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Raising Money for a Hedge Fund

  1. how would one go about doing this. please, don't say friends and family, because i don't know any wealthy people ;)

    can you work with financial advisors and provide some sort of referral fee? they have an established clientele and would already know who would be suitable to have a portion of their portfolio in alternative investments. i don't remember reading about that in the series 7 material.

    you can't actively solicit clients or advertise. so no cold calling, direct mail marketing, etc, but, would that change if you register as a NASD broker dealer, have a license?
     
  2. Without an audited track record outside your own small personal retail account and a background from a large investment bank where you already have some good contacts, friends and family is all you got.....
     
  3. Hedge Funds: Game Over



    Hedge-Fund Managers Make Midair Pitches

    Small-Fry Firms' Hopes Take Off On Eos Flight of Captive Investors Amid Delicate Time for Industry

    —Wall Street Journal


    There was an interview in, I believe, Barron’s several years ago, consisting of a roundtable discussion among some of the smartest minds in technology investing.

    When the subject came to microprocessors—the chips that drive the computers we all use—and whether to invest in market-leader Intel or perennial Number Two AMD, one of the smartest of the smartest minds at the table said this:
    .
    “It’s game over—Intel won.”

    Unfortunately for the magazine's readers, AMD stock proceeded to triple while Intel languished. In hindsight, his words had been spoken at or near the absolute bottom in AMD’s stock price, precisely because all the bad news about AMD that made it such an easily dismissed company in the pages of a financial magazine had already been reflected in the stock price.

    Things could only get better for AMD, and they did, thanks to a new CEO and a new generation of microprocessors that caught Intel flat-footed, making AMD—not Intel—the microprocessor stock to own at the very moment it was declared “game over.”

    Which is why I hesitate to declare anything so bold as “game over” for anything but, say, the Red Sox without Manny Ramirez.

    Still, once in a while, things get so out of hand—such as last summer’s Time Magazine cover article about “Why We Love Our Homes,” which marked the absolute top in the U.S. Housing Bubble—that the phrase comes to mind and refuses to leave.

    And Friday’s Wall Street Journal article about hedge fund managers pitching their funds on New York-to-London flights is about as obvious a sign of a top as I have seen since, well, “Why We Love Our Homes.”

    I have tried to figure out how to excerpt the article, with appropriate comments, as I did the housing story last summer, but I find the hedge fund article is so full of fin-de-siecle whoppers that commentary merely detracts from the entire experience.

    It begins thusly:

    As Eos Airlines Flight 2 lurched amid heavy turbulence on Saturday night, hedge-fund manager Kurt Hovan tried to stay on course, making his pitch to a prospective investor.

    The 25-minute sales job by Mr. Hovan, manager of a $21 million health-care fund, fell flat. The investor didn't bite -- he said the fund was too tiny and its investment team too green.

    Mr. Hovan was one of a handful of small-fry hedge-fund managers whose hopes took off with the Eos flight. Each paid $3,900 for a round-trip seat on the New York-London trip. The draw: to mingle with captive big-time investors and make sales pitches over champagne and canapes. Investors rode free of charge.

    "It's speed dating for hedge funds," says Bartt Kellermann of Global Capital Acquisition, which raises money for hedge funds. If investors express interest, Mr. Kellermann arranges follow-up in-flight dinner dates.

    For the rest of it, including the hedge fund manager who believes he deserves a 2-and-20 fee structure because of his returns since inception all of 18 months ago, I will only suggest you dig up Friday’s newspaper or, more realistically, check it out online and read it from beginning to end.

    As Time Magazine’s everybody-in-the-housing-pool cover story last summer proved, the smart money does not invest in a trend when it is front-page news—especially not when cracks in the foundation, such as the Miami condo market back then, and the Amaranth fiasco today, are visible.

    Which is why I’m calling “game over” in hedge fund land. Buyers on the New York-to-London flights, beware...or at least insist on a longer track record than Britney Spears' latest marriage, which, for the record, will be two years in November.


    Jeff Matthews
    I Am Not Making This Up
     
  4. Can't tell you anything about hedge funds, but when I started as a CTA, I kept an audited track record for a couple of years, then posted it, along with my disclosure doc, etc. on Autumngold & Barclay's for a while, and money found me. If you have a good record at least a few years long, reasonable drawdowns, good equity/margin ratios, good risk profile, etc., IB's & others will find you, it's not that big a universe of good money managers. Lots of people will especially give small sums to "emerging" CTAs, bigger institutional money wants to see 4 or 5 years, and see how you handle bad markets and drawdowns. And keep in mind that returns aren't the only, or even the first thing that people look for. Lots of institutional managers look for lack of correlation with their other managers and markets. For some, it's much more important that you be able to "smooth" their overall equity curve than for you to make 20%/year. If you are looking at managing futures/options money, you might go to the NFA website and look at their materials on starting a CTA/CPO.
    Hope that helps,
    Jessie
     
  5. What's your edge? Is the edge real and scalable or are you just the lucky trader per survivorship bias? Why would someone invest in your fund instead of one of the 1000's available with extensive track records? Do you have a niche?

    Just some questions to ask yourself prior to going down the hedge fund path.

    surf
     
  6. Good advice, especially about scaleability and edge. I was initially surprised at how many institutional managers wanted to know exactly what I did, assuming that my "proprietary" methods were my business. The truth is that they would rather have me do it (and pay me for doing it) anyway than steal "my ideas", but it was important to them that my methodology "make sense" and that there was an understandable (to them) reason for me doing everything I did. they even went through my trading records and asked why I did specific trades, or exited a trade when I did. The other piece, scaleability, was equally important as I attracted larger money. If you trade natural gas or rice, you aren't going to be able to do what you can if you trade treasuries or the S&P, you will get killed on bad exits, and they know what your liquidity issues are likely to be. But, like I said, for me the first step was demonstrating a consistent few years with (most important) a good risk profile. I don't know of a single money manager or IB that would rather see a trader that makes 80% one year and loses 35% the next, versus somebody that can consistently make 15% annually. It's just too hard for them to deal with the client hand-holding that is required with very high volatility accounts, even if they are more profitable.
    Good trading!
    Jessie
     
  7. 'I kept an audited track record for a couple of years, then posted it, along with my disclosure doc, etc. on Autumngold & Barclay's for a while'

    Jessie,

    Can you elaborate on A&G process a little more, what are minimums for the time period of record, assets in program, number of clients etc. etc.
     
  8. it worked for some on here, but it seems like posting track records is only limited in effectiveness. there are tons of funds with <5 million in management with 5 year track records of 30-40%.

    i'm not sure i'd want to go the hedge fund route, but the issue of raising money when not around money is a large hurdle. hopefully we'll get some other ideas.
     
  9. One thing that did help me was that my track record was similar to what funds & IB's were looking for. First, I would disagree that there are a lot of people with a 5 year track record of 30%/year. That would be an amazing record, and that alone would easily land you in the Futures Magazine annual "Hot New CTA's" article and have people throwing money at you. But, that said, I was told on more than one occasion that a return of 50%+ in one year would raise serious red flags, that it was not necessarily a good thing, and would make them think long and hard about putting money with me. The thinking is that to do that, you would typically have to take risks that would make most people uncomfortable. One thing that was repeatedly cited as a good thing in my trading was that I rarely used even 10% of my available margin. Had I regularly used 25% or more, lots of money managers would not have even considered me. Another was that I had rebounded fairly quickly from drawdowns, and my drawdowns never exceeded 15% (although they would have preferred less). If I had ever had a drawdown of 25% or more, I would never have been considered by most of the managers, and if I had changed my trading style or level of aggressiveness after a drawdown, that would have ruled me out as well. So would trading thin markets in many cases; pros know how hard and expensive it is sometimes to get out of a 100 lot coffee or natural gas position in a fast market, vs the ease of doing a 10,000 lot in treasuries. It's that kind of thing that keeps money away from lots of new CTAs, especially the belief that high returns are the most important thing that people are looking for. It is important to keep in mind that for most people, the most aggressive part of their portfolio, especially if in futures/options is often strategic, not tactical, and so returns are less important than risk profile and non-correlation with other investments. It really is true that if you do those things well, and do them publicly for a few years, IBs & managers will find you.
    Good trading!
    Jessie
     
  10. Sorry but if you are relying on the Series 7 as a guide for anything than you are not even close to managing a Hedge Fund. Do you actually believe it is that easy ? Fund manager don't have or care about the 7, they have years of experience and a CFA.
     
  11. i've made my living out of the markets for the last 5 years? i have a track record. to be honest, this topic is about how one would raise money IF they had a good strategy that was scalable, but didn't know any wealthy people. i never said i was that person. so if we could stay on topic, i'd appreciate it. :)

    so if you had a series 7, you still couldn't market hedge funds, or do people not know the answer to that. what if you registered as a broker/dealer (although i realize that is expensive, could you market hedge funds then?). and no one has any idea on whether you could work with financial advisors at established firms, so they could screen clients properly? i don't see a problem with this.

    maybe trying to talk to fund of funds managers. cold calling them has to be allowed i assume.
     
  12. Barton Biggs book "Hedge Hogging" is a good read in laymans language......

    Where are you located?

    Put together a short preliminary business plan....cold call on CPA, CFA etc etc...local pension funds, police dept, fire dept, other small local institutions....you would be surprised who might invest...


    Short business plan very important....quick overview to see if ANY interest whatsoever....

    Entity....minimum,maximum dollars....splits/fees etc etc...mandate for type of investments...

    Back in the RTC (Resolution Trust Co) days of bad loans from defunct institutions I had a friend who bought these loans from the Govt.....you just got a cardboard box full of loan files....some old, some new....you were buying the "loan" and all legal rights that went with that loan, if any...pretty dicey/risky investments

    You know who their investors were??? College endowments, Harvard, Princeton and the like....true story!! These guys would throw $5,000,000 in the pot to see how it went, LOL...

    So, just get organized, put on your suit, act like you know what you are doing and go after the money...

    SteveD
     
  13. and put some of this in your briefcase:

    http://www.bumwine.com/md2020.html
     
  14. I believe the key here is salesmanship. It takes charisma to lure in the cash and then it takes charisma to keep it there. When an investor calls, you have to be quick to provide answers. When an investor wants to meet, you have to be ready to sit down with them. I believe experience in a brokerage type environment like Morgan Stanley would probably help a person in that regard. They have a great training program of dealing with customers both on the phone and face to face.

    As for returns and trick trading strategies, I think those days are over. I am not a fan of the hedge fund industry because I believe its a rip-off. To illustrate my point, look at the following link.

    http://www.hedgefund.net/HFN_Averages_Sept_2006_Report.pdf

    Year to date they are up 6.66% on average. Some funds actually took a loss. Those days of 20+% returns are now history.

    Those hedge funds who simply placed all their holdings into the Vanguard 500 Index Fund Admiral Shares at the start of the year would have enjoyed a 9.63% year to date return which appears to be above the industry average.

    https://flagship.vanguard.com/VGApp/hnw/FundsSnapshot?FundId=0540&FundIntExt=INT

    So go around with your suit and tie. Collect the cash. Then place it in the 500 Index and then collect your fees.
     
  15. I agree. You would need to be very good at sales, or hire some sales guru. You can have an average product and be the market leader if your good at sales and marketing. World is full of examples.

    Or you would need an awesome track record. I believe a good product would sell it self. If you have a money machine it will sell it self. Don't you all agree?
     
  16. jessie, how do you know if you correlate with others? how do you find data to do the analysis?
     
  17. I think Steve has a great idea here. Going to local players like a municipality which is bound to have a pension fund. This gives me some ideas in which I never thought about myself.

    However, there is an old saying which states "What the wise man does at the beginning the fool does at the end," In 2003, I think this idea might have worked great. However, there is a lot of competition nowadays, Congressmen pounding the tables for regulation, and now the mutual fund companies appear to be posting very reasonable returns. As I posted earlier, the 500 Index is posting nearly a 10% return YTD and with very low costs as well. Then there are all the stories that are circulating around the media about blow-ups. Then there is the data which suggests the returns from the risky hedge funds are not that rosy anymore.

    So if you were a manager of a local pension fund, would you trust your cash with Vanguard who will give you a reasonable return for very low cost or the hedge fund who might return less money then what you put in?
     
  18. Eagle -- are you Bogle in disguise?

    Let's look at the drawdown on the S&P 500 in 2000-2002. There are many hedge funds out there that deliver historic returns similar to that of the S&P 500 with much less volatility. Granted, the hedge fund indexes show that the hedge funds, as a whole, aren't delivering much but there are some hedge funds out there that deliver consistent, lower-risk, returns than the S&P 500.
     
  19. I'll agree that there was some need for hedge funds from the 2000 to 2005 time frame. There were many factors that placed the market into a secular bear. Tech crash, 9/11, Iraq war, real estate boom (takes away cash from the stock market), etc. It was the perfect storm. Making money in a secular bear requires trading in and out of different areas and other non-conventional strategies.

    However, if the S&P500 is going to roar, why would I risk my cash for an extra two bits in an unregulated hedge fund. Amaranth was supposedly a conservative fund but behind the curtain you had a young daytrading like fool whose strategy resembled that of an 18 year old with a Scott Trader account. My god, a 7 billion dollar loss? The USS George Bush cost 6 billion dollars to build from greedy government contractors.

    All I know is that if I hand my cash over to Vanguard, I will be handed something back and if something does go wrong then there is government body that I can complain to. If I hand my 2 bits to an Amaranth-like hedge fund, where is the guarantee that I will get anything back?
     
  20. Re. the question about non-correlation with other asset classes, it's not even necessarily a quantifiable thing (although you certainly can do so with a simple correlation coefficient). It is often done in a simply intuitive manner. Managers in many cases are looking for people who can smooth their equity curve. It is usually preferable to most clients to make a little less every year, but avoid stomach churning drawdowns in equity that might accompany a narrower investment "world". So, often they are looking for traders whose style would complement their other traders rather than duplicate it. For instance, if I traded futures or options on the S&P with a demonstrated long bias, I might be of less interest to a manager who already had a lot of money in the stock market. He might be more interested in adding somebody who traded agriculturals or currencies. Or within the equities market, if he was typically a directional trader or trend follower, he might be interested in adding somebody like Max Anspager who sells S&P options and usually makes money in flat markets (but does relatively poorly in very volatile or strongly trending ones) when his other equity investments are likely to do well. That is also why people will often keep money with a manager who has a few "bad" years, as they may be the result of transient or fluctuating market conditions. Sometimes markets go sideways, sometimes trending, sometimes volatile and sometimes flat, and that applies to hundreds of markets. the more managers you have whose styles are uncorrelated (to a point, there are diminishing returns in overdiversification), the more likely you are to have a smooth equity curve. Yes, this means that you are very unlikely to hit a home run and have a 50% year (or 20% year), but that isn't what institutional managers (and most individual clients) are looking for.
    Hope that helps!
    Jessie
     
  21. thanks. i guess this is why it's all about presentation and marketing. the person who can do the best job convincing the allocator verbally is going to get the money.

     
  22. Thanks for your insights Jessie, very informative.
     
  23. Thanks, one other thing that I thought of that I thought I'd pass along is that it is worth keeping in mind that EVERYONE is looking for good money managers and the next great CTA, and so I found that it was actually very easy for me to get in to see decision makers that had money to allocate. (I lived in Chicago at the time, which did help logistically, but I've done it by phone too.)

    None of them gave me anything at all the first time through, and most never did, but I learned a LOT about what they were looking for, and I got priceless good advice. As time went on and I stayed in contact, a couple of them mentioned me to an IB or two who were looking for somebody who did what I did and would take small accounts, then as those IB's got to know me a little, and got a bit more confidence, they sent a few more accounts my way, until one day I got a call asking if I could take about 50 new accounts at once that an IB was moving from a CTA who was "blowing up". I then learned in a fast and somewhat scary way what is meant by "scalability".

    I had been a (rather mediocre) floor trader, and had never worked for another CTA or CPO, so I have no idea how it has worked for most others, but I have talked to at least a few with similar experiences. I honestly do believe that if you are persistent, ethical, and a good trader, the rest will get accomplished if you really want it.
    Good trading!
    Jessie
     
  24. some good discussion and contributions on this thread. yeah, it's probably just persistance and salesmanship. i think with a consistent, high sharpe 20-25% annualized with a 8-10% max drawdown drawdown, and scaleable, it would be good enough to draw in some money. many hedge fund managers are analytical by nature, and like to trade, not sell. so maybe that's why many struggle in raising money.

    that's great that you can work with FAs. that would be perfect really, since as i said, the clients would be well screened for suitability. i'm willing to do some selling, but not sure that it's my forte or something i'd enjoy. i do know however, a cold calling superstar, who actually managed cold callers. he's in grad school and i plan on hiring him as soon as he's done.

    i find it interesting marketsurfer is a supposed hedge fund manager, but hasn't chimed in with anything helpful yet. i would hope that he would :)
     
  25. I have a friend who works for a FOF, and I've talked to him about how they construct their portfolios. Jessie explained it pretty well before, they are most concerned about putting together uncorrelated strategies to smooth their equity curve. Just to expand on what Jessie said, they do employ some quantitative methods to achieve this. Basically, you are looking to minimize the portfolio standard deviation. The less the hedge fund you are looking to invest in correlates with your portfolio, the greater reduction in portfolio volatility can be achieved. The problem you face is that correlations are not stable, and when the market has an "abnormal" move, correlations tend to converge (ie. everything moves the same way), as the guys at LTCM experienced.

    A quick way to determine to add a fund:

    Sharpe ratio of Portfolio * Correlation (portfolio, potential fund); compare this to Sharpe ratio of potential fund. Add to portfolio if Sharpe of the potential fund is higher.

    Just wanted to throw a quick and easy example of a way to quantify if you should add a hedge fund to a portfolio. In practice, this equation is flawed (and so is the Sharpe ratio for that matter) because it assumes a normal distribution of returns.
     
  26. my combination system has annulized sharpe of just over 1.1 and max ddown over the last 3yrs ive traded it of just 12%.

    HF material?

    Position trading system no problems with scalability.
     
  27. i find the discussion of pensions funds and other institutions investing in ones fledging hedge fund rather amusing.

    these institutions require that you have a substantial infrastructure in place, a staff, contingency plans and resources, top lawfirms, top auditors with stellar reputations, etc. prior to even considering your strategy, etal. these items cost 100's of thousands of dollars a month to do it right---

    outside of institutional money---which you are not going to get without the above---true HNW hedge fund investors look far beyond track record when making decisions--- the strategy is way more important than last years record-( the past never made any current investor money) and true hedge fund investors understand this all too well.

    regards,

    surf
     
  28. Surf,

    do you manage a HF and if yes, from which country do you operate?

    Cheers,

    Mark
     

  29. no, i do not manage a hedge fund. i did but discovered that i lacked the resources and knowledge to do it succesfully with any size at this time--nothing to do with trading skill.

    i presently work with a great team on a NYC based multi-strategy fund with both off-shore and on-shore structure.

    i am physically based east coast, USA.

    regards,

    surf
     
  30. I've spent time on both buy and sellside in the HF world, including co-creating a 3PM business that pushed a new fund to over US$150mm in aum within a year during a bear market.

    Jessie and marketsurfer's words accurately reflect the reality of the business of moneyraising in this era.

    Also, read what I wrote here on manager selection:

    http://www.elitetrader.com/vb/showthread.php?s=&postid=574512#post574512

    As a registered IA, I am on the receiving end of numerous pitches from both new managers and distributors. Mostly one acts as a publisher does receiving unsolicited manuscripts. Unless I know directly or indirectly the management team or the referror, the risk is too great to contemplate jeopardising clients accounts.
     
  31. 100% in agreeance.


    I started a fund a couple months ago with the help of a broker dealer (overseas..the the same princial applies anywhere, i do it overseas to attract big money in the form of a tax shelter, taxation issues are vital VITAL to growth and are a mian issue when people have real money). My years of smiling and dialing as a broker several years ago have paid off.

    I went to every broker dealer in town and pitched them. showed my results, my methodology, my risk control system..and how much potential much they could make. i also pitched my cost (which is highly weighed towards my bonus which i only get paid if i perform...low risk for them). Most of the empasis was placed on risk control in the fund...If the rules are follow...a monkey could basically do it. I never pitched myself as a genius...but quite the opposite..i pitched utter simplicity. I got several bites...and took the best offer.

    PM me if you like...but sales is the secret to many things in life, from getting a job, starting a company or finding a wife...it is all sales. It takes practice like anything else, but it is worth it. I think the most valuable ability that one can learn in life, is the ability to sell. it will make or break you.

    good luck my friend...it CAN be done.
     
  32. Jesse (or others),
    Did you set up an LP to establish a track record or were you able to use a personal trading account (auditable trades, single strategy)? What are the requirements to post on Autumngold or Barcleys? Could I post with a 5 year personal account if I had the record audited?

    Thanks,
    Ken
     
  33. You can use your personal trades as long as they are clearly identified in your disclosure document as proprietary trading, and as long as the strategy is essentially identical to what you are doing in the CTA. What gets posted on sites like Autumngold are the returns in your DD, so it is really dependent on how you choose to portray them there (I used my personal trading history). NFA has pretty rigid but reasonable guidelines on how you present your own trades. There is no NFA (or Barclay's or Autumngold) requirement to have them outside-audited at all, just know that if you misrepresent them, whether intentionally or accidently, you are way up the creek legally. This is easier to do accidently than you might think, there are very specific ways that they want returns calculate & presented. For instance, as an exchange member, my fees are a few cents lower. I had to go back and recalculate every (many hundreds of them) trade I had done for several years adding something between 3 and 6 cents to each, to give a more realistic picture of what a client would have experienced. Also, it is likely if you are a new CTA that any significant money or large concern will want to audit all of your trading records themselves. And don't forget, you will undergo an onsite NFA audit, no matter how small you are, sometime during your first year. You will also have to state clearly that you have either no experience or very limited experience managing client funds, and the NFA has specific language they will want you to include about that. I would go to the NFA site and read their guide to preparing disclosure docs, it goes into some detail about how to present proprietary returns, and if you have any questions, call their compliance dept., they are really helpful when getting started.
    Good luck!
    Jessie
     
  34. Jesse,
    thanks. very helpful.

    Ken
     
  35. unfortunately being a professional trader and a professional salesman doesnt usually go hand in hand.
     
  36. From your experience, do you think managing other people's money is the way to go? Or is it not worth the headache?

    Where can I read more about your returns, or if I wanted to invest with you?
     
  37. How/where did you get the record audited? how much does it cost?