How does the seeding process for new hedge funds work? Has anyone on here gone through it? Obviously pedigree/contacts are part of the equation, but I am also curious about how initiating the process works.
Also, I am interested in how growing funds avoid the pitfalls of getting outside the AUM sweetspot.
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Generally, you come at it through 1 of 3 paths.
1.) You have rich friends, and they give you some capital to start punting around the markets.
2.) You currently work at a bank/HF, have a strong trading/strategy track record, and are looking to move out on your own. If your firm likes you, they may seed you for a percentage of your fund. If they agree to do this, they will probably also give you office space, computers, Bloomberg, phones, accounts and clearing services so you do business with the bank. Further, they will likely introduce you to some 'capital introduction' people in the prime brokerage of your firm, who will help raise capital for your fund.
3.) You currently work in a hedge fund, but want to break out on your own. Depending on how junior you are, and how much they like you, you may be able to speak with the founder of the firm about giving you a 'carve out fund.' In this scenario, the fund will allocate you a portion of their own AUM to manage in a seperate fund. You remain at the fund you're currently working for, establish a track record for yourself, and don't have to worry about all of the legal/operational/accounting/fund raising nightmare that comes with running your own fund.
brotherbear, you are awesome as always! i'd hug you but you'd probably scratch a huge scar across my abdomen or crush my head with your jaw (given that you're some kind of bear and all)
would it be a good idea to start with some other guys who share your ambition? based on the idea that two heads are better than one. perhaps later on, after the team is comfortable with its operation, the team may decide to split up. after all, hf analysts have much more time to network than banking analysts
also, does anyone out there know if it's easy to find cap introduction people on your own?
2 and 3 are pretty much the same. A third (or fourth), and more common, scenario is to find a seeder. There are specific funds that exist solely to seed new managers. You usually have to come from a rather well-known shop and have a well-planned strategy to present to them to get the money. The downside to these places is that they take an ownership percentage...but that's true of most carve outs as well (like he said in #2). This seeder scenario is more typical though from actual seeder funds, rather than one's old fund/former place of employment. Carve outs are the likely scenario from a former employer, or a personal investment by one of the founders (e.g. many of the "Tiger cubs").
Equity funds often avoid seeders because they dont want to give up ownership and it takes a relatively small sum of money to start an equity fund. Credit funds take quite a bit more capital though, and they are likely to seek out seeders.
great posts. thanks.
what happens if you start one early on and fail? presuming you come from a good background, what's your next move?
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