Starting/Working for a Hedge Fund

Though the guy is from new jersey.

 

Rock, it's nice to see that you've been able to raise 10MM to 15MM to start a fund, yet just pay 5k$ a year in accounting fees to operate, without the need for further expenses. But this is not what I would call the typical operation. Here, you have a bunch of kids who want to start hedge funds with no track record, no industry experience, and no contacts. The regulatory stuff is the least of their issues. If they had track records, industry experience, and contacts, they would probably know how to deal with regulators in their respective fields already.

Here's a more realistic picture of what it would take for someone to raise any amount of seed money for a hedge fund:

At least one internal accountant working full time on reconciliating positions for corporate actions, splits, dividends, etc., dealing with pricing issues (both the instruments and the fund shares), tax issues, and analysing performance;
At least one compliance officer who will make sure you're not screwing up your clients, and that you respect regulation;
At least one independent risk manager who will monitor your positions and make sure you are within the risk limits established by your clients;
At least one or two client relationship people to report and keep up to date the clients seeding your fund, and prospective clients who might want to invest;
At least one receptionist/secretary, because clients don't actually expect you to answer the phone while trading their money;
That's already a 5-6 people staff, with the risk manager and compliance officer having a significant weight on the payroll. And that's being conservative.

Now on top of that you have to pay for the office space and furniture. You have to pay for your administrator and custodian. You have to pay for legal advice. You have to pay for external audit. You possibly have to pay for your bloomberg. Etc.

The one million dollar annual budget is far from being an overstatement. Everyone who ever started a business knows how quickly a first year expense budget can be blown up.

That's what a real hedge fund start up looks like. That's where the notion of economy of scale takes its sense. Anything below that is likely to die in its egg. It seems like a lot of people here think they can do competition against the Citadels, Och Ziff and GLGs of this world just by trading on IB in their parents' basement. They don't seem to remember that all those multi-billion dollar hedge fund managers offer the same kind of performance they want to offer, but with reputation, track record, and heavy weight infrastructures to support them. Meanwhile, they are not even able to get a simple job as analyst or trader at a second tier fund manager or bank. Not very realistic, is it?

 

???? Did I say that? not even close. Launching
my first pool w/ $250K in next few weeks, probably have just over $1mm in the next few months, but not counting on it. As a matter of fact I wouldn't expect anyone to commit to my program in a big way from the get go. One piece of advice that I can attest to is that just like trading on your own, which I do, is to sock away 2-3 years of living expenses. Why, so I am in no rush to gather assets that won't even touch a new program, why chase it? If I make it and the returns are adequate then the investors will find you.

The example I provided was about my accounting only. To be more thorough. Legal to form entity: $20k Accounting: $5K Audit: $2k (Dirt cheap) Website $7k.

All which was paid for by trading profits: I realize that my providers are not top of the line, but they can certainly support an operation with AUM < $5mm. I'm not a quick buck artist trying to inhale assets, if I can keep my infrastructure costs low, I am managing my customers funds in a prudent manner? Besides I have found that the top tier service providers are not only overpriced but are also too busy. I have been waiting 3 weeks for an audit of my prop performance for june from a top tier administrator. they charge like 20K for an audit.

 

7k for a website?

WHy not just trade prop and keep 100%? giving up 80% plus of your profits makes no sense.


CPW

 

Thousand times sorry, I mixed you up with someone else (cmitseff).

At this amount of assets, once again, you just don't need to run a hedge fund. You don't even need a website (most managers don't have one). As for everything else, your numbers are probably quite in line with your needs.

As for your accountant, trust me, he doesn't charge 5k for a 90MM fund. These guys do their own accounting in the first place, it's pretty much a requirement to get institutional assets. The administrative complexity of running a hedge fund, or any fund in fact, should not be underestimated. The ratio of back office staff to front office staff if about 4:1 in most firms. In other words, you need 3 accountants, compliance officers, operations, performance analysts, etc. for every portfolio manager in the firm.

Question like that, didn't you mention you spent 12 years on a trading desk? And 250k is all you have to start your fund?

 

No, it's actually a comfortable % of net worth to invest in my program trading futures only. Leverage is there and diversity is sufficient. Besides my returns are volatile and I will add to the program when drawdown reaches historical levels.

I think your approach towards protecting investors and keeping the industry clean is the good to hear. Thats why I have told friends who want to invest with me to consider the inherent risks/drawdowns and the possibility of 10+ sigma events. I want to do this for 20 years with the same customers, theres too much hot money out there sloshing around.
I guess I don't want to be a "REAL" hedgefund
too much drama.

 

Let's not forget about contingency plans and back up structure demanded by institutions and many high net worths.

i don't know how these microfunds survive.

CPW

 

do this and you will succeed



Incubation and Seeding: The Inconvenient Truth
Incubation and Seeding seems to be very much in vogue these days. New entrants are piling in, while a few have pulled up stakes and exited the business. We recently attended a number of events that covered this topic. A conclusion common among all events was that there remains considerable confusion as to the goals of the seeder and the types of funds that are appropriate for the model. Read More

The inconvenient truth is that if you are a manager, and you approach a seeder, you will be rejected 99% of the time. In other words, we have heard it said, “If you want them they probably do not want you." The clear message from industry experts was that they are looking for managers that do not “need” them but would benefit in the short term to get out of the gate. According to some of the major seeders such as Skybridge, Weston and MD Sass, out of the 600-800 hedge fund managers they review each year, they will invest in only 1-2. These are not attractive odds.

Before you approach, or preferably, seek introduction to a seeder – review what you have to offer from their perspective.

1. Capacity: Absolutely critical - seeders are venture capitalists and are looking for strategies that have the capacity to grow and can ramp up relatively quickly. I have heard $700 million in 5 years thrown out as one example.

2. Due Diligence: Seeders are looking for managers that have a business plan and know what they want from seed providers. The seeding groups are not monolithic – some are passive capital, some provide infrastructure and others will offer marketing support. Understand what it is exactly that you want from a seed partner. The goal of a meeting with a seeder is NOT to run through the strategy, lean back and ask "what do you think?" but to have a very specific conversation based on your understanding of their model and what you want. Remember that they will ultimately be your business partner.

3. Business Plan: As they are effectively venture capitalists, understand that they will be curious to see your business plan across a 3-5 year timeline. After all, seeders become a business partner and attach their reputation and capital to the success of your enterprise.

4. Will it sell?: Outside investment remains critical to the success of the partnership. A perfect score on points 1-3 will still fail if the seed firm comes to the conclusion that the fund will be a difficult sell. This is particularly true for seed arrangements that have buyout provisions. The manager must have sufficient capital to buy out the seeder. points to consider:

a. Manager pedigree – Did the manager come from another hedge fund or investment bank? What is the manager’s pedigree and is he viewed as an expert in his field?

b. Complex nature of the strategy – If a strategy is too complex and difficult to sell to investors a seed provider may opt not to make an investment. For example, quant strategies, mortgage and systematic trading systems are tough sells.

c. Location – Investors have to do due diligence and site visits as part of the investment process. The location of your office may impact your ability to raise capital as investors cannot travel everywhere.

d. Have an office – Virtual operations are not acceptable if you are trying to build a successful hedge fund business. Spend time and money to create a solid business including infrastructure if you want to be taken seriously by investors and seed providers.

e. Balance strategy vs. capacity – Analyze your strategy and be honest with yourself and the seed provided about your capacity. Seeders want capacity.

 

Still want to do it,

any questions??

<b>a. Manager pedigree – Did the manager come from another hedge fund or investment bank? What is the manager’s pedigree and is he viewed as an expert in his field?</b>


Do we see performance as a critical factor?? Remember EVERYONE has top performance, otherwise they wouldnt think they could start a fund... DUH!!!

 

Thank you for the post.

What strategy is the current fad? Who is getting funded and why?

Thank you again