a friend is going to start a private fund with $5MM AUM. His target is 30% annualized return. He mostly would do swing trades (holding period from 1 week to several months) and some risk arbitrage (for exampe yield curve spread, stock or ETF paris trading) and take small directional bet in currency and stock index. He was asking my opinion. I just wonder if 30% doable for 5MM aum? seems to me most hedge fund cannot achieve that results and AUM of 5MM is too small to have any edge. any thoughts?
Can you elaborate? while aum of 5 MM is small size for private fund, but its advantage is that it has no impact on market. 30% seems to me is not very high.
30% is not high. The question is what kind of drawdowns he expects. I know people who produced around 50% retrurn per year for a number of years with much larger capital. The questions is just whether the market environment is favourable for the fund manager's style.
What kinds of returns does he get now? I'm very suspicious of the experience level. Goals are another issue all together. If he's up 5% in september, is he going to press harder for the rest of the year? If He's up 34% in June is he going slack off the rest of the year? You need to take what the market gives you in any given year. If he can do 30% year over year, he will be the biggest rock star fund manager in history. Leverage is another issue. 30% in the prop industry is a joke. With no leverage at all, good luck. And index pairs? Good god. Impossible. Sorry.
If "he" is asking "you" for an opinion then it is 100% certain the answer is no. Why? Because no one starts up a fund and ask opinions. You have your business plan in place your swat analysis complete. If you have an edge how would anyone from the outside be able to tell you what you can and can't do. The smaller the fund the easier it is to trade your edge. Lots of wrong reasoning going on here.