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What's the biggest cost to run a hedge fund ?

  1. What's the biggest cost to run a hedge fund ? For example, a quant HF
     
  2. Besides designing an investment strategy, possibly legal costs, 20k-50k.
     
  3. thanks, that sth I didn't know
     
  4. There are many costs, but you asked for the biggest.
     
  5. Bernie Madoff
     
  6. You need two things:

    a) a hedge fund vehicle
    b) an investment management company which manages the hedge fund

    the fees of the hedge fund vehicle is paid by the investors (limited partners), and usually account to 50k p.a. + a % of the AUM. This limits your ability to run a fund if you have less than 20m$ initial money as the cost will reduce your performance.

    the investment management company needs to be regulated wherever you're based, if in the US, it means SEC / CFTC depending on whether you trade securities and/or derivatives. You will have an ongoing compliance cost as you need to meet the regulators' requirements, so count a good 50k a year just in compliance salary, OR 30-40% of your time.

    regulators and clients will also look for a strong management team... today a hedge fund minimum annual expense is around 1m$, making it almost impossible to start with less than 100m$ as nobody charges 2/20 these days.
     
  7. Acknowledging the ultimate loses, returning whatever is left over to the investors and closing the fund.
     

  8. Very optimistic view, here, IMO. I was thinking "legal + compliance costs" certainly into 6 figures, realistically.
     
  9. %%
    In banking, its gov regulation, dont know the ratio for funds, hedged.....
     
  10. Capital Introduction
     
  11. %%
    LOL
    True in some cases Trend M. I see Boaz Weinstein /Saba Capital Management settled the 15 month lawsuit with Canada's Public Pector PIB [actually the pension fund of the RCMP -Royal Canadian Mounted Police ]Forbes[ online] had it . Noted he took the other side of the JPM London whale trade.............................................................................................................They also noted the trend of hedge funds cutting fees[MARCH 2017 Forbes free online artcle]
     
  12. Set Up Fees around 15k in Bermuda or Cayman including standard Offering Memorandum (you don´t have to invent the wheel again for quant funds).

    Monthly Fund Admin costs = depends on what asset classes the "quant fund" is going to trade

    a) equities
    b) bonds
    c) currencies
    d) Futures, Options
    e) ETF´s
    f) Commodities (and Futures)

    Audit costs (Deloitte, PWC, KPMG, E&Y) approx 10-15k once a year.

    Then the usual fund domicilation and government fees.

    Note:
    There are a lot of rookies out there WHO "think" their fund must have well-known service provider names in their Offering Memorandum. Don´t forget: you engage in this business to MAKE ACTUALLY MONEY and not to spend money - with other words make your legal, fund admin, auditor happy! These "players" will sell you fairy tales....
     
  13. With all due respect: 6 figures legal & Compliance costs? LOL! ROFL! LMAO!

    Sure, if you want to pay your legal´s USD 500 five star restaurant visits and their Porsche´s...Ha, ha, ha....
     
  14. investment banks offers "prime brokerage" services to hf. including compliance, brokerage, capital (some times), legal and sometimes even office room
     
  15. It's about right. If you want a real, Manhattan attorney, you can expect to pay upwards of 1,000 / hr. And this is not a one-time cost to set up the legal structures and docs (a typical fund has three entities, an LP which is the fund, and LLC for the GP, and an LLC for the management company, each needs it' own taxpayer ID's and returns fled) but the ongoing legal as well, every month. Six figures is conservative and easy to hit, believe me.

    The biggest cost though, as someone pointed out here, is capital introduction, and the pipeline of going along maintaining your business as they sit and watch, most, for several years.

    What connections do you have? This is the first question to ask in starting your own fund. Who will invest and how will you get them?
     
  16. Set it up outside of the US, and don't take US clients. Will reduce your cost hugely and also makes the paperwork and disclosure documents much easier.
     
  17. No, set it up in NYC. There are several regulatory reasons for this, but also for marketing. You can always build out a master-feeder structure later if that becomes necessary. Do it by the book and top shelf. Don't cut corners on anything. Expect to pay $300,000 to stand it up, then t that add however much you intend to prime the GP investor with.

    Even if you do it like this, you will have a difficult time getting a respectable auditor. You will likely not be able to get on the decks of a decent prime broker either - these things take time.

    A real-time track record helps, but that is only a minor help compared to actual month-after-month of the fund trading real money -- usually yours and family and friends if you are lucky. Most serious investors will not invest on year one, and most require you be up and running for two years. You need an office, employees, a payroll wherein you're filing the monthly EFTPS, and you can expect to do that for two years before you can attract any real money.

    You need to go out and hustle it, talk to potential clients, get into various events, expect to pay 5,000-50,000 to present at any event. The Context event in Miami will cost you $10,000 / year alone just to be on the floor.

    You'll need someone (employee) to handle the trading for you.

    Of greater concern, of course, is defending the downside on the equity. That's the over-arching concern of the manager, far more than big enough returns. The road narrows, like everything else in life, and you need to be able to survive long enough to garner clients, and that means surviving market downturns, being defensive.

    If you want to create a fly-by-night-type operation, you won't get off the ground. People who are going to invest millions with you are not going to engage with anyone who is not absolutely, totally clean, totally top-shelf.

    Do you want to start a real hedge fund, or do you want to run a business out of the trunk of your car?
     
  18. Many huge businesses started out "of the trunk of a car."

    Microsoft started in a garage. Facebook in a dormitory of students...

    If you are really good you can start very simple., and clients will stand in queue once your performance is skyrocketing. There is more money available from investors then opportunities to invest it in. You don't need big investments, you need performance to catch clients.
    Speaking from personal experience... Investment was close to zero. But none US, so no annoying NFA or CFTC.
     
  19. It sounds as though you are speaking of futures, and I am speaking of essentially, everything else (equities, private equity / lending, etc.) I agree the US regulatory agencies in that arena are onerous, and I would not start anything in the US that included being under their jurisdiction.

    I you're looking for small investors, I'm certain you can do it for a much smaller cost, as suggested. Serious family offices, FoF's, sovereign wealth funds and other institutions will have "their people," to watch and interrogate you for a considerable period of time, and they are not chasing returns - that's for guys at the track. These types of investors are primarily interested that you are able to withstand various market regimes, have staying power both as a business and as a strategy, and mostly, what you will do in worst-case scenarios.

    That said, there's also a lot to be said about getting many smaller investors, and, if you have a streamlined-enough operation, you can definitely do very well that way. But there is a different market you are after in both instances, and you should determine at the outset which you want/can pursue, and they do come with different initial costs.
     
  20. Your answer and several others would make sense if the original poster already had $50M in investor capital lined up. I'm guessing he/she doesn't. In which case hiring your cousin Vinny to do your legal work and your brothers friend's nephew to do your compliance will make it incredibly difficult to get any outside capital, and you'll never get institutional money. Sure you're buying attorneys Porsches, just like you're buying professional athletes Porsches when you buy a ticket to a game or pay $120 for a jersey with $15 worth of cloth and labor in it. It's the ticket to entry.

    A good deal of the advice on this thread completely ignores both the difficulty of getting capital and the amount of capital you need to make enough even as a one person shop to make it worth your while. Capital doesn't magically come to you just because you can post a good 3 year track record. You don't start a hedge fund in a garage any more than you start an investment bank in a garage. Take a look around at the successful funds started in the past 20 years. Let me know how many are earning their founder more that $100K a year and started in a garage by someone with no industry pedigree paying less than 6 figures for their combined legal and compliance costs? I've got every advantage in the world to start a fund with the exception of working a buy-side job, and I'd give my-self low single-digit percentage chances of success, and that would require huge amounts of work and luck in equal parts. It sucks, it's probably not how it should be, but it is reality, and as someone who's started a couple companies I value painful reality advice much more than overly optimistic bullshit.
     
  21. It seems the odds are a lot better for the budding CTA. In terms of starting up a viable business, why not start with the CTA route and transition to the Hedge fund model once the foundation is built?
     
  22. Thanks for the +1 Sig. Is it because people are so tied to equities only strategies or is it due to marketing and fund raising? I'm sure I'm missing something. Are investors still leery of managed futures?
     
  23. I'll just add something I found interesting. The manager of a well known managed futures database noticed my interest in trading and asked, "Do you want to sign up as an investor or a CTA?" I found this a little funny and intriguing at the same time as I'm no heavy hitter. The barriers to entry are starkly different...by like an order of magnitude.
     
  24. Your original post made me think for a minute and I actually had the same question as you. I think you're right, it's the unfamiliarity or discomfort with futures, but that's just my gut feel and not based on anything empirical so not worth a whole lot.
     
  25. You know what...biased perception is real. And I'm not immune either. It seems like an opportunity for somebody.
     
  26. I just had a funny image of Joe Pesci from "My Cousin Vinny" as a hedge fund lawyer in NJ. Time for a sequel?
     
  27. Yutes
     
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  29. YOUUUTHHESSS
     
  30. I don't want to derail the conversation. Sorry OP. :)
     
  31. Gotta' have your hedge fund lawyer. Austin Pendleton for teh win.

     
  32. Yes, sorry, we got carried away. Apologies. :)