Incubator Hedge Funds
According to my research, an aspiring hedge fund manager can set up an incubator hedge fund to set up a track record with as little as $25,000 in capital. The legal and accounting expenses are also significantly less for an incubator hedge fund as opposed to a fund that is available to outside investors. So here's my plan for the next 40 years of my finance career. Every time I have $25,000 to throw at an incubator hedge fund I will. My investment portfolio will always consist of less than 15 stocks in each fund, in order to maximize the possibility of market crushing returns over a 3 year period of time. Eventually I figure by pure luck, or my stellar intellectual capacity. (That was a joke, I am strong proponent of the efficient-market hypothesis. If you're beating the market every year you are either incredibly lucky, or doing something to gain an unfair advantage over the investment community.) When one of my incubator funds do take off, I will turn it into a traditional hedge fund, dissolve all my other investment funds, and put the money into my star performer, convince a few wealthy friends to invest to bring my fund up to a respectable value, and im ready to start attracting some big time institutional investors.
Has the information on this website completely mislead me?
http://www.greencompany.com/HedgeFunds/HedgeFundI…
Is there anything else im overlooking? This kind of all sounds too simple to get rich off of.
I didn't link by the web site. BUT if using the logic stated what is to continue the success of your fund that you get outside investors into? If you were playing a pure numbers game and banking on EMH and the survivorship of your portfolios then that wouldn't fare well as a strategy IMO
I'm of the EMH is crap camp, also a perspective disciple of Taleb
I don't need continued success. I need a few years of stellar success to get large investors involved. Then once the big time investors are involved all I need is 1-3 years of moderate gains. If I have $20 million or more AUM and we're playing by the 2 and 20 rule, if I have a few years of 9-10% gains following explosive gains, at a fund with 1 employee that is more than enough to start the same process all over again.
Now that you've told us your super huge secret for hiding your losses we will all remember what a colossal douchebag you are and warn all our super rich friends to stay the hell away from you. How about that?
Thanks for the input. I don't have a lot of super rich friends and I would never try to convince one of my moderately rich friends to invest everything with me. As for your super rich friends, im almost positive the things I say on an anonymous forum will not come back to haunt me 10 years from now. Market efficiency states that their returns will pare as well as the rest of the stock market, with periods of time of higher than normal gains, and periods of time where there are higher than normal losses. The only crime I am committing is not using illegal means to gain an unfair advantage over the market. Meaning my funds over the course of my lifetime will more than likely average 8-10% gains, nothing to brag about, but also not colossal losses. Am I really that much worse than all the other hedge fund managers that rob small time investors of any shot of beating the market? Insider trading is everywhere, and it is one of the primary reasons hedge funds on average usually outperform the market.
go ponzi scheme go!
Find a law I conspired to break, and I will wear I giant red hat that says ponzi scheme, and let you throw darts at my ass.
Find a law I conspired to break and I will wear a giant red hat that says ponzi scheme, bend over, and let you throw darts at my ass.
I don't know what happened to my last post but I tried to edit it and it wouldn't let me.
Sounds good, be sure you save a few of those quarters for yourself, you know you could buy a boat and sail around the world taking your time (say 10 years) drinking foreign liquor and tickling foreign women for a lot less than $100K. Imagine: retirement before 30.
Hahaha this made me laugh. First off, the EMH is a theory only, markets are not efficient. If they were, they wouldn't move like they do. Sure, there are a lot of closet indexers and all that, but there are some managers that have strong above market performance (and they achieve it fairly).
Second, as someone who has put together a small fund (small, but def a lot more than $25K - and knows other who have done their own funds, with varying degrees of success), the way you're going about this is crap. You may be able to convince some stupid HNW individuals to invest maybe 6 figures in your fund, but forget about anything institutional. No way an institutional is going to give you money when all you're doing is throwing darts at a board. How are you going to say what your strategy/thesis is? Also, they're going to get mighty suspicious when they see how small the "fund" is; why didn't you put more money in it if it's so great (and you can't say - "oh, I didn't have any")?
There are like 100 other things you are overlooking, but I don't want to write an essay since your post was more of a joke than anything (a strong proponent of EMH starting a HF, talk about ironic). No one should start a hedge fund unless they have a very high level of conviction in their thesis/strategy, know how their product is different/better than those of others, have at least a few hundred K of money to start the track record with, and at least another $50K for fund expenses (legal, admin, acct.).
You're an idiot. Here's why:
1st of all, markets (assuming we are talking about the S&P 500), are far from efficient. How do you explain bubbles? How do you explain the mispricing of risk on mortgage-backed securities that led to the recent financial crisis? What about a flash-crash? The market is prone to crowd psychology, fear, greed, and all other human emotions, bounded rationality, etc. Some hedge fund managers think differently, do more research, have an edge ....
2nd of all, you may perhaps be able to lure some investors with your strategy, but since your tactic is to simply employ a monkey to throw darts at the universe of stocks, you won't make any profit ... besides a management fee ... and your investors will pull out ...
.
This is illegal, a very similar scheme is described in my investment textbook. Have you not taken Finance or Investments 101?
Suppose you want to make your fortune publishing a market newsletter. You need first to convince potential subscribers that you have talent worth paying for [but what if you have no talent]... you start 8 newsletters
Basically it suggests that half of your newsletters pick the TSX or S&P to rise and half suggest it to fall. After each year you eliminate the newsletters that fail...so after three years, you would technically have one newsletter that has predicted the movement of the index correctly for three consecutive years.
This is highly unethical and not legal. Because you have not proven the skill that you are selling, you are just (as some commentators have said) are just throwing darts on the board and hoping for the best. That is NOT an investment strategy. You are basically stealing your "friend's" money with this bushleague tactic that you described above.
I changed my mind on market efficiency theory. I will start 5 different funds with 5 different investment strategies. When I find one that works, I will stick with it, and put a significant sum of money into it before transitioning it from an incubator fund to a traditional hedge fund. Some investment strategies implemented by fund managers are nothing but luck. Picking stocks based on astrology, even animal migratory patterns are both strategies funds have chosen to implement over the years. Is there anyone here who is going to try and tell me that funds with strategies such as those are successful for any reason other than luck? Who knows what other strategies fund managers have come up with over the years that actually have zero correlation to stock performance.
FYI if you don't believe me, I am referring to investments by Bodie, 6th edition, page 325
good luck, don't drop the soap.
+1
Best advice given so far.
Mikegj1 you are the definition of moral hazard running amuck. Did you not take anything away from this past financial crisis?
I'm not saying im perfect but c'mon man.
Well, I can see posting this thread has greatly reduced the likelihood of me making friends on this forum, but the anger generated is giving a feeling in my gut that this idea might actually work, and be completely legal. Legal consultation here I come. Who wants to give me $20 million seed capital for a 40% equity stake in my first fund? Im also looking for marketing people who will work solely on commission.
You should try to get a job at a real hedge fund and build a real track record. Sophiscated investors will be able to recognize that you are full of it if you take this approach.
.
I am aware of many different investment strategies, and I most certainly do not throw darts when I invest my own money despite my feelings on the efficient market hypothesis, but that is besides the point I was trying to make. The point I was trying to make is that it is entirely possible for a monkey throwing darts combined with excellent administrative and marketing management skills to successfully run a series of profitable hedge funds over the course of their career. If you can replace the dart throwing monkey with a successful investor, well that is the difference between a millionaire hedge fund manager and a billionaire hedge fund manager.
So you think the market is efficient yet your stock picking actions say otherwise? How can you even believe in the concept of a successful investor? Do you realize the contradictions you are making and how intellectually weak your thought processing capabilities are?
I honestly cannot form an original thought after reading the idiotic posts of the OP, I can only quote one of the greatest artistic films of all time:
"what you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul."
You do realize that potential investors would be able to view your track record (your 7 or 8 stupid incubator funds that blow up) so you couldnt exactly cherry pick one and ignore the others. You should probably read a few books and get a real job before commenting further.
Why not just wait for the market to shit again, then invest in the blue chips at discount prices? Fuck your theory.
OP we ripped into you pretty well. BUT please don't get to depressed about this. Being ambitious is nothing to be ashamed about.
Starting from a good foothold(strong education and experience) is always a good starting point though. Keep going at it though man
LOL then gtfo
It is sad but this is actually a fairly common strategy on wall st. A hedge fund company sets up several funds and then just closes the ones that do poorly. Then they a) get to raise money on their funds good performance and b) dont have to trade in funds that fall way before high-water marks. Some big name funds have done this...any time you hear of a big manager "retiring" after a bad year and then re-surfacing a year later with a new fund they are essentially doing a variation of your strategy.
Of course, you wont really be able to raise any money with a track record on $25,000....other then that the plan is unfortunately not as crazy as one might think.
Here u go...the OP's strategy in action...
September 16, 2010 Hedge Fund Managers Set Up for Next Acts By JULIE CRESWELL James J. Pallotta, a legend of the hedge fund industry, is calling a do-over.
After shutting his giant fund following a humbling loss, Mr. Pallotta, the money manager who is an owner of the Boston Celtics, is doing what hedge fund types do in tough times: he is opening a new fund.
There have been plenty of mulligans in the rarefied realm of hedge funds these days. Mr. Pallotta, 52, is one of a number of prominent money managers who are trying to start afresh after the tumult of the financial crisis.
By closing one fund and opening another, managers can, in a stroke, wipe clean their investment records and start collecting fees from new investors.
Who would entrust their money to a hedge fund washout? Plenty of people, it turns out. Before the financial collapse, Mr. Pallotta had a record of handsome returns. His new fund, called Raptor Evolution (his old one was Raptor Global), will in all likelihood have no trouble drumming up investors, analysts said.
“Will it be easy for him to raise money? Yes,” said Tim Berry, a head of hedge fund investments at Private Advisors, a Richmond, Va., firm that advises large institutions on their investments. “He has a long track record of success.”
Others hoping for a comeback include Gabe Nechamkin, a former trader for George Soros, and John W. Meriwether, whose Long-Term Capital Management failed spectacularly in 1998. Mr. Nechamkin is on his second fund, Mr. Meriwether his third.
Not everyone will get a second or third chance. Hedge funds, whose outsize returns — and paydays — defined an era of Wall Street riches, are in the midst of a painful shakeout.
Over the last two and a half years, investors have withdrawn nearly $320 billion from these private investment pools, leaving the industry’s combined assets at $1.5 trillion, according to data from BarclayHedge.
Small funds have been hit hardest. Since their number worldwide peaked at 12,000 in 2007, it has fallen to about 8,400, according to research from the executive search firm Heidrick & Struggles.
The industry as a whole struggled in 2008 and 2009, and this year is not looking much better. For the year through the end of August, the average hedge fund was down 1.4 percent, according to Lipper, a unit of Thomson Reuters. Investors are increasingly asking themselves whether they would be better off putting their money in a low-cost index fund. The Standard & Poor’s 500-stock index is up 0.5 percent.
Given that showing, nearly half of the hedge funds included in the Hedge Fund Research Index have been running below the levels they need to attain to earn their rich performance fees for the last three years. (Hedge funds typically charge a management fee of 1 to 2 percent and take a 20 percent cut of profits provided they pass performance milestones known as high water marks.)
“It’s a pretty crowded field with very high fees,” said Todd Buchholz, a former managing director at Tiger Management, the hedge fund firm run by Julian H. Robertson Jr.
“I don’t see that this is the death or the last gasp of hedge funds, but there is certainly a shaking out going on here,” said Mr. Buchholz, who now oversees a real estate hedge fund called Two Oceans. Some managers are closing underperforming or money-losing funds and trying to persuade their old investors, plus some new ones, to provide new capital.
These funds face two challenges, however. Many have to agree to make up past losses before earning a performance fee from their previous investors — if those investors return at all.
Most also have to indicate to investors that they have learned their lessons and that the investment strategies of their new funds — at least on the surface — will address past problems.
Jeffrey Gendell’s firm, Tontine Capital Partners, averaged returns of 38 percent from 1997 to 2007. Tontine Capital oversaw $7 billion before it closed two funds that had lost more than two-thirds of their value in 2008; a few months later, in 2009, Mr. Gendell opened a new hedge fund.
The new fund, Mr. Gendell said in a letter to investors, would invest only in easy-to-trade securities and would not use leverage, or borrowed money, to improve its returns. Mr. Gendell vowed he would not collect performance fees until investors had recouped their previous losses. A spokesman said Mr. Gendell declined to comment.
It is unclear whether Mr. Nechamkin and Mr. Meriwether, neither of whom returned a call, are using new and improved strategies or offering to make legacy investors whole before collecting new performance fees.
The looming question for these and other managers is whether investors are willing to forgive and forget.
Hedge fund managers and their employees are reluctant to discuss their attempted comebacks. One individual who worked at a fund that closed and is now trying to raise money for a new fund said many in the industry were trying to play up their past success, rather than their recent losses.
“It creates a weird dynamic,” this person said, who asked not to be named so as not to jeopardize the new fund. “You want to be part of the good, but not part of the bad.”
For Mr. Pallotta, whose Raptor funds had more than $12 billion in assets at their height, there were a lot of good years.
Mr. Pallotta — who recently built a 27,000-square-foot home in one of Boston’s wealthiest enclaves — posted average annual returns of 19.2 percent in the 15 years he worked for the billionaire Paul Tudor Jones and five years before that at Essex Investment Management.
Raptor was spun out of Tudor Investments in late 2008, after the fund lost 20 percent. Turning in a flat performance in the first few months of 2009, Mr. Pallotta shut the fund n that June, telling investors in a letter that he had doubts about “the sustainability of certain aspects of the industry’s structure and short-term focus.”
A spokesman said Mr. Pallotta declined to comment.
With his new fund, Mr. Pallotta is going back to Square 1, recreating the conditions that he had at the start of his career, said a person with knowledge of the fund, who declined to be named because of continuing efforts to raise capital.
Using a small team and focusing on a small number of securities, Mr. Pallotta is not looking to become a megafund for now, this person said. So far, Mr. Pallotta has won back some old investors, as well as new ones. But he will not earn a performance fee on the new fund until previous investors recoup their losses.
As Mr. Berry put it: “If he’s passionate about investing and doesn’t mind working with a smaller capital base for a while and wants to prove to investors he’s still got it, then he’ll do fine.”
Just saw these threads you wrote 2 years ago. Very well written and very true. Although Pallotta hasn't been all that successful in his latest raptor incarnation, having only about $700mm in AUM so far. This is a good bit of money but a far cry from what he had before. As to Meriwether, the 3rd time may indeed be the charm as he has hardly raised any money thus far. Perhaps it is time for him to finally step out and retire with his millions.
Bondarb, your examples are almost as bad as the OP's original premise. You are comparing successful hedge fund managers who managed substantial sums of capital before blowing up and coming back for a second chance to a kid who wants to start a handful of incubator funds with no discernible investment strategy. Your example includes some of the greatest funds of all time backed by some of the most brilliant minds: Tudor, LTCM, Soros, Tiger, etc. (Read More Money than God).
How do you generate alpha when you believe markets are highly efficient?
You throw enough darts at a board and eventually you're gonna get lucky. As far as generating alpha goes, I'll let the marketing people figure that one out.
Now that I have demonstrated my outstanding moral character, who wants to hire me? I know in theory a proponent of EMH is worthless in the investment, but I do offer something many ivy leaguers lack. Outside the box ideas. I'm sick of college, and in all honesty European history and all these other bullshit courses they make me take are never going to make me rich. Time is money, and I have dozens of business ideas that flow through my head all day long when my professors to teach me shit I don't care about. Who wants to hire an 18 year old with one semester at a state school, and zero relevant work experience?
Starting multiple funds and closing the ones that dont work and closing funds after losses are common strategies...anyone who has been in the business for more then a few years has seen it done many times. It is unethical in my opinion, but the OPs original post is actually closer to the mark then the rebuttals which made it sound like his idea was totally ludicrous. $25,000 funds are ridiculous, but many managers do the same thing after they have been in the business for awhile and can raise money. John Merryweather blows up every single time volatility spikes and then re-capitilizes with a new high-water mark and a fresh track record. How is that any different then the OPs idea except on a larger scale?
On the second question, i dont see the markets as being efficient at all. Even if you think a hypothetical free market would be efficient there are so many unnatural forces that push the market away from where it would be (govt intervention, central banking, etc) that i think the notion that markets are efficient is absurd.
You throw enough darts and eventually you're gonna get lucky. As far as generating alpha goes, I am certain the marketing people will figure something out.
I only believe in highly efficient markets when all market participants are playing by the rules. However, I can imagine Wall Street being a place where rules are stretched, broken, and manipulated all the time. People who trade based on information that everyone already knows aren't really getting such an amazing deal on anything. Sure, I am a permabull in the long run, and believe everyone who invests will eventually make a profit given enough time, but there is a huge difference between the people who are going to make a decent investment return and the people are are going to get rich. As I stated in more detail before, in order to generate market crushing returns over long periods of time you need to either get lucky, or create your own luck.
As far as seed capital goes, would $100,000 be sufficient for an incubator fund, or would I need at least a million to be taken seriously by anyone worth mentioning?
I work with people who have consistently made above-market returns for 20 years and do not do anything unethical or illegal. I also have seen enough in my relatively short career to prove to me that markets are not even close to efficient. Given that we have had multiple massive bubbles and subsequent bursts in the last decade has effectively killed any argument that prices incorporate all available information. Even the academic community has mostly abandoned the efficient market theory at this point. To me this is a theory that has already proven to be incorrect and arguing about it is a waste of time.
On the actual mechanics of working your scam...i dont think you are really going to be able to raise any capital using this strategy. The people who do this like Merryweather spent years in the industry building credibility which they have since exploited...unless u r a great natural marketer I dont see you having alot of success with a history that includes several failed micro-sized hedge funds and no other experience.
.edit.link no good.
I wash my hands of this thread and I'm moving on....
Why are investors stupid enough to put their money with a manager with periods of mild success but then massive failures. Meriwether for example. It annoys me because traditional risk metrics are unable to capture the inherent risks that are associated with certain strategies.
institutions may be using those traditional methods, Also the ability to sell an idea is very powerful.
Well... my hats off to the salesman in these cases because its hard enough to make sales when its a good product its a different situation entirely trying to sell something you dont believe in
Haha well Meriweather like the institutions he is selling to, believes in EMH and black scholes so...
Never underestimate the stupidity of other people. Do you think a rich widow or some yuppie trust fund douchebag really does thorough research before investing? I can present potential investors with 3 things. An investment strategy that sounds perfect, an excellent track record over the last few years, and a remarkably good looking salesperson wearing a nice suit. You finance gurus have forgotten the fundamentals of marketing. Once I collect $10 million+ from rich widows and yuppie trust fund douchebags I will probably be able to even talk some institutional investors into investing, obviously not Goldman Sachs, but I'm sure if I call 100 firms someone is gonna call me back.
Pretty sure this has been beaten to death, but Bondarb,you are comparing a young novice investor with no track record working with nominal sums to people who have generated out-sized returns and subsequently blown up in a spectacular fashion. I dont think the OP is an idiot and I appreciate his creativity but his inexperience is quite apparent. What you could have done even 3-5 years ago is different from what you can do today (post crash, post Madoff, post whatever). Fortunately for the OP Wall Street does not have a great memory and there are enough suckers in the world (bigger fool theory) to think that something like this could potentially work. Best of luck to you.
Mike you belong in sales. You would do well. I am being serious because you make it sound easy.
Thank you. I have often considered a career in sales, but still remain uncertain about my future. My biggest concern with sales is that I am an arrogant asshole, and I am not certain if I can pretend to like people long enough to get a deal done. I also hate being told what to do by other people, and can only take being someone else's bitch for so long, which is why I think the entrepreneurial route may be a more suitable option for me, regardless if it's running a pizza place or a multi-billion dollar hedge fund. However, I understand that I must pay my dues and being someone else's bitch is a necessity if I expect to get a paycheck/start up capital for my ideas. The difference between me and the other wage slaves is that I would rather throw myself off a twelve story building than spend my whole life being someone else's bitch. I expect to be the boss, not because of my intellect or management skills. For me it is a biological necessity and a life or death situation. When consequences are this severe failure is not an option.
In an ideal world I will have all this stuff figured out by the time I get out of college. If not, I will have the best pizza in NYC and deliver at all hours of the night.
A huge problem in your idea is that 99% of professional investors will require composite performance numbers as well as your underlying funds performance numbers, therefore your little slight of hand and probability strategy wont work.
Also, as an institutional investor in hfs (and private equity partnerships) who looks at more than 20/30 strategies per week and meets with 6/7 I can guarantee that you wont pass our most simple selection criteria. Why would we invest in you when we can invest with the ex head of Goldmans risk arbitrage group who is investing $15m of his own money (and reinvesting 80% of performance fees) and has a 15 year track record and references???
You're 100% right. Most institutional investors will see right through my bullshit. The target market for this product is not institutional clients, at least not in the beginning. The target market is people with a net worth of over $1 million, but still have limited investment experience. However, if this thing does get larger than $10 million AUM and I continue to have a strong track record after 5 years, which I will undoubtedly have at some point over the duration of my life with at least one of my funds, then I respectfully disagree with your assessment.
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