With Hedge Fund Start-Ups, It’s Fortune Over Fame

There are a number of compelling reasons money managers establish hedge funds, but it seems that wealth creation is a paramount goal among partners, and by a wide margin.

In a first-quarter survey by Flynn Family Office (FFO) of 188 general partners who have started hedge funds within the last five years and who manage an average of $63 million in assets, 92.6% said their goal in creating a hedge fund was personal wealth creation.

Along these lines, research in 2012 and 2013 found that nearly 84.2% of portfolio managers believe that being a hedge fund general partner was the most likely path to exceptional wealth.

There were, of course, other reasons. Managers are also drawn to the independence that a career as a hedge fund manager can provide, with 65.4% of hedge fund partners in the FFO survey citing “autonomy” as their chief goal in establishing a hedge fund. Only 14.4% said their aim was to become famous.

The survey illustrates the importance partners place on personal wealth. What many partners fail to realize, however, is that they need a foundation of advanced planning to achieve their goals.

Advanced Planning Opportunities
Without question, personal wealth creation is a measure of hedge fund success for general partners. Investment performance and a solid track record of returns are of course an essential component of asset accumulation efforts and vital to fund stability.

As they get their hedge funds off the ground, general partners tend to concentrate their energies and resources on three areas:
• Getting their hedge fund running effectively.

• Investing.

• Raising more capital.

If the stated objective is to achieve exceptional wealth, however, many general partners should add advanced planning to this list. Squarely focused on wealth creation through investment management, many new hedge fund partners do not initially address—or even consider—advanced planning elements that can substantially enhance or diminish personal and family wealth. Research suggests that most new managers are largely overlooking significant opportunities.

For the exceptionally wealthy, ensuring the continuity of family fortunes is often as important as the ongoing ability to amass assets. Many of the strategies used to protect and transfer personal wealth generally fall under “advanced planning,” which can be  defined as the skillful leveraging of legal, regulatory and financial expertise to enhance and safeguard an individual’s or a family’s net worth.