How to invest with a hedge fund?

How does one find a hedge fund to invest with? Are investment banks a better choice for the unwealthy? The rules include that a hedge fund must have 65% of it's investor's to be accredited. I am not a millionaire. It seems that every hedge fund that i know of with high returns are only for private friends and family of the manager. How does an average person find a high performing fund that is open to the public?

 
sambotanman:
What can i invest with if i want high risk/ high return?? There MUST be something better than Vanguard... i want an actively managed fund that can go long/short. There are manager's out there that are hungry for cash- even if it is 900 grand

My friend has an under the table fund you can invest in that has just that ...

I hate victims who respect their executioners
 

Dude, even if you had a net worth of exactly 1mm, you would not want to put that in a hedge fund. You cannot afford to take on that kind of risk. I'm pretty skeptical about giving money to fund managers in general, because even they have a hard time beating the S&P, yet they collect huge fees from investors. Just read up on value investing, open a TD Ameritrade account, and obtain the experience to manage your own money. If you know what you are doing, nobody can manage your money better than yourself.

 

@Connor: that is so true i've been trading for the past few months and trying to get a hang out it- HOPEFULLY if im good at it i wont need a hedge fund because i can get the same results if not better on my own

@BlackHat: when i actually have money i would definately be interested in a fund like that! lol

 

Usually, hedge funds cannot have more than X investors otherwise they must disclose more stuff. So they're not going to let you become one of their investors if you don't have a million dollars.

 

I realize the qualifications for becoming an accredited investor, 200K in income or 1M Net Worth. I also realize that many funds who limit their investors to 99 require a $5M net worth. The individual who would be interested is much above both of those. Would appreciate insight from those who actually work at a HF or are familiar with the process.

 
hedgefundfreak:
So a lot of places that I have read articles about hedge funds make it sound like as long as you have a decent track record managing your own money it is easy to get other investments, in fact sometimes they make it sound like people will just throw money at you. I'm smart enough to realize that that can't be true. So does anyone have any input on this? And has anyone on here actually started there own hedge fund?
Sirtradesalot would know a lot about this
 

In my experience it's the exact opposite.

You may read about guys with a great pedigree that are leaving an established fund to launch their own and will start with $500m or $1B AUM. Those are extremely rare.

Two broad ways of raising AUM: wealthy individuals and institutional (Fund of Funds, Pensions, Endowments, SWFs, etc.)

Most funds start out with some capital from founders, friends, and family. The next round of AUM usually comes from some wealthy individuals - friends of friends who have heard you've had a good track record. In my experience, these groups do not pay 2/20. The subscription docs say 2/20, but there's always a clause that says the Manager may offer at lower rates.

Beyond that, it can be very difficult. It's time consuming to market to individuals even with a track record. It can certainly be done, but you probably need a full-time marketing person which small funds may not have at the get-go. And adding a few hundred thousand here, $1m, $2m at a time doesn't really get you anywhere.

So everyone hopes to get institutional money. In my experience working for both a new fund and an established small fund, here's what happens: * You copy them on your monthly performance reports and you check in with them every so often or they'll call you. * If you are a young fund, they'll tell you they require a 3 year track record before they can invest * You continue to put up good numbers, and keep in touch. AFter 3 years passes, they'll say "sorry, you must have >$100m AUM for us to invest" * You'll continue to run into this kind of an AUM hurdle - as an institution grows, it isn't worth their time to write a $15m check and monitor it, and they won't be okay with being 10% of your AUM. So now you need $150m AUM before they will invest, and so on. * On a related note, you'll face continued skepticism as to whether your fund can scale. If you put up 30% annualized returns investing in penny stocks, you probably can't do so managing more than a few million AUM. * Lastly, sometimes you get almost to the finish line with a whale of a client, and they'll make requests that you can't meet. I worked for a firm that had finally worked its way in with a large pension fund. The fund seemed like they'd invest, but they said we'd have to utilize this trading platform/software that integrates with theirs and would cost $5m a year (their reason was that they required real time data and also prohibited you from investing in Iran or some bad nation; you couldn't just say you wouldn't - they had to ensure it). * Institutions will ask for the breakdown of your AUM as part of their due diligence. There's a catch-22 where they want to see other institutional money invested before they invest their own.

So if I were going to strike out on my own, I would be sure to have enough stable AUM (mine, friends, family, extended circle) to cover the funds overhead and pay me enough to live on for 3 years using very reasonable expectations. The best case would obviously be where you have enough AUM and the desire to manage a small pool of money, and if larger/institutional money follows, all the better.

Or, start a fund focused on "the next big thing" (Africa, Moon Minerals, Space Tourism) and the money will chase you.

** One other note about how I'd do things differently. There are "3rd Party Marketing" firms out there whose sole purpose is to find you AUM. They take a cut upfront and/or ongoing %. The two funds I worked for that were actively trying to raise funds rejected this route. The argument against is that your strategy can only scale to a point, so what if you reach 50% of your AUM target, but you are only earning 1% and 10% (due to the 3rd Party's cut). Also, in my experience, PMs think raising AUM will be easier than it is so why give up the economics to reach AUM goals a little bit faster.

I would embrace 3rd Party Marketing firms. 1% and 10% on any additional capital would be a bonus in my view. Plus, the real money is made through your performance. So even if your strategy maxed out at $500m, if you can put up 20% returns and get 10% of that ($10m) you should be doing fine.

 
hedgefundfreak:
So a lot of places that I have read articles about hedge funds make it sound like as long as you have a decent track record managing your own money it is easy to get other investments, in fact sometimes they make it sound like people will just throw money at you. I'm smart enough to realize that that can't be true. So does anyone have any input on this? And has anyone on here actually started there own hedge fund?

Actually, this was true in 2006. You must have been reading an article from back then.

The fundraising environment right now is a completely different animal.

 

fundraising is very very very difficult. Majority of HF launches are tiny (albeit majority of hfs are launched by guys that never managed money in a hf setting before). If you are a BSD PM at a well known fund you can raise in the range of 300m+ otherwise its very very tough.

Its also question of stickiness of capital, if you raised 10-20m from personal funds, family, friends and random other rich ppl you know and put up one good year of performance you can tap some FoF but put up one or two quarters of subpar performance and your entire FoF money is gone.

Lastly its a question of diversifying your investor base, a lot of funds die by having 40%+ invested by one party and that party pulling the plug

 

I'm in the midst of dealing with this myself My experience has been that institutional investors are just plain impossible for a new fund. I've had much, much more success with sophisticated UHNW investors. My institutional investor meetings have been like this: "We invest in 10 billion plus dollar funds. Best of luck...talk to us in three years." I would also add that UHNW investors are not necessarily going to be interested...the investors who have actually invested with me are very smart and have a lot of prior hedge fund experience both as managers and investors. The UHNW investors who made their money outside of finance have been hard to convince to say the least.

 

it seems tough. Everybody wants more track record and wants you to have more assets, which as one of the posters above pointed out is impossible without more assets. My success has been with people in the industry who are UHNW like the guy above. I just launched in Jan with a good 2 year carve out track record and having a very good year so far, but I feel like sales cycles for non UHNW / non finance literate investors are long.

 
Best Response

If you watch enough American Greed, it makes it seem like a very easy thing to do. And I'll be the first to tell you that it actually is...... that is, raising money from individuals.

The real bread and butter is the institutional money however, and that is an absolute bitch to get without a track record, some size already, and a story/backdrop for those FoF managers to fall back on when you blow up and they get reamed by their respective bosses. My experience dealing with pension managers and FoF management teams is very scattershot though... some are hardasses (probably because they're not retarded) who require a lot of data and very specific benchmarks before they can even think about investing with you, others honestly just don't give a shit as long as you fit what they're looking for. For a brand new fund I'm sure everything is going to be much different and a lot harder no matter how stupid the managers though, but working at an established fund and going through this process I have a great story to share.

So a certain West Coast state employee pension fund with a rather significant asset base that will otherwise go unnamed invited us into their offices to essentially pitch them for an investment. My boss, my co-PM, another analyst, and myself all sat at the head of a conference table with the CIO and six 20-something looking kids with copies of our presentation and investment materials. CIO has a checklist that looked to me to say things like "Time Horizon," "Strategy," "Derivatives," and a few other gauges of risk. We start discussing our strategy and using a case study as an example, and halfway through the guy cuts us off and says we already meet all the criteria he needed since he was looking for a long-term equity play focusing on business services. We all walk out dumbfounded that we just got 9 figures from the guy without even mentioning our returns in person.

I hate victims who respect their executioners
 
BlackHat:
So a certain West Coast state employee pension fund with a rather significant asset base that will otherwise go unnamed invited us into their offices to essentially pitch them for an investment. My boss, my co-PM, another analyst, and myself all sat at the head of a conference table with the CIO and six 20-something looking kids with copies of our presentation and investment materials. CIO has a checklist that looked to me to say things like "Time Horizon," "Strategy," "Derivatives," and a few other gauges of risk. We start discussing our strategy and using a case study as an example, and halfway through the guy cuts us off and says we already meet all the criteria he needed since he was looking for a long-term equity play focusing on business services. We all walk out dumbfounded that we just got 9 figures from the guy without even mentioning our returns in person.

So THAT's why "The PERS" has such a healthily funded set of obligations... I'm glad someone benefited from their genius and attention to detail!

"Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game." - Donald Trump
 

Capital introduction was by far the most difficult part of starting my fund. I am fortunate enough to have a father who's the president of a company, who allocated a portion of his company's pension fund into my fund. He later met with a close friend and business associate who provided me with additional initial capital. I began trading in 2009, and although my performance was good for a few months, only friends and family trusted me with their money, being only 25 at the time. My partner who handles the marketing set me up with many fund of fund managers but we had no luck. Performance is one aspect, but because I lacked - and still do- a top tier prime brokerage, had local auditors, lawyers, and administrators, investors were still skeptical. Although my fund has grown in AUM from inception, due to a few new clients, additional capital from existing clients (mostly my dad and his friends) and increasing value of my fund, its still difficult to secure new capital. Also, investors want to meet with you during obscure times, which somewhat burdened my performance. Sometimes you have to weigh the opportunity cost of visiting a potential client and managing your account.

But all in all, if your looking to begin a fund, expect money only from the people who know you during the first few months, even years. I'd say 80% of my clients - I don't have many - have known me since childhood.

Portfolio manager of a boutique value-oriented long/short and event-driven hedge fund Disciple of Graham since the age of 12 Started an investment fiirm and two funds at a young age, all you young-lings interested in hedge funds, pm me.
 

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