.
You are expected to have some key roles occupied by experienced professionals. Hedge fund career paths generally consist of the following roles: Research Analyst, Trader, Portfolio Manager, Risk Manager, Marketing or Investor Relations, Chief Financial Officer (CFO) & Chief Accounting Officer (CAO). Over and above, you will need a minimum of 6 staff to successfully run a hedge fund firm.
The Service Delivery Process of a Hedge fund Business
A hedge fund is a pool of money contributed by investors and run by a fund manager whose goal is to maximize returns and eliminate risk. Irrespective of the structure, the hedge fund is operated by a manager who invests the money into different assets to achieve the fund’s goals.
Usually, hedge fund firms invest in some or all of the following investment vehicles;
- Global Macro/CTA
- Commodities
- Seeder/Accelerator Funds
- Emerging and Mid-Sized Manager Focus
- Aggressive Growth
- Distressed Securities
- Emerging Markets
- Funds of Hedge Funds
- Income
- Macro
- Market Neutral – Arbitrage
- Market Neutral – Securities Hedging
- Market Timing
- Opportunistic
- Multi Strategy
- Short Selling
- Special Situations
Hedge fund firms make money by charging a Management Fee and a Performance Fee. While these fees differ by fund, they typically run 2 percent and 20 percent of assets under management. This incentive fee motives the fund to generate excess returns
It is important to state that a hedge fund company may decide to improvise or adopt any business process and structure that will guarantee them efficiency and flexibility; the above stated hedge fund company business process is not cast on stone.
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Write a Marketing Plan Packed With ideas & Strategies
The fact that the entry barrier for hedge fund business is high does not mean that more players won’t want to come into the industry if they have space. In essence, you must come up with unique marketing strategies if you must carve out a market for yourself within the available market in your community, city, state or country.
So, when you are drafting your marketing plans, make sure that you create a compelling company profile. Aside from your qualifications and experience in the industry, it is important to clearly state what you have been able to achieve as it relates to return on investment (ROI). This will help boost your chances in the market place.
Here are some of the platforms you can utilize to market your hedge fund business;
- Introduce your hedge fund company by sending introductory letters alongside your brochure to rich and wealthy people, business owners and other key stake holders throughout the city where your hedge fund company is located.
- Advertise on the internet on blogs and forums, and also on social media like Twitter, Facebook, LinkedIn to get your message across
- Create a basic website for your business so as to give your business an online presence
- Directly market your services.
- Join local hedge fund company associations for industry trends and tips
- Advertise our business in investment magazines and newspapers, local TV and radio stations
- List your business on yellow pages ads (local directories)
- Encourage the use of word of mouth marketing (referrals)
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Work Out a Reasonable Pricing for your Services & Products
One of the key strategies that you need to employ if you want to stay competitive in the hedge fund industry is to consistently produce results. Investors can only handover their monies to you to invest on their behalf if you have proven your worth as a competent hedge fund manager. Your ability to give your clients good returns on their investment is all you need to stay competitive and to win over clients in the industry.
It is important to state that successful hedge fund managers select their clients, their doors are not open to all and sundry. This is so because hedge fund is a regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the hedge fund’s investment manager.
So also, if you are able to secure business partnership as it relates to getting referrals, then you will be able to get the right pricing and of course maximize profits from your business.
- Develop an Iron-clad Competitive Strategies to Help You Win
The hedge fund industry is a volatile industry and you can lose the whole of your investment within a short period of time. The major techniques that you need to increase customer retention is to continue to give them good returns on their investments. The truth is that if you trade at a loss consistently, you will steadily lose your clients.
On the average, those who invest in hedge fund do so on a short term basis and the only reason why they will continue to re – invest is when they continue to get returns on their investment. As a hedge fund manager, you need to continuously invent new and workable investment strategies; strategies that will guarantee that you get good returns on your investment. If you can be successful in doing that, you will not struggle to keep your clients.
Another possible competitive strategy for winning your competitors in this particular industry is to build a robust clientele base. Over and above, ensure that your organization is well positioned, key members of your team are highly qualified and your services and products can favorably compete with the some of the best in the industry.
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Brainstorm Possible Ways to Retain Clients & Customers
When it comes to business, no matter the industry that you choose to pitch your tent in, one of the easiest ways to increase customer retention and perhaps attract new customers is to produce results and satisfy your customers always. If your customers are satisfied with your products and service delivery, they can hardly source for alternative service providers.
One of the strategies that you would need to employ in order to attract more investors that will pool more cash to your hedge funds is to ensure that you always generate good return on investment (ROI).
Part of what you need to do to achieve this is to track progress, results or outputs with the aim of improving on them quickly as the case demands. When it comes to managing your customers and building a loyal clientele base, you should purchase a customized CRM software.
With a customized CRM system, you can easily stay in touch with your clients (you can carry out quick surveys, you can introduce new products and prices to them without any hitch, you can felicitate with them on their birthdays and other anniversaries, you can keep track of their progress, you can send bulk sms and customized e – mails and above all, you can easily receive compliant and feedback from them).
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Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
If you are in business and you are not conscious about boosting your brand awareness and communicating your corporate identity, then you should be ready to take on whatever the society portrays your business to be. One of the secrets of larger corporations is that they are willing to spend good money to boost their brand awareness and to continue to communicate their corporate identity the way they want people to perceive them to be.
No matter the industry you belong to, the truth is that the market is dynamic and it requires consistent brand awareness and brand boosting cum promotion to continue to appeal to your target market. Here are the platforms you can leverage on to boost your brand and create a corporate identity for your hedge fund company;
- Place adverts on both print (newspapers and investment and business magazines) and electronic media platforms
- Sponsor relevant community – based events/programs
- Leverage on the internet and social media platforms like; Instagram, Facebook, Twitter, YouTube, Google + et al to promote your hedge fund company
- Install your Bill Boards on strategic locations all around the location where you have your office
- Distribute your fliers and handbills in target areas
- List your hedge fund company in local directories/yellow pages
- Advertise your hedge fund company in your official website and employ strategies that will help you pull traffic to the site.
- Position our Flexi Banners at strategic positions in the location where your hedge fund company is located.
- Ensure that all your staff members wear your branded shirts and all your vehicles and vans are well branded with your company logo et al.