Don Bright... great post! I have never read so much "hedge Fund" bs in my life. Yes, an "average" trader can share his risk trading in a fund. But if you are a good or great trader just put up $25k of your own risk capital and get to work. Perhaps if you have developed some wizbang "system" that requires billions to to work. But then... good luck selling it!
Why is everyone comparing prop. trading to hedge funds? The simple fact is that hedge funds often trade products and strategies outside of the universe of typical proprietary trading. How about Convertible Arbitrage, High yield trading, Capital Structure arbitrage, International Statistical Arbitrage, Commodities trend following, Mortgage Derivatives, Global Macro. My fund trades all of these strategies as we are a multi-strategy fund. I don't think that any prop. firm could accommodate this type of activity. Not all hedge funds are single man and a dog buy 'em or sell 'em in equity types (most aren't). Most prop. firms could not fully cater to the trading needs of a hedge fund. And as for costs, I've already spent $2.5 Million on set-up in the last 2 years (includes compensation 15 staff). It can be done cheaper of course. Bottom line, can you raise $5-10 Million+ to start, if so, go ahead and do it. It's the way to go if you can raise sufficient capital.
Yes...the hedge fund "number" is $30 million I believe (for SEC purposes)...and, yes, when gettin involved in the exotic, global type, capital intensive products...then a niche exists, I agree. For the other 99.9% of us, other options might work out better. And, yes, I was addressing the "single man" or "small firm" type "fund manager" wannabe, for this discussion. We certainly don't want our guys getting involved in another LTCM, or Barings Bank...where we might not even know what the Heck is going on with our money...LOL The banks with nothing but money as a tool, tend to lock up much of the exotic markets, as you all know. Anyway, good discussion...always learn about the possiblilities, and then make a decision. Don
I worked for one, and the two of the programmers that worked for that hedge fund went to start their own. The guy that runs the original hedge fund, his #1 job is to fly all over the place getting more customers, and to keep the ones he has from bailing when things don't go well. I think they are >$250M now. This guy must love the "customer" side of this business because that is all he does. He has made himself pretty wealthy. The other programmers from that hedge fund that went on to start their own hedge fund also started on a wildly successful run, but when things started to go bad (read extended drawdowns) they found out what the other side of the sword was with their customers. They decided to dismantle it and trade for themselves. Here is the equation: People + money = a lot of headaches. nitro
Yes. But if you have sufficient trading accounts then why bother ? The only reason to get into the hedge fund business is to obtain more capital: many people get out of it once they have sufficient funds ....
I think the term "sufficient capital" has a morphing definition, like many other things as we become indoctrinated to the markets over the years. Early on, 5M may seem like enough to hang it up, trade alone and shut the world out. If you achieve that and are still young, you may then think 100M would really be the gig, then 1B and so on. Sure you can't spend all that, but after a while you start thinking about what all the money means...about what your legacy will be...about what you've done to make the world a better place now that you are set. For Gates, his 20B foundation eradicated several diseases in Africa and many many other wonderful things. Sufficient capital is as elusive as the fear and greed many of us fight with every day in my opinion.
...that may be of interest to ET readers: http://www.afsrmagazine.com/cgi-bin/articles.pl?id=154§ion=15&action=display
Thanks for starting this discussion, ktm. I've been very interested in starting a hedge fund as well. I disagree with many posters here that say hedge funds are only a good idea if you are as good as Soros. One advisor I've been talking with helped start a hedge fund with a partner several years ago with only $500,000 in initial assets; they had great performance the first year and by year 3 it was at $50 million due to strong inflows. They charged a 35% incentive fee so the profits were very nice that 3rd year. I think the fund blew up after that due to a flawed trading system. I'm sorry I can't address your original question since I'm not as far down this path as you yet; however I will say I read an article last week that was very interesting. It was saying that a large number (200 or so) of hedge funds go bust every year, not due to trading, but due to poor back-office / business processes! That really surprised me to be honest, so just be careful there. Anyhow, hopefully we have have good luck with our funds! Cheers, -Taric