There are basic steps to start a low cost hedge fund. This is not a detailed list but a guide which can help in the hedge fund formation process.

1. Decide on a jurisdiction. There are advantages and disadvantages when choosing a jurisdiction where your hedge fund will be domiciled. For example, if you choose setting up the fund in the U.S. you are limited to only U.S. based investors. Also, depending on whether you trade in commodities, futures or forex, you will be required to become licensed as well as your fund. If you decide on an offshore fund then British Virgin Islands, Cayman Islands and Bermuda are one of the most popular choices when setting up an offshore hedge fund. Typically, an offshore hedge fund caters to foreign investors located outside of the United States. Certain exempted U.S. investors are also allowed to invest in these offshore funds.

2. Count your setup costs. If you set up a U.S. based hedge fund, your costs should range $15,000+/-. This includes preparing your offering documents, registering the LLC (I recommend Delaware) and having a qualified securities attorney review your offering documents. For offshore funds, the costs are slightly bit higher. Any further out-of-pocket expenses are for marketing and travel to meet and greet your potential investors.

3. Calculate ongoing costs. This is where many start up funds fall short. Setting up is easy, maintaining is another story. You will need to consider hiring an administrator who will handle your accounting records, calculate your fees, and run due diligence on your potential investors. All this comes with a monthly cost which is charged to your fund. Administrator costs can range from $500 to $4,000 per month. You will also need an auditor. Technically, it is not a requirement but most, if not all investors demand it. Depending on the name of your auditor, yearly costs can be from $5,000 in upwards to $20,000 (Big 4). Again, charged to the fund.

4. Open your bank and brokerage accounts. It is not always necessary to have a prime broker in the early stages of a fund. They become way too expensive. Start with a basic cash account for subscriptions, expenses, distributions, etc. Then open a brokerage account. If you go offshore, your custodian bank can provide you with those services as well. They will be happy to cultivate that relationship since it is to there best interest that you succeed. Why? So they can earn more fees, of course.

5. Decide on a launch date. I have seen funds launch after a certain amount of seed capital is raised. I have also seen funds which launch as soon as the first subscription is approved. This all depends on your minimum investment amount and your trading strategy. It’s best to consult with your hedge fund advisor on this one.