"Marley's face. It was not in impenetrable shadow as the other objects in the yard were, but had a dismal light about it, like a bad lobster in a dark cellar. It was not angry or ferocious, but looked at Scrooge as Marley used to look: with ghostly spectacles turned up on its ghostly forehead." A Christmas Carol, Charles Dickens.

Anyone who hasn't set up and run a hedge fund probably doesn't know how much it all adds up to. In our second of a three-part series, Paul Smith of Triple A Partners in Hong Kong estimates some of the legal and running costs.

Fund manager set-up costs (US dollars)

Company formation in Hong Kong: $1,250

Company formation in the Cayman Islands: $1,000

Licensing with Hong Kong's Securities and Futures Commission: $75,000 (using lawyers)

Fund set-up costs:

Company formation and registration in the Cayman Islands: $3,000 (charged to fund)

Legal work on Private Placement Memorandum (plain-vanilla): $75,000 (charged to fund)

Legal work on Private Placement Memorandum (US): $200,000 (charged to fund)

Annual running costs of manager:

Audit: $15,000

Corporate fees in Hong Kong and the Cayman Islands: $2,000

Licensing fees etc: $2,000

Company secretarial: $5,000

Annual running costs of fund (all charged to fund):

Custody and fund administration (plain-vanilla): $75,000

Custody and fund administration:

  • Master feeder: $125,000
  • Company registrations: $1,000
  • Audit: $25,000
  • Company secretarial: $5,000

All this means a fund is carrying about $110,000 of fixed annual costs, plus annually amortising set-up costs of about $20,000 a year, says Smith. "Thus, at a $25 million launch, costs are a drag of about 0.5% minimum on fund performance over and above the 2% fee the manager charges," he adds. "Obviously as the fund scales, this declines."

You would think it would be cheap to set up an unregulated vehicle. But, like Christmas, the nuts, the sherry, the transforming robots and the handbags all add up.

In part three, we look at the price of office space. (This is all getting expensive.)