Like any business, it takes time to grow and expand, but from what I've been reading in books like "Hedge Hogging" paints a different picture. Some of these guys worked at big firms, so they know the big money..so what? Why hire traders?..cant they make the trades themselves?..why hire an analyst..cant they do their own research?..why hire an accountant?..cant they use the accounting software from office depot? Then these guys, on a good year spend millions on a life style they cannot maintain... They take on too much overhead, which puts on much pressure to "out perform" the market. I guess what I'm trying to say is...why cant a fund be run by one or two guys in a basement or something? They're trying to go global in one step and it obviously doesn't work for most.
i know a few very small firms. overall they dont do very well to tell you the truth. there are exceptions....like niederhoffer is less than a 10 person operation. I have a fund where i do the majority of the reseach , trading etc. It is really valuable to have other people other opinions and i would love to have a "pecker"(the guy that enters orders) that simply carried out my orders and kept me up to date. remember this is a mental game....when all the pressure is on just one person, it get overwhelming mentally. you have to spread around the risk, ideas, and vacation days. that is just front office. back office you need to keep seperate to avoid cooking the books. so i have a fund department and an acocunting department that does those duties and you need people to sell as well. I would say 5 people would be BARE minimum for a very small fund.
One way to "keep it small" would be is if you, yourself, make all of the trading decisions and clear your trades through a firm that can handle all of the backoffice paperwork in exchange for the commission dollars you generate. It can be done. That is a good way to start out initially. Eventually, if you want to attract larger allocations, you'll have to set-up a big office with lots of bodies, expensive walnut furniture and expensive laptops.
As Michael Mauboussin points out, there is a distinction between asset management as a profession and asset management as a business. Sure you can run a small fund -- but as a business there is tremendous leverage obtained by hiring a few more analysts and adding more infrastructure to manage billions instead of hundred millions. The marginal increase in income is levered compared to the marginal increase in costs -- so if these guys have the ability to do it, why wouldn't they? The only reason you would not is personal reasons (e.g., you don' t want the hassle) Otherwise, there is a strong financial incentive for scale.
In an article called "Soldier of Fortunes," the Guardian Unlimited profiles the lifestyle of Karsten Schroeder, a 28-year-old German hedge fund manager living in London. Despite his relatively young age, he manages more than $100 million in assets, making him "one of the new breed of market high flyers, whose investment decisions can yield big sums for clients and himself." ... What makes Karsten's hedge fund unique is its reliance on quantitative trading methods to out-perform human traders. On average, the firm's computer buys and sells $10 million every hour, searching for microscopic inefficiencies in the marketplace: âAmplitude is a very particular kind of hedge fund. Here, as in many other funds these days, all the trading is done by a computer. Schroeder and his colleagues do not buy or sell a single pork belly, or even decide to, they just operate and refine their own computer model, which continuously watches the markets, looks for patterns, chooses what and when to buy, and then does it. _________________________ http://tradeking.financialblogs.com/post/blog/categories/4DBAFD96-9DC7-4E89-8B04-C790B02AA618.html