I have been pretty successful as a full-time stock index futures day trader. I was wondering if anybody had comments/ideas/experiences to share on the pros/cons of starting a hedge fund versus just trading my own accounts. Funding is not a problem for me because I have several family members with friends interested in investing with me based on my track record (both day trading and longer-term trading). I remember reading in Buzzy Schwartz's Pit Bull that he tried to run several funds, but it was hell because the clients were always riding his ass about their positions, etc. When he got sick, they all pulled their money out of the fund. He made it sound like managing a fund took most of the fun out of trading.
If ya gotta ask, then don't do it. I say this because most fund managers that were successful, just did it. The other failed ones were begged to manage money by others. Some of the others that failed, they just failed to perform. So two things to watch for: 1) you must know you want to do it 2) you need the skills to perform. Or else, don't do it.
Managing a fund does convert what can be enjoyable trading into work. The amount of paperwork is absolutely mind boggling. You will come across some "pain in the ass" investors and also some investors who will absolutely adore you if you make them money. You will get letters and emails from people telling you how much you are appreciated. Finding someone to generate high, consistent returns is very difficult so if you are sure you can do that then it's absolutely worth it. For the first few months you will be overwhelmed by dealing with investors and by paperwork. It gets better. When I was finished with the paperwork I gave myself an entire month before I pulled the trigger for an investor or even talked to an investor. You will absolutely need this down time because you're gonna be fried. If you can do something like 200% on a $100k account you make $200k for the year. If you can do something like 50% on a $10M account you will make $1M, depending on your incentive fee and management fee. Which sounds better? The answer is pretty obvious. So, to sum up.....in the early part of the development phase you'll probably wish you hadn't gone through with it. Once you're on your way and things are rolling, and you are familiar with your investors and vice versa trading does become fun again. The first year was hell. The second year is great and it's typically smooth sailing from there <b>if</b> you deliver. The question now becomes: Is this your dream? If it is go through with it. If not then don't. For me, it's all I ever wanted to do. From day one I wanted to be a hedge fund manager. Once I had the track record I tackled it all out. I have no regrets. Good Luck!!
22andrich ... Rather than dive into the deep water (form a limited partnership, comingle funds etc.) taking a smaller interim step will probably be better. Here's how many others have structured a trail period. Since you are dealing with friends and family why don't you have a few of them open accounts that you trade. You'll need to research or check with competent counsel to find out how many you can trade for before being obligated to register as an investment adviser but that's fairly simple information to get. Doing it on a very small scale will give you a sense of how aggravating -- or rewarding -- the endevor is. If they don't drive you crazy in the first six months then form the hedge fund and run with it. Be sure to charge as much as is customary in the hedge businees -- frequently 2% of donated capital and 20% of profits or some a similar equation. if you want to avoid headaches charge like a pro, act like a pro and insist they act like clients. The last thing you want is for one of them to ask you to justify a trading strategy over Thansgiving Dinner ... lol. Good luck. Tommy
Good post Tommy, If the OP is trading fut's he can trade for up to 15 clients and up to $400k without registering. If it's stocks then I don't know the numbers. When I first got started I waived the 2% management fee, and just went with a performance fee of 20%. This was a courtesy I gave my investors because the fund had no track record. Once I got established I raised both of these numbers. Oh, and I actually did have to justify my trading strategy to an investor over "Thanksgiving Dinner." He flew in from out of town and insisted meeting me. I didn't mind because he has become my biggest investor. You will meet some very difficult and demanding people. You don't have to do business with them, however. And if you do find a difficult investor....nib it in the bud. Before you know it they will be telling you how to manage your fund and ask you when they can start trading for you. You gotta put a stop to this sort of thing right from the get-go.
Even if you could make 50%, you just should not, with other people money. 50% doesn't come without significant risk. Lossing 20% in your account is acceptable to many people here. Lossing 20% in a hedge fund is considered blowing up.
Agree with you that 50% return comes with 50%, or perhaps even more, risk. However, 20% drawdown in a hedge fund is quite normal. Hedge funds are much more risky than mutual funds so large deviations between monthly or yearly returns is a natural course of the business. A top notch hedge fund manager has a complete understanding on the concept of risk and reward, and should track his/her risk exposure on a constant basis. A 20% drawdown should never come as a surprise.
You are currect, ProfitTakgFool. It is 15 if you stick to futures but since I wasn't 100% sure my information was up to date I felt it best not to opine. I get a sense that many -- obviously not you -- are very hesitant to manage funds for others. I think it is important for professionals to recognize that knowledge and skill are capital. I encourage anyone who has put the effort in to acquire the knowledge and hone their skill to capitalize on those very valuable assets. And, as you have so correctly pointed out, if you end up with a customer(s) that are a pain just cut them loose. Do business with those that are comfortable to do business with. All others need not apply.
lol, where do you get this stuff from, do you just dream it and then wake up and make inane posts on ET Too funny.....