Educate me. I thought 50% a year was good

Discussion in 'Professional Trading' started by ElectricSavant, Jul 13, 2005.

  1. The reverse is also true, FoF and Pension funds would maintain a good
    relationship with banks to get access to top tier hedge funds (not to mention
    other benefits like structured products).

    For instance, Citadel stopped taking in even normal institutional money for
    years now, how does a FoF get into Citadel, well, Prime Brokers would
    have the information about recent Redemptions, for instance, and such
    information are incredibly valuable. The FoF can buy the LP interest in a direct
    transaction. The FoF / pension would then need to generate $xxxx (think big)
    commission for the bank in a month, for instance.

    I remember that the top 100 Hedge Funds have approximately 50% of the
    AUM for the entire hedge fund industry. The competition to get into the top
    funds are absolutely insane. I see transactions like Banks doing, "I will
    get you the next $10M into Citadel / QFS, but you will need to invest
    $2-3M into these *startup* hedge funds". Guess which startup hedge
    funds would get the show?

    There are a lot of private hedge fund conferences that are entirely closed to
    anybody in the "public", you either have to be an HNW client (sometimes
    Ultra HNW, >40M only), or a "prized" hedge fund client. Example is that
    a hedge that is < 100M or only generates 100K / month in fees would
    get their "brochure" to the clients only, where as the "prized" clients get face
    to face meetings, etc.

    This is exactly why I left Wall Street, it is a terribly scummy game once you
    see the inside. I raised money (for a failed hedge fund that I was a part of),
    and the experience was absolutely terrible.

     
    #51     Jul 16, 2005
  2. I don't want any part of it....


     
    #52     Jul 16, 2005
  3. Ebo

    Ebo

    Don't quit the day job ES!
     
    #53     Jul 16, 2005
  4. I absolutely agree! But why so many top grads want to get into Wall Street, I have
    no idea, is it just the money? Sure, a 25 year old make $250-300k a year is "cool",
    but that is the big deal? In 20 years the kid will be tossed out to the sidewalks.

    I been through a lot, the late LBO bubble, Internet bubble, the convertible
    bubble, the MBS bubble. I mean, I had a junior analyst said "I think if you
    don't make $1M in a year, then you are a failure" in '99, and this is during her
    interview *into* my group, what the heck is that? I mean, I hope she is
    doing well now, but that's insane.

    I am just completely disillusioned, sometimes I think I may have met
    enough people to write a book, but I was too much of a "fly on the wall" to
    be of any importance. So I did the only thing I can, dropped out the wall street
    life, joined board of a museum. started trading for my own account, *never*
    aspire to manage money.
     
    #54     Jul 16, 2005
  5. Rufus. You've provided probably the most insight I've ever read into the workings of the HF industry. Thanks so much for your postings!
     
    #55     Jul 16, 2005
  6. Fair enough. So, you're as confident making a thousand times the same bet (assuming you somehow raised $5m)?
     
    #56     Jul 17, 2005
  7. jerryz

    jerryz

    rufus this is excellent info. i always wanted to know how things really worked in prime brokerage and capital intro.

    you mentioned that in return for providing access to top hedge funds, the prime broker would ask the FoF to invest $2-3 million in these start-up funds. how does the prime broker choose which start-up fund to show to the FoF? is it mainly based on whichever one is generating the most commission?

    what should one look for when choosing a prime broker?

    i am trying to ask you the right questions. if you have any other advice or stories stories i would love to hear them.
     
    #57     Jul 17, 2005
  8. Excellent info rufus-------------------let them all hear of the real game!
     
    #58     Jul 17, 2005
  9. Wow, I am having flashbacks, it has been almost a year since I left the
    scene. Heh. This is probably the last brain dump, since I need to tune my
    model. :)

    Choosen the right "stable" of startup funds is more of a black art than
    anything else. If anything, there are pecking orders in the hedge fund
    industry as to how important they are.

    Tier-1: Ex Portfolio Managers of Top funds, like anybody in the top 20. So
    an ex-PM from, say, DE Shaw, or Citadel would get a *tonne* of
    attention, regardless of size of their new fund.

    Tier-2: Ex Portfolio Managers of top asset management firms. So, say,
    the former head of stat arb at Goldman, yep, a lot of attention.

    Tier-3: Former top Prop traders, these guys probably made as much money as
    Tier-1&2, but Investment Banks rarely publish their Prop desk returns. So
    there are no verifible track record, so it is reputation based only. The big-3/4
    prime brokers would rarely touch anybody who is not Tier-1-2-3.

    Tier-4: Former head of desks, head of research, etc, of various investment
    banks. These guys tend to be on the sell side, so no track record to speak of

    Tier-5: Mutual fund stars, back in '99-'00, a lot of these guys are hot, but
    they mostly flamed out since very few of them know how to use leverage or
    risk manage in a down market.

    Then current capital under management and the commissions
    they generate get evaluated. It is not unusual for a hedge fund to generate
    5000-20000 trades daily. So future growth is absolutely the key here.
    $1B hedge funds seem to grow on trees these days.

    Now, I am more familiar with the first tier prime brokers (Goldman, Morgan,
    Bear, UBS, Citi, Merrill, BofA barely, etc). The second tier prime brokers like
    Fortis, Refco, DrKW, ABN AMRO, etc are less selective, since 90-95% of the
    "star" funds go with the big-4 or 5. There are such thing as third-tier
    prime brokers, Bleischroder, Scotia Capital, etc, then they would be even
    less selective, but their ability to do good capital introduction or complex
    products will be very limited.

    A good story is that a friend of a friend who was the head of economic
    research for an tier 1.5 investment bank, started a hedge fund (of around
    50M), both Goldman and Bear passed on being his primebroker, so he had
    to settle for a tier-2 prime broker. His goal is now to have 2 years of
    track record (and he is doing pretty good so far), then maybe GS, Morgan,
    or Bear will take him.

    Disclosure, I am currently clearing through a tier 1.5 firm now, but I am
    not a hedge fund (and don't plan to be), and I have basically no financing
    needs nor overtly complex portfolios.

    If I were a part of a hedge fund, I would ask questions like:

    * Integrated product offering, the last thing I want is my fixed income
    portfolio and my equity porfolio maintained seperately, they should
    be financed as a package, for instance. You will be surprised how many PBs
    do this poorly.
    * Access to desks, can I call up the head of the stock loan desk and ask for
    all the "hard to borrow" inventory by 7am? Can this be done regularly?
    Who do I call when I need a read on Chilean GDP growth as correlated to
    Philipino currency flunctuations?
    * Risk management, how is my portfolio risk calculated, this is especially
    important for funds with exotic trading models, since financing charges can /
    will kill you.
    * Access to markets / different technology, if I have, say MacGregor,
    how quickly can I get the positions from the trades processing engine? 2 secs?
    5 mins (why?)? Can I get access to the snowball basket option pricing
    engine that the investment bank have?

    Basically, I would be quite frank with the prime broker, as to my general
    model (and I would expect them to understand it! not just headnodding),
    my growth, and where I think my needs are (finacing / capital / people /
    technology / administration / etc).

     
    #59     Jul 17, 2005
  10. Catmango,

    Sure I am confident.

    If you knew my system and read my thread you would understand why it is not a problem. Now that I slept on it, I do not want any part of OPM.

    I do not want to sell myself to clients, CTA's, HF's or Banks (I am a CTA, just need to pay the 1k and re-activate, and make some disclosures doc's). I just want to trade and it will be with my own money. As far as the Journal here in ET and my personal motives (everybody has to have a personal motive) well, I guess I will keep posting, but I do not know why anymore.

    Rufus: I want to to thank you for giving this trader a little peek into the world of HFs and I am very glad I started this thread. Your Comments and Insights have shaken my world, and the "illusion" that I had was a lie to myself.

    Michael B.


     
    #60     Jul 17, 2005