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Steps to Starting a Fund
Starting a fund requires a lot of upfront time spent on getting the operational set-up right, even for relatively simple operations. The below was written by one of MIT's emerging managers, and we share it here to give you a concrete sense of what you need to do.
One of MIT's recently launched emerging managers offered to share the steps they took to set up their stockpicking fund. His summary was: "none of this is rocket science, but it takes a fair amount of time." The steps he went through were as follows - please note this is a US-based manager with primarily US-based limited partners. It is also worth noting that he already had several limited partner (LP) relationships built when he launched his fund, and the typically time consuming and often challenging process of meeting and building relationships with LPs is glossed over here.
- Legal docs and law firm. Need someone to come up with the LLC agreement for the management company, GP, LP filings for the fund, etc. This is an early step as one needs the EIN (tax ID) of those entities for many of the following steps.
- This loops back around. Our law firm did our blue sky filings right before we launched as well.
- The law firm generally wants cash up front to start working on your docs.
- We looked for an outsourced CFO right at the beginning as well to help us figure out all the forms, etc.
- In parallel from there, finding an administrator and then Prime Broker/Broker would be next. (Especially if its long-only.) I think lots of people in the US end up going to IBKR as its easy, cheap, and integrated (custody and brokerage, which is nice.) If you go another way, you need to either find a PB who will do both custody and brokerage, or find a custodian and then a broker. Some funds trade with more than one counter-party, so getting all this set up can take time. The PB docs are extremely onerous—probably a month of work if you did it yourself and wanted to read all of them. (Our CFO did this part.) This was by far the most time consuming thing for us. Figuring out trading commissions, getting them coded into the trading system, etc. (This was easy for us as JPM let us use Neovest which works pretty well and has good support. IBKR would also make this easy.)
- Administrators are much easier. There is a lot of KYC (know your customer) stuff and they want to review your docs once you have them, but it’s an easier thing to find. Once you are closer to launch, there are a bunch of decisions to make (how often do you want reporting, how often do you want it sent to your LPs, how do you want to get the data, etc) but it's pretty easy.
- Finding a bank for the limited partnership (the admin will open it, but you select it with them) and then one for the management company (it's easiest if it’s the same bank as the LP uses). Getting the account set up generally takes 10 business days.
- Finding an accounting firm/auditor—also easy.
- The PB/Custodian/Brokerage/Admin/trading platform all need to talk to each other, but none of them want to, preferring to go through you. This coordination takes a bunch of time. Like, a trade file gets sent every day from your trading system to the admin and the PB.
- Once all this is set up, you send out sub docs to limited partners and collect the money.
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