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How much does it cost to start a hedge fund?

There are numerous costs associated with launching a hedge fund. The primary initial outlay is for legal fees that cover the formation of the fund and the management company entities, registering the manager as an investment adviser (sometimes required), and drafting the offering materials, including the confidential private placement memorandum, limited partnership agreement and subscription document. This can cost as little as $15,000-$20,000 (plus expenses) if the manager hires a boutique law firm or sole proprietor, or as high as $40,000-$60,000 if a larger prominent law firm is retained. The manager will also need to engage an administrator, auditor, tax preparer and open a brokerage account, all of which add to start-up costs.

A fund’s offering materials typically permit a manager to charge most start-up expenses to the fund. Nevertheless, managers must determine whether the resulting drag on performance makes it prudent for the management company to bear these expenses.

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