How to Start a Hedge Fund From Scratch in 2026

In today's video, we're breaking down how to start a hedge fund from scratch. Today, we're going to cover what a fund is, how to build one, the key legal structures behind it, what licenses you need, and the step-by-step framework that successful fund managers have used to launch these funds. So let's start out with simply what is a fund and where do hedge funds play in this category? You can see my beautiful board. I drew this myself. All right. You got funds. We'll come back in a second. But you have what I call the private sector. Businesses start here. Some of them go through what's called a J-curve where they go down, they lose money or have investment here. They then become privately held companies and sometimes they become distressed and distressed firms help hopefully become good in the future. Once those companies hit a certain level, they then typically do an IPO, an initial public offering. They then hit the public markets. And they are here and they can grow and go from there. That's generally where hedge funds play. So again, what is a fund then and where do these different fund types work? Well, a fund simply is a pool of money and that pool is deployed into different parts typically of this lifecycle. A venture capital fund starts here. It invests at the beginning by the J-curve, early on the early stages of the business. It's still a pool of money. And by the way, we've helped hundreds of people launch these types of funds through Fund Launch. I'm talking private equity, venture, and hedge funds. I currently run 2 of these funds right now. So I've seen the insides of these funds. They on the back end run very similarly. Number 2, you have private equity funds. Private equity funds typically come in later on the lifecycle of venture capital. They are usually while the company is running. The goal of most private equity— they can enter here, they can enter here, they can enter here— a lot of times is to get to an IPO and exit or maybe sell to a larger private equity firm. Even some come in at the distressed level over here. when a company's not doing well and they want to make it better again and get it back up here. Finally, of the fund types we're talking about today, we have hedge funds. Now, hedge funds as a broad term are funds that play in the public markets. Again, just a pool of money. Instead of investing in the private markets or in the venture markets or the credit markets, they're investing in the public markets. So Stocks, options, even crypto would fall into this. Now, technically speaking, a hedge fund is hedging returns through trading, but in a general sense, they're investing in the public markets. Today we're going to talk specifically about this on how they play. But again, these funds, we've helped launch hundreds of them. Now, in my experience, about 99.9% of private funds use this legal structure right here. This legal structure is the general partner Limited partnership with a management company structure. I'll break this down a little bit. So what are we talking about here? We have the general partner and management company. This is you. This is the fund manager. The fund manager is the general partner and also usually owns the management company as well. We'll come back to this in a second. The limited partnership is just a fancy entity for the pool. Okay, this is the pool. of money that is being accumulated here. The fund is this. You then have limited partners who put their hard-earned money into the limited partnership. You following? So limited partners put money into a limited partnership that's managed by a general partner. Okay? Not too crazy. Just pretty similar. A fund manager manages a pool of money. And the purpose of this pool of money, The, the pool goes and makes investments. Today we're talking about hedge funds. So this would be in the public markets. When those investments make money, the money flows back to the limited partnership and generally speaking, is split 20% to the general partner and 80% to the limited partners, what people call an 80/20 split. Furthermore, The limited partnership pays a management fee for investment advice to the management company. They pay a fee typically of 2% management fee. This is usually charged 0.5% per quarter. So you'll hear funds that are 2 and 20. This is what it means. 2% management fee, 20% of— and this is what's called carried interest or carry. All right. Not too crazy. Now, some funds have hurdle rates. We have other videos on that. We have— some funds have high watermarks. We have other videos on that. We'll come back to that later. All of this structure is governed by 2 main legal documents. These legal documents are called your LPA or Limited Partnership Agreement, and then your PPM, your Private Placement Memorandum. Both these docs, I like to lovingly call them The Bible. They are the Bible for your fund. They are all the laws, the covenants, the bylaws of how this— all the relationship of this works. These docs are thick. They are big. Okay. I'm talking 200 pages plus of docs. Generally speaking, these will run you just to set these up. Anywhere on the low end is $30,000 to the high end. You can spend up to half a million or $1 million to do this. But we're going to— for a startup fund, let's kind of put around here now. With Fund Launch, we help a lot of people do this much cheaper because we get economies of scale with law firms. We do a lot of these funds, but again, $30,000 is a good estimate cost for a startup hedge fund. Now, the great thing about running investment funds is you get to write the Bible. You actually get to determine the rules around your fund. If you want to do an 80/20 split, great. You write that in your LP and PPM. You could do a 70/30 split. If you're Jim Simons, I think he did a 45/55 split with investors because he had one of the most successful hedge funds of all time. You write that in your LPA, PPM, you get to decide. But once it's written in the quote unquote Bible, you need to follow the rules of your LPA and PPM, your Bible. Now let's talk about licenses. We're going to come back to this page in a minute, but I want to hit on licenses for a second. So big question in funds: What licenses do you need to run your fund? Well, it depends, and it depends on a number of things. So let me break it down for a second. In the United States, under the SEC, which is the Securities and Exchange Commission, there's a few licenses that may or may not be needed depending on your size. Okay, so I've broken it down into 3 buckets here. Number 1, this is what's called an investment advisor. An investment advisor is under the state level. This is if your fund or hedge fund is— I'm going to put under $150 million. You fall under the state rules of whatever state that you're primary business operations are in. You can't just pick, oh, I'd love to be in Wyoming or Nevada. It's wherever you actually reside and are. You fall under state levels. Okay? If you're over $150 million, I'll put O $150 million, you file under the federal level, which would be the SEC, Securities and Exchange Commission. You are not under both. You're either one or the other, which is kind of interesting. Now, at the federal level, generally speaking, you need a Series 65 license, which allows you to charge management fees from an individual or from a fund. So that 2% management fee that you're earning, you earn as a registered investment advisor, and you have to have a Series 65 hung at a registered investment advisor. At the state level, it depends. Some states adopt the same rules as the SEC and they want you to have a Series 65. Some states don't, or they don't need you to have a Series 65. You actually can run some funds in certain states without a license, which is kind of cool. One other thing here is what's called an exempt reporting advisor. Both of my funds I currently run fall under an ERA, exempt reporting advisor. What an ERA is, is they're under $150 million right here, but they're exempt from the state laws, some of the state laws as well, because They're over $25 million and they are only advising to a private investment fund like a hedge fund. See, an investment advisor or registered investment advisor, this is the same as like, you know, your brother-in-law that like works at some investment management firm and is like, hey, let me help you with your stock and bond portfolio. That's an investment advisor or a registered investment advisor. And typically they have Series 65, the same license. They're giving investment advice for a fee. Well, for us, we're running hedge funds. We're not giving retail investors, mom-and-pop investment advice. We're only advising to one group or one fund. It's called our hedge fund. It's a wholesale investment advisor. That's why they created this ERA carve-out here. A lot of times, depending on your state, and you got to look at what exactly what you're doing, you can run some of these funds without a license, which is pretty darn interesting. Now let me come back to our previous page here. The other licenses you may or may not need depend on what you are trading and doing. So down here on the investments, if you just run a typical hedge fund and you charge a management fee and you're an ERA, exempt reporting advisor, there's a chance you don't need a license. Now, if you're a registered investment advisor or an investment advisor, the— this would be— this entity would be the one that gets licensed and you would hang your Series 65 Or 66 at your registered investment advisor. You'd set up your own RIA or investment advisor, and it would be this entity that collects a 2% management fee. Now, over here, if you're doing trading, a lot of times you can use what's called a prime broker. A prime broker actually holds a lot of the licenses that you may or may not need to execute trades on your behalf. So your hedge fund here works with the prime broker. The prime broker oftentimes holds broker-dealer licenses. That's where you'd have like a Series 7. People always ask, do I need a Series 7? Series 7s are at broker-dealers, and most, if not all, prime brokers, they have a floor of people with Series 7s who execute your trades on your behalf if you're doing broker-dealer activities. Following? One other thing that you may fall under if your hedge fund is doing commodities or futures, you might fall under the CFTC, which is the Commodities Futures and Trading Commission. If you're trading commodities or futures that fall under the CFTC, you may need to get licensed with them as well. And that'll be on a case-by-case basis depending on what you're investing into. So in a lot of cases, you can run your entire fund with only a Series 65, or in some cases No Series 65 at all if you're an ERA in a certain state. And you can lean on prime brokers and also make sure you're in compliance with CFTC and you may need a license there as well. Now furthermore, always consult an attorney or lawyer to verify and check everything I just shared for your specific situation. This is not me giving you financial or legal advice. I'm just sharing you general terms of what I've seen work in the past. Now let's talk about actually launching your fund. This is the successful formula we have used across hundreds and hundreds of funds. We have launched through Fund Launch and I have used to launch my 2 funds. So down to the iPad here. This is what we call the Fund Launch Formula. I'm going to zoom in here on this left side. Now, this might seem obvious, but make sure to follow this order. When you're launching a hedge fund, obviously look and focus on the strategy. What are you trading? And please backtest this as much as you can, maybe even test it with your own dollars. Secondly, though, most people at that point want to jump right to legal. Don't go to that point yet. Number 2, go and frame/structure your entire fund. The stuff I just talked about on the whiteboard right here, go and figure out what your GP will be, your LP, what kind of splits will you do? How will investors get paid out? Are you going to do high watermarks? Are you going to do commitment periods? These are all stuff we talk about on this channel. You go watch other videos, figure out your frame and structure, then go and actually see if people would potentially invest into this thing? Start floating this around to real-world investors to gain validation. You want to have dozens of people lined up saying yes. Once you launch that fund, I want in. A little trick I use as well is if you go ask people for money, you generally get advice. But if you go and ask people for advice, you generally get money. What I would tell someone is go and find people that you look up to, mentors, people around you, and actually ask them About your strategy. Ask them about your frame and structure and ask them about this whole idea. Get their advice and say, hey, you look at lots of funds. Tell me if I'm barking up the right tree. You can tell this is written in a circle for a reason. They will probably give you some sage advice that will go and tweak your strategy. It might even tweak the way you structure your fund. Again, the whole goal of this is to get validation. Then and only then, let's go talk to lawyers. And when you walk into a lawyer's office, you say, hey, I want XYZ with a drink and a side of fries. You know exactly what you want. You're not guessing. You're not having your lawyer teach you all the things about it because this can be a very expensive lawyer. This is how people spend $150,000, $250,000 on legal docs when in reality they could probably get the same legal docs done for $30,000 to $40,000. Or even less. If you know what you want, this cost can drop dramatically because lawyers bill by the hour. Once you do the hard work upfront, they just take orders, build you a great fund that you want. You go and launch that fund. Then you go to capital markets, you go back to all those investors, you finally get them committed, you start calling capital. You then start buying assets and deploying that capital. You strike a NAV, you start moving capital in and out of the fund. And you start building out a firm. You build that firm with you and you continue to do this. You continue to raise money, you continue to deploy capital, and you continue to build your firm over the next millennia as you become a multibillionaire and crush it and become one of the titans of the universe type of people. This Fund Launch Formula has been amazing for me launching my funds and for other people launching their funds. Now, if you see here, this is a more complex version of the Fund Launch Formula. On this channel, we break down all these subcategories of how waterfalls work, open-end and closed-end funds, how legal formation works, different checklists and things you can go check out on the rest of our channel. Furthermore, you don't need to work on Wall Street for 30 years or have an Ivy League degree to launch a fund. If you actually go watch how Warren Buffett, Ray Dalio, Ken Griffin launched their funds, they all launched their funds in their 20s without this huge track record. Again, watch what people do, not what they say. People like me and you can actually play in this game and be successful with this. If you want to learn more, go to funlaunch.com, click the link down below, follow, subscribe, and we'll see you on the next videos. Bye-bye.