FYI, Amaranth had an excellent sharpe ratio.....till they blew up Any trader/manager who can last in this business is going to manage risk. It's called high-probability setups, using stops, limited downside per trade. Sharpe ratios, etc. mean nothing. ~Past performance is not an indicator of future success
Oh man....this is very easy. I started with 150k managing money for people I knew. Once I grew to accept clients I didn't know and accepting larger investments I couldn't get to a lawyer fast enough. Since you are estimating your startup at 10-15M don't even hesitate -- get a lawyer. It will cost you about 20 grand but that's 20 grand worth of sleep. Get a lawyer.
Oh, and it's an accepted business practice for the fund to pay the startup costs. Traditionally, what you do it front the money and the fund reimburses you over time. Startup costs are typically amortized over a 4 year period but if your investors agree you can expense them in the first year. Double check with your accountant on that though.
thanks to all for your responses... I think I'll be getting an attorney, although I could probably create the docs myself, it's worth it for peace of mind. Also, this question is for PTF... I will not be the trader of my firm. I will be doing everything else, essentially running the business while my buddy does the research/trading. What types of things are necessary to be done on a daily basis? The startup process will keep me busy, but on a daily basis what are the most important things to do? With few transactions and a handful of participants, very little transactions will be made. FTP what do you do, other than trading, on a daily or weekly basis to keep your firm running smoothly? Thanks a lot.
I'm not saying this is total bullshit, but here are my thoughts. You started with 150k and now have 5MM, which you regard as a success. Yet, two years of 500% returns alone will bring you from 150k to 5MM. You propose that in order to be successful you need strong numbers for the first years. Of the 5MM you have now, what proportion is from those sophisticated investors, and what proportion was the result of growing your initial 150k? My thought is that if you are able to maintain such returns with controlled leverage and risk, as you seem to propose is necessary to attract investors, you don't even need the trouble of running a hedge fund. You might as well trade for yourself. 5MM is actually a micro-scale operation. Operational costs necessary to attract serious money are not even worth it when you can generate that kind of returns on a 5MM asset base. 2% mgmt fees represent barely 100k of those assets. Knowing that a huge share of those assets are probably yours, assuming you are not bullshiting on your returns, and knowing that increasing assets can significantly decrease the performance you have on your own money (which you probably don't get fully compensated for by your perf fees), I don't even see why you are running a hedge fund in the first place. The fact is also that any 'sophisticated' investor in his right mind will not go for funds that have triple digit returns (eg. 523%) that were produced in a so called 'risk controlled' fashion (at least in your opinion) because this is simply unsustainable and the likelihood that there's something you are not telling or that you cooked your numbers is simply too high. In order to generate 523% returns for two years, you need to *take* the risk. And every sophisticated investor knows about: 1) the cost of blowing up and the fact that your final payoff is zero whenever you reach that point 2) the fat tails of returns distribution and the fact that once in a while, they will meet traders who pretend they can maintain such performance while in fact their last two years were the result of pure luck. Institutions see people who want their funds seeded all the time, and among those, they do see astronomical numbers once in a while (law of large numbers!). Yet that doesn't make them more credible. Going to the second point (hedge fund hiring), this is exactly why hedge fund managers hire people with good pedigree, ivy league diplomas, industry experience in bulge bracket banks as prop traders or analysts with impeccable track record (eg. never blew up or bleed to death). They all know about the beginner's luck. What they want are sustainable skills. It is true that if you are unable to prove that you can provide such sustainable skills, you are better off by yourself. Starting a hedge fund might not be the way to go though, unless you know people who have blind trust in your skills (as opposed to experienced hedge fund managers, who actually know what they are doing). Maybe getting a trader or analyst position in a lesser known firm for a few years in order to prove yourself is a better alternative. Note that nearly every big name (if not every) in the world of hedge funds, and investments in general, has usually worked in the securities industry at some point. They may not have all been goldman partners, but they at least made some money for a known firm before making money for themselves. Patience and humility are key to succeed in this business. As for those who did have enough patience, ambition, combativeness and discipline to prove their skills in the securities industry, starting a hedge fund might not be the best alternative either. Joining an reputable firm, negociating your pay package, significantly participating in performance, and leveraging the firm's name and exiting operations to make even more money is most likely the preferred path. But once again, go tell that to people who blindly believe that the american dream is about everyone being successful, as opposed to having a chance at success. I'm not trying to break dreams here but those who were unable to make their way in the investment world have a very slim chance of becoming billionaires by setting up their hedge fund. That's the way it is.
very smart replies from cosine. suggest listening to him. the others seem to either have agendas or simply don't know what they speak of. if you don't posess what he states, all is not lost, suggest partnering with someone who has the pedigree(s) he mentions. otherwise, you are wasting your time in the HF business surf
I'll try to make this as brief as possible. The 5MM is more invested capital than profits. I used 523% as an extreme an example. I've never even come close to a number like that, nor do I try to do a number like that. I watch my profit curve very, very carefully and when it speeds up I slow my activity down. I know how dangerous making too much money too fast is. I tried getting a job with the likes of GS, MER, MS, etc....the phone never rang. I was even interviewed by a few prop shops and couldn't get hired -- go figure, I hear all you need is a pulse these days but I couldn't get a job. MSFT was started in a college dorm room as many businesses are. I started my business out of my basement because starting a hedge fund is no different than starting a software company. You have to have a good idea and a differentiated product or service. Why did I start a hedge fund? Because it's all I've ever wanted to do. I wasn't born with a silver spoon in my mouth so Ivy League wasn't an option. So since that wasn't an option for me starting a hedge fund and becoming successful shouldn't have happened? You think starting a hedge fund should be a result of a coming out of Ivy League, getting schooled at the big banks, and letting go so you can "spread your wings?" You don't think a blue collar, average joe can do this, or should be doing this? A hedge fund, investing, and trading comes down to one thing. Can you make money while managing risk? Where you went to school and what side of the tracks you grew up on, and what firm you were groomed at doesn't need to include the likes of NYU and/or GS. You don't have to be priviledged to do this. Why don't I just trade my own account? Because, for example, 200% of 100k is 200k in profit, which I can do. 50% of 5MM is 2.5M, which translates to 500k based on 20%. Now think of how interesting the numbers get when you do 25% per year, for example, on 30M. That's 1.5M based on 20%, plus 1 or 2% management fee. I agree completely with one of your points. You cannot triple 30M as easily as you can 25K, but you don't have to. I'm not sure there is much more to say other than I'm pretty good at what I do and I'm simply living my dream.
Surf, I just couldn't disagree more. Being successful in the HF business comes down to generating profit while managing risk and just being good at business. I firm handshake and a kick ass presentation squashes an MBA from NYU. I have presented in front of individual investors, research scientists working on cures for cancer, doctors, bankers, investment managers, traders at the CBOT and CME, and others who are well established in this field and who are leaders in others, and I've landed some nice accounts. Communication skills are a must. It's very difficult to draw any kind of conclusion on something you're reading on a message board from some dude you never even met. If you watched me trade, saw how I manage risk (it's not with stops), and we went out and laughed over a beer afterwards you'd probably come away with a different impression.
The most important daily thing you need to do is trade reconcilliation. In the beginning, managing your clients will also be time consuming but that will drop off once you've been running for a while. Your investors will either be emailing you or calling you "just to check in." They are actually a little nervous because they are involved in a new venture with a fair amount of risk but they won't tell you that. They will just want to talk, which is perfectly understandable. Another thing that will take a lot of time in the beginning is office procedures. The flow of paper will be hectic at first. You probably won't be able to get your books to balance, your printer will run out of ink, then it will jamb, then it will take two pages at a time, then your stamp machine will run out, and on and on. Things will just go wrong. Once you're up though, you're up. After the first few months all you do is research, trade, reconcile, and end of month. It's not a labor intensive business for me because at the moment I'm flat overnight. Once I start holding overnight the research end will sky-rocket. Also, since futures are M2M the accounting is much easier. If you are doing stocks then you'll have much more to do.