Fund formation and first-time fund managers
How do I launch a hedge fund with small starting capital?
Short answer
Start small and raise from the people who already know you. In my experience that means friends, family and angel type investors worth roughly $1 million to $10 million, who often do the least due diligence. In my experience, family offices often wait until a hedge fund reaches $30 to $50 million. Many managers talk to a securities attorney about structure, and also consider direct deals or co-investments alongside the fund.
Start with the investors who can say yes early
In my experience, many small hedge funds get their first dollars from high net worth individuals. These are angel investor types worth roughly $1 million to $10 million, sometimes a bit more. They often do the least amount of due diligence and invest based on referral and personal relationships. Their sales cycle can also be the shortest.
It tends to happen through friends and family, peers and past colleagues from the workplace. It is also how many traders who go out on their own start a fund.
In this clip I walk through the five types of hedge fund investors, starting with high net worth individuals and family offices.
Summary and key takeaways from this video
Why family offices usually come later
Do not aim at big institutions on day one. In my experience, family offices often have more barriers in place before they allocate. They run more due diligence, they may negotiate harder on fees, and some want a piece of the GP if they invest early.
For a hedge fund, you might have to reach $30 to $50 million in assets before a family office invests as a normal LP. Sometimes it is $100 million plus and you are still too small. Some also do not want to be more than 10 or 15% of your total LP base. Estimates often put the number of family offices at 20,000 or more globally, so risk preferences vary a lot.
Do not treat the fund as the only door
Many managers talk to a securities attorney before they start raising.
Beyond the legal work, I think many people lean too hard on the idea that a fund is the only way to take money.
"There are some communities out there that just bang the 'create a fund' robot drum so hard that I think it really hurts people's progress."
In this talk I share ten lessons for investor events, including why a fund should not be your only structure.
I know people who manage $500 million and tried to launch a $10 million fund that never got off the ground. I know others who launched and grew to $100 million quickly. Both happen. What I see is that a lot of family offices like to go into real deals directly.
So if you start a fund, also be open to direct investments or co-investments. Otherwise you may lose some of your best investors by not being agile.
Add value before you ask
With small capital, your relationships are your main asset. When I email someone, I try to show the value in a sentence and a half. Saying your fund is amazing is just a pitch. Giving them something useful first is different.
Context also matters. Investors on our stages have told us that who refers a deal to them can matter more than the merits of the deal. A warm introduction from someone who trusts you beats a cold email.
Finally, vet everyone you meet, and expect investors to vet you. Keep your own due diligence materials ready. Many people talk to a securities attorney about their structure.
From the Family Office Club stage
One thing I tell hedge fund managers is not to wait for a long track record before you start raising. Some people say if you build the track record, the investors will come, and that is not true. If you do not try raising capital until you have years of results, you will not have learned anything about what investors ask, what objections come up, or how to explain your strategy. Start the conversations early with the people who know you, and let each one teach you something.
"Some people think, especially in the fund management industry, and the hedge fund space needs to hear this all the time, that if you build the track record, the investors will come. That's not true either, because if you don't try raising capital until you have a long track record, you're not going to have learned anything yet."
Facts and figures
- High net worth angel investor types worth roughly $1 million to $10 million often do the least due diligence and invest on referral.
- A family office may require a hedge fund to reach $30 to $50 million in assets, sometimes $100 million plus, before investing as a normal LP.
- Some family offices do not want to be more than 10 or 15% of a manager's total LP base.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: 5 Types of Hedge Fund Investors, How to Maximize ROI at Investor Events | Tips from Family Office Club CEO Richard C. Wilson. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fund structure choices, offering exemptions and public communication limits. Do not use AI to write your own legal agreements.
Your next steps
- List 20 to 50 people in your network who might invest as friends, family or angel types.
- Talk to a securities attorney about your fund structure and options.
- Prepare a short pitch deck and a due diligence package before you start conversations.
- Plan to offer direct deals or co-investments alongside the fund.
- Revisit family office outreach once you approach $30 to $50 million in assets.
People also ask
Who invests in a brand new hedge fund?
Usually high net worth individuals, friends, family and former colleagues. They often do less due diligence and move on personal relationships.
When do family offices invest in a hedge fund?
Often after the fund reaches $30 to $50 million in assets, and sometimes $100 million plus. It varies by family office.
Should I only offer a fund structure?
I would not. Many family offices like direct deals, so allowing co-investments can keep more investors open to working with you.
Related questions
- How do I launch a venture fund with no track record?You start by borrowing credibility, because you cannot create a track record overnight.
- How do hurdle rates and catch-up work in a fund?A hurdle rate is the minimum return investors receive before the manager shares in profits.
- What does a placement agent do and what do they charge?A placement agent introduces your fund or deal to investors and manages part of the raise.
- What is an SPV and when should I use one?An SPV, or special purpose vehicle, is a separate entity formed to hold one investment, with investors pooled into it.
Work through it with the investor meeting follow-up checklist. See all fund formation and first-time fund managers resources.