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How to Start a Hedge FundFinancial regulatory reform cramping your style? Go rogue with VF.comsstep-by-step action plan.

BY KEENAN MAYO

PHOTO ILLUSTRATION BY HAMISH ROBERTSON

WEB EXCLUSIVE SEPTEMBER 28, 2010

If youve spent the last 5, 10, or 20 years enjoying the fruits of a blissfullyunregulated financial system that created wealth for its adepts but nothingfor the American people, then surely youre steamed at the big regulatoryoverhaul that passed in Congress this summer. But theres still something

you can do: move over from the stringently monitored world of banking tothe somewhat less monitored world of hedge funds. We spoke to an actual

big-shot hedge-fund manager to pick up tips on how you too can start therogue finance shop of your dreams.

Step 1: Create a he dge-fund team !

The bare essentials to get your new fund going: two junior analysts, a juniortrader, and a chief financial officer. When you spin off from your current


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bank, its crucial to steal away some crack subordinates. A big selling pointto potential investors is that you have a well-oiled, cohesive unit with ahistory of crushing it.

Actual big-shot hedge-fund managers tip: Choose people who have a nosefor ferreting out opportunities, but who are not willing to cut your guts outand try to replace you. You need junior-level people.

Step 2. Name your fund!Lets face it: aggressive, testosterone-redolent names (e.g., Hungry WolfCapital, Thor Hammer Fund, Tomahawk Capital Management) are as passas Meatpacking District mega-restaurants and conspicuous luxury boxes atthe stadium. Come off as attuned to the times with something gentle and/orarboreal (e.g., Sassafras Group, Bending Birch Asset Management,Larchwood Partners).

Actual big-shot hedge-fund managers tip: The goal is to projectsturdiness without rapaciousness. You dont want to be Three-Headed-Dog-Guarding-the-Gates-of-Hades Capital. And you dont want to use your ownname. Typically, guys use streets and towns from their childhoods. Or atree, to convey strength and deep roots.

Step 3. Hire a law firm !Youll need a good firm to incorporate your fundfirst in Delaware, andthen offshore in either the Caymans or the British Virgin Islands. But

beware of big, sprawling, white-shoe corporate law firms that overcharge.

Instead, go with the specialists who do this thing all the time.Actual big-shot hedge-fund managers tip: The Coke and Pepsi of thebusiness are Schulte, Roth & Zabel and Akin, Gump, Strauss, Hauer & Feld.Avoid the high-tone and really big firms. They are too expensive and theydont know what theyre talking about with funds. Theyre too busy billingPfizer millions upon millions to file their 10-K forms.

Step 4. Get that anchor capital!You need your first assets under management (A.U.M.) to get your fund offthe ground. But you most likely dont have deep pockets yourself, and that

damned Madoff has discredited the formerly effective inscrutable-Zen-warrior passive-aggressive approach to investor solicitation. So your bestbet is to find a seeder to put up the anchor capital. Warning: This can beexcruciating.

Actual big-shot hedge-fund managers tip: The nasty world of seedinvesting is one step up from human trafficking. They try to own a piece of

you: Ill give you $25 million, but I own 40 percent of your company. Itssimilar to the pimp-and-ho model: they put the money into you, and youvegotta go work the street. One of the best seeders is a company calledReservoir.

Step 5. Get a prime broker !


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When you buy a stock, that transaction needs to be recorded somewhere.Your prime broker is like your custodian. It clears your trades for you. Walkaround to Goldman Sachs, Morgan Stanley, or Deutsche Bankor maybeBank of America.

Actual big-shot hedge-fund managers tip: Probably Goldman is still thebest. Remember: When you start, youre walking upright but weighed downby the seeder, the prime broker, and your own teamtheyll all want equity,of courseand its a real slog. But once youve got your seed and yourdocuments in order, youre ready for business.

Step 6. Check into your very ow n hedge-fund hotel!Even though youre going rogue, you still need a proper office to lookrespectable and legit. And guess what? The very same investment housesthat serve as prime brokers almost invariably have unused office suites

hedge-fund hotelsthat are just waiting to have their reception areasemblazoned with your funds logo.Actual big-shot hedge-fund managers tip: They might provide you withlow-cost rent. There are lots of little hedge funds trying to make their start,and the brokers will agree to a month-to-month lease.

Step 7. Hire a goo d P.R. person!Its a long road to your first billion. But when you get there, watch your

back!Actual big-shot hedge-fund managers tip: When you have over a billion

dollars at least, thats when people start shooting at you. Theres so muchSchadenfreude out there that youll need Schadenfreude-defense. Butrememberthats way down the line.

Once youve successfully navigated all these steps, celebrate in pre-2008style: build a Suffolk County house that eats up 90 percent of your lotsfootprint; marry that yoga instructor; or, best yet, exploit every campaign-finance loophole to underwrite a slate of candidates who will repeal theObama-nomics overhaul bill of 2010.

Photo illustration incorporates artwork by ROJOdesigns (wheelbarrow of money).

KeywordsBUSINESS,

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