Starting/Working for a Hedge Fund

Discussion in 'Professional Trading' started by ProfitTakgFool, Feb 17, 2008.

  1. A few years ago I started a small hedge fund, which has grown into a fairly good sized hedge fund. Since I responded to this thread my Inbox has been hopping. I'll take a few moments and answer some questions I've received on this thread in the hopes that it will slow down my PM's :p
    The biggest question I received is, "How do I start my own hedge fund?"

    Disclaimer: Everything I'm about to tell you is based on my experience and may or may not be the experience of everyone in the field or anyone who ventures to embark upon the field. You are required to verify all information for yourself and all included information should not be considered advice to buy, sell, or sell short, any financial instrument of any type, nor should it be considered advice on starting a hedge fund or investing in a hedge fund. You, "the reader," need to seek advice on all matters from Certified Public Accountants and Attorneys before starting a venture based on the information provided below:

    The first thing you need to do is do as much research on hedge funds as you possibly can. You can start with the following links and Google "Regulation D" and all of the various rules that fall into Regulation D. Also, be aware of the difference between an "accredited" and "non-accredited" investor. These are sometimes referred to as "qualified and non"

    Go to: pay your $250 to join and read every document they have on their site. After you finish these steps you'll have an extremely good understanding about how hedge funds operate and what it takes to start one.

    Let's talk order to attract wealthy investors to your fund, assuming you don't currently have connections, you need to generate strong returns. A return of 10% per year will get no one's attention. A return of 523% per year, for example, will get jaw-dropping responses. If you mention a number like this you will have more inquiries than you know what to do with. However, and this is a very big however, you will attract some very intelligent and sophisticated investors who will ask some very important and prepared questions, which will focus primarily on risk. If you cannot demonstrate that you can generate strong returns with a minimal amount of risk, or reasonable amount of risk, you will not get many intelligent or affluent investors. I didn't start my fund until I could demonstrate that I could continue generating strong returns on a declining degree of risk. Until you can achieve this kind of performance you are not qualified to start a hedge fund. You have to have an incredible understanding of the relationship between <b>risk and reward.</b> High returns can be generated with declining amounts of risk but it's incredibly difficult. If you are generating 523%-type returns with a fully leveraged account you're not ready to start a hedge fund. Study the Sharpe Ratio and be prepared to tell your investors how you manage risk and balance the trade-off between risk and reward.

    More on Returns.....if you have one negative year you will probably be out of business unless you have had many positive years prior to this bad year. Investors invest in these types of ventures with the full expectation of realizing strong returns. Oddly enough, investors are very familiar with the relationship between risk and reward and demand high returns in exchange for high risk. You have to be able to deliver these returns consistenly. One bad year out of 10 won't hurt you much but 3 bad years out of 4 or 5 and you'll be out of business.

    Hedge Fund managers can and do often blow up. Obviously, this does signal the end of your fund but not necessarily the end of your career as a Hedge Fund manager. If you have a track record and you blow up it is highly likely you will get investors to help you start over if your blow up was caused by an unusual market event, such as the one we are experiencing now. That being said, however, you should be experienced in managing money through trending, non-volatile markets, and non-trending, volatile markets. If you don't have this experience you aren't ready.

    The next question I received was something to the effect of, "How do I get a job at a hedge fund."

    I tried in vain to get a job at a hedge fund and couldn't. In fact, I never even got an interview at a hedge fund so I started trading my own account and started my own hedge fund when I felt I was ready -- after many years, and many blown accounts.

    It has been my experience that hedge funds only hire Ivy League-type graduates, unless you know someone in the industry. XYZ State isn't going to get it done, unfortunately. If you have an education from XYZ State it doesn't mean you can't go to Ivy League MBA. To get into this industry you have to do something that puts you head and shoulders above the crowd. Have you worked on or developed something "proprietary?" Have you been published? Do you trade now? If so, how are your returns? Show Hedge Fund managers that you have something to offer that other candidates don't. That's how you land these jobs. The competition is fierce. Everyone wants to work at a hedge fund. It's more likely that you'll be more successful starting your own hedge fund rather than trying to hook up with an existing hedge fund. The lines are long for these jobs.

    Alright....all other hedge fund employees/managers are more than welcome to jump on this thread, if they so choose, to add to the limited amount of information I've just provided. I will monitor the thread from time to time and try to answer questions that arise. Please don't PM me because I have more PM's than I can possibly answer. If you have questions post them here for everyone to see.

    Good trading to all!
  2. Background: I started my own retail home furnishing business in high school. I went to college and earned my degree. Learned tons in school, realized where the money was at. I learned all I could about private equity, holding companies, ibs, and hedge funds. I sold my business and started towards a career as a stockbroker. My training program focused primarily on opening accounts and dealing with clients, I quickly left the sales position and now I'm in the situation of finding a position as a trader. I read the boards (prop, ib, hedge fund, retail trading) applied to tons of places. I got tired of waiting and I just opened my direct access brokerage account with the profits from selling my business. I have experience developing business plans and working with clients. I also have experience networking with HNWI and I've read about hedge fund managers and have a pretty clear idea about starting a hedge fund.

    I read your previous posts that was the first step. It looks like you were in the same position sending out 200 resumes, I've sent over 500 and only 2 that got back to me weren't scams and they weren't interested. Experience will beat out education any day.

    Great to see what I want to do is possible. Thanks for the great post.
  3. How much AUM did the fund start with, and how much AUM is there now?
  4. What are your qualifications, educational and otherwise?
  5. Only question I have for you is regarding education. Would you say that when an investor is considering investing in a fund, do they care about which college you went to or if you even went to college or do they care more about things like performance, risk, etc.? Thanks in advance.
  6. What did you do for income while you were learning to trade/ blowing up accounts?

  7. your education doesn't really matter to investors, but that of your team does. most funds, excepting micro daytrader type startups, have PhD's or Masters in Quant on the team OR at the minimum on the board of advisors.

    strategy and niche is more important than returns to all but the least sophisticated hedge fund investors. everyone knows that past performance is not indictive of future performance, let the cowboys with 500 % plus returns dazzle the smaller naive investors while the ultra rich and most institutions seek out a totally different set of criteria--- the ultra rich and institutions do not seek the same criteria either....


  8. Nattdog


    We all know "ultra rich" and institutions have different things they are looking for. The "ultra rich" care about these things because they are listening to an army of consultants and their advisors at institutions.

    Why is it that every time someone mentions starting a fund, there is always this call that you are not the real deal if you are not catering to the so called "sophisticated" investors.

    It kind of reminds me of the loser cab driver in the movie Collateral.. He wants to start his business, but first he has to have a fleet of Mercedes limos, etc, which of course makes his dream 100% impossible. Tom Cruises character, the man of action, asks, "Why don't u just get a used xyz limo and get started" to which, the cab driver is like, "cause I have to go first class, et etc"

    Of course his desire to be 100% first class right from the start is really just a self imposed block, it is based on fear, and is keeping his dreams a fantasy and not reality.

    That is the position of many I see who want to start a fund, etc. Hey, maybe U can't go all high class right from the start. Guess the fuck what? Unless u have that grade a prestigious background, it will never be possible. If u want to succeed, u have to get the hands dirty and shovel the manure when necessary. Those who are unwilling and fantasize about "class" operations and "class" clients, well, keep dreaming. Maybe in the next life.

    Or u could work at getting a little success at the level u can handle, with clients that will accept you, and build from that. That is why a CTA is a great vehicle for getting started.
    Get started managing some accounts, prove you have “safe hands” and you are on your way. There is a real need for talent in this industry, don’t let delusions keep you from getting started.

  9. :confused: maybe because it's the LAW that only accredited investors can be approached with hedge funds??

    your missing the point totally--- institutions and ultra rich are looking for DIFFERENT things however niether are 500% plus past returns.

    this is not child play seeking out orphans and grandma's to invest their savings in ( see sch@ndler fund thread, someone is upset about losing their retirement). but rather sophisticated investors who understand what they are doing and have the resources to deploy.

    i agree with you, CTA is much smarter place to start rather than a hedge fund. your other points are well taken, well said.

  10. Nattdog


    A few things. first, being rich or an accredited investor has nothing to do with being financially sophisticated. second, the definition for such is far from "ultra rich" by most peoples standards.

    My point is, if a guy has trading tallent, he needs to work with where he is and who he is, in order to get where he wants to go. PLenty of tallented traders do not have the background to appeal to institutional people. Such a person can forever be trading for self in pj's from home, or they can look for ways to get involved with clients who are interested in their return profile, who they are, and what they offer.
    #10     Feb 18, 2008