- Hedging Bitcoin with Futures - How to Protect Your Long Term Crypto Investments During a Downturn
- What is a Cryptocurrency Hedge Fund?
- What is your Hedge Fund strategy?
- Market Neutral Strategy
- Hedged Equity strategy
- Global Macro Strategy
- Think of a name for your Cryptocurrency Hedge Fund
- Get a lawyer for your Crypto Hedge Fund
- Select your Hedge Fund Entity
- Get a tax ID number
- Sign up as an investment advisor
- Create the corporate by-laws for your Hedge Fund
- Sign up for a Registered Investment Advisor
- Sign yourself up as the Investment Advisor Representative
- Sign your hedge fund up with the SEC
- Create a team of trusted advisors
- Create a corporate partner for your Crypto Hedge Fund
- Create your offering documents
- Market your Cryptocurrency Hedge Fund Online
- Collect anchor capital for your Hedge Fund
- Promote your Crypto Hedge Fund
- Look out for a prime broker
- Success attracts investors
- Expand and grow
Hedging Bitcoin with Futures - How to Protect Your Long Term Crypto Investments During a Downturn
Since Cryptocurrencies are strongly competing with the traditional world of finance, it also makes sense that there are Cryptocurrency hedge funds.
So, how to start a Cryptocurrency hedge fund?
To start a Cryptocurrency Hedge Fund you need to pick a strategy, a name for your hedge fund, get a lawyer, deal with all the legal requirements, create a team, build an online presence, collect anchor capital and promote your hedge fund to potential investors.
In this complete guide, I am going to show you everything you need to know about starting a hedge fund in the world of Cryptocurrencies.
Without a lot of talking, let’s get right into it!
What is a Cryptocurrency Hedge Fund?
As a creator and manager of your own hedge fund, you first need to know what you are getting yourself into.
Basically, a hedge fund is a pool of money from other investors, and it is your job to invest that money profitably, so you can create a profit for your investors, and yourself, of course.
Also, hedge funds are normally only available to high net-worth individuals and investors.
(more than 1 million US Dollars)
But since you don’t want to create any generic hedge fund, but specifically a Cryptocurrency hedge fund, you need to invest the money of your investors into different Cryptocurrencies, and make a profit by doing so.
Now that we know what a Cryptocurrency hedge fund is all about, let’s get into the details of actually creating it.
Let’s start off with the strategy for your hedge fund.
What is your Hedge Fund strategy?
Of course, not all Hedge Funds are the same.
There are different strategies that you can use in your Cryptocurrency hedge fund.
I will go over the most common strategies that hedge funds use and how it can apply for a Cryptocurrency hedge fund.
Market Neutral Strategy
The market neutral strategy is a type of strategy where the hedge fund is buying an equal amount of short and long positions in an asset (in our case Cryptocurrencies) and is, therefore, trying to make a profit while reducing the risk as a much as possible.
This works, because in the case that the overall market goes down, he will be “neutral” since he shorted 50% of the investments.
This type of strategy is favored by investors when they think the market could crash, as then their money is still somewhat protected by the market neutral strategy.
Hedged Equity strategy
To be honest, the hedged equity strategy is kinda similar to the market neutral strategy, with the exception that it isn’t a perfect 50/50 split, as with the strategy presented above.
A hedge fund using the hedged equity strategy might short only 25% of the investment.
This means, that while there is some protection in case the market goes down, the hedged equity strategy generally makes a profit when the market stays good and goes up.
Global Macro Strategy
The global macro strategy is a type of hedge fund strategy where you are investing based on large economic trends.
For the last 2 strategies, it was pretty easy to incorporate them from the traditional world into the Cryptocurrency world.
For this type of strategy, it’s not so easy.
Examples of global macro strategies in the traditional world are what happens to countries, interests, interests rates or maybe even inflation/deflation.
Of course, the definition leaves room for interpretation, but in my opinion you can transfer this definition over to the Cryptocurrency world by saying that a global macro strategy looks at things like whether a country is introducing a new Cryptocurrency (for example the Petroleum in Venezuela) or how different Cryptocurrencies are being adopted in different areas of our lives.
Now that you decided on one of the strategies for your Cryptocurrency hedge fund, it’s time to give it a name!
Think of a name for your Cryptocurrency Hedge Fund
While I personally do not think you should spend too much time thinking and obsessing over a name, take a few moments and think of something trustworthy, stable and memorable.
I would also make the name reflect the industry you are operating in (Cryptocurrencies) so it is clear what type of investments you are dealing with.
If you would like to hear ale examples before choosing your name, here are some of the most popular Hedge Funds:
- Bridgewater Associates
- AQR Capital Management
- Man Group
Once you have your name figured out, it is time to lawyer up.
Get a lawyer for your Crypto Hedge Fund
When dealing with large sums of money, that you do not even own, but only manage, it is extremely important to have your legal stuff in place, as you otherwise you could lose a lot of money and even worse, go to jail.
It is best to get in touch with trusted law firms, that are experts in dealing with finance.
Ideally, you would want to get in touch with a lawyer who has experience with starting hedge funds, so you know that you are having an experienced lawyer on your side.
Select your Hedge Fund Entity
When starting a Cryptocurrency hedge fund, you will also need to select the type of entity that your Hedge fund should operate under.
Of course, it all depends on your local area, state, and country, but generally, the typical entities used for hedge funds are Limited Partnerships, LLC (Limited Liability Companies) and trusts.
Get a tax ID number
In order to be a registered and official hedge fund, you will need to get a tax ID number.
In the United States, it is free to get such a tax ID number.
All you have to do is to call the IRS or fill out the form on its website and that’s basically it.
Sign up as an investment advisor
You also need to register as an investment advisor with the Securities and Exchange Commission.
If you have less than 15 investors then this step is not a MUST, but even so, it is advisable to do it anyways, as it looks more credible.
Depending on your local area and state, you also have to pass the Uniform Investment Adviser Law Exam.
Attending the test usually isn’t expensive and will cost you around 30 US Dollars.
Create the corporate by-laws for your Hedge Fund
In order to complete all the regulatory requirements with the SEC and other regulatory bodies in your country and state/
These are essentially the “rules” for your Hedge Fund and can include things like a compliance manual, an advisor’s portfolio-management agreement, an ethical code of conduct and a manual for supervisory procedures.
Sign up for a Registered Investment Advisor
In order to make your partnership legal and allow your hedge fund to manage other people’s assets, you will need to register for the Registered Investment Advisor, also known as the RIA.
You can do this on the website of the Investment Advisor Registration Depository and it should not cost you anything.
Sign yourself up as the Investment Advisor Representative
In order for you to be the official representative of your Cryptocurrency Hedge Fund, you will have to register yourself as the Investment Advisor Representative.
You can do that on the website of the Investment Advisor Registration Depository again, and I will cost you around 30 US Dollars.
Sign your hedge fund up with the SEC
While you aren’t actually registering the fund itself with the Securities and Exchange Commission (SEC), you have to register the “offerings” of your Cryptocurrency hedge fund.
With a hedge fund, you aren’t offering stocks, like a publicly traded company does, but rather you are offering interests to investors.
In order to register your offerings with the SEC you need to fill out Form D of your state, AND in every state, you are trying to sell these offerings.
Create a team of trusted advisors
It is always good to bring more investors in your Cryptocurrency hedge fund.
On one hand, they can help you make better investment decisions, and on the other hand, you can promote true previous track record to your investors.
So, make sure you bring experienced Cryptocurrency investors on board, that have had many successes investing in Crypto in the past.
Also, since your team and you are going to make important decisions about other people’s money, make sure that you can cooperate well and understand each other well.
Create a corporate partner for your Crypto Hedge Fund
Since you are dealing with a lot of money, that isn’t even yours it is important to protect yourself and your personal assets from any lawsuits that might happen.
That’s where a corporate partner comes into play.
That means that it is recommended to create a corporation instead of running it as a sole proprietorship, so your personal assets are protected should there be any lawsuits in the future.
Of course, speak this through with your lawyer and let him advise you what’s best in your situation.
Create your offering documents
Now it’s also time to write the offering documents for your Cryptocurrency hedge fund.
These essentially explain your hedge fund, the terms and conditions, and your goals and vision going forward.
By having this document the hedge fund and the investors are protected and are required by the Securities and Exchange Commission.
As with the last step, let your lawyer advise you throughout this process.
Market your Cryptocurrency Hedge Fund Online
Now that you finally completed most of the mundane stuff, it’s time to build your online presence and let the world know about your Cryptocurrency hedge fund.
Just create a clean and professional website, that explains the background, story, and experience of your hedge fund.
But keep in mind, that Hedge Funds aren’t allowed to advertise publicly.
Having an information website, however, is completely fine.
Collect anchor capital for your Hedge Fund
Once you have set everything up, it’s time to actually get your first anchor capital for your Crypto Hedge fund.
If you are independently wealthy and have a net worth of over 1 million US Dollars you can seed the fund yourself.
But if that isn’t the case, you need to get your first money from banks, wealthy investors and venture capital firms.
Or you can also ask friends and colleagues to invest in your fund.
Promote your Crypto Hedge Fund
The hardest part of the process is, of course, in convincing investors to hand over their money to you.
All in all, you have to become a good salesman in order to attract high-profile individuals into your Cryptocurrency hedge fund and get access to manage their money for them.
It is important to have a great investment strategy and of course, a good track record of success so your investors know that you have delivered results in the past.
One way to get early investors to your Hedge fund is to offer lower fees, for example.
Also, make sure you aren’t doing anything illegal when it comes to marketing your Hedge fund.
It is best to contact your lawyer for further advise.
Look out for a prime broker
When launching your Cryptocurrency Hedge Fund you might as well want to look out for a prime broker, which will provide you with all the essential services for running your Hedge Fund.
An example of what a prime broker might do for you is to lend you money for your investments.
What are some prime brokers, you might ask?
Goldman Sachs, Bank of America and Morgan Stanley are all examples of prime brokers.
Success attracts investors
One thing that is pretty obvious, yet so important when you start any Hedge Fund, but especially a Cryptocurrency Hedge Fund in the “wild west” of investments, is your track record.
The ONE thing that will attract numerous of new investors to your Cryptocurrency Hedge Fund is if you have produced great results before.
So, remember, that your number one job is to invest wisely and profitably, which will then attract more investors to you.
Expand and grow
Once you have your first successes and made quite some money, you can think about expanding your Cryptocurrency Hedge Fund, by hiring more employees that can perform more transactions on your behalf.
As you grow your team, keep in mind that you will need to rent out bigger office spaces, and expand effectively.
And that’s it!
Follow this advice and you will be on your way to create a Cryptocurrency Hedge Fund.
Are you planning to start a Crypto Hedge Fund now?
Let me know in the comments below and I’ll make sure to get back to you as soon as possible.
Anyways, thanks for reading all the way to the end and I hope you learned a lot from this article!