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Launching my own fund
 

nameback's picture
HF
 
Points)
 on 6/1/12 at 9:17am

So, some of you are aware from my posts that I'm trying to start my own hedge fund. Yes, it's a bit ambitious for someone with a stats background and no finance experience to try to launch a fund, but we have a great system so we're going for it.

Anyway, I just wanted to post that we raised money for the management company's startup costs, and have started getting all our docs done. We'll be launching on August 1st. Whether we have our seed capital by then is an open question, but we're on our way.

Anyone who's interested in the launch process -- ask away! Hopefully my experience can be helpful to some folks out there.

Tags:
oR3DL1N3o's picture

cool story brah

IB
(Orangutan, 319
 
Points)
 on 6/1/12 at 10:02am

cool story brah

Buddyfox's picture

pretty cool. good for you

O
 
Points)
 on 6/1/12 at 10:19am

pretty cool. good for you man. congrats on getting it together.

See my Monday Morning Brainteasers

wannabeaballer's picture

good luck. reduce overhead

O
 
Points)
 on 6/1/12 at 11:12am

good luck. reduce overhead costs! I've read books on small, successful funds that started up in a garage or empty office space. The more you put into the business, the more time you're devoted to non fund activities.

Gun Control Discussion

esbanker's picture

out of curiosity: is there a

PE
(Gorilla, 577
 
Points)
 on 6/1/12 at 11:21am

out of curiosity: is there a minimum $ requirement to create a HF? and what are the legal differences between a HF and a traditional investment fund?

i know i could google this, but since we are already on the topic...

Capitalist

rls's picture

Hedge funds with a reputable

HF
(Orangutan, 367
 
Points)
 on 6/1/12 at 11:42am

Hedge funds with a reputable law firm (and ongoing representation) is between $60,000 and $100,000 and 6-month lead time. Now, you can get it done cheaper, but then you'll have other problems. Post-Bernie Madoff, people are doing additional due diligence and if anything smells funny (or cheap), they won't go. I'm an analyst at my firm and potential investors asked for my biography; and I have to have a notarized certificate of graduation on file in the office. That's how thorough things are getting.

Bene qui latuit, bene vixit- Ovid

Bearearns's picture

rls: Hedge funds with a

(Orangutan, 275
 
Points)
 on 6/1/12 at 11:46am
rls:

Hedge funds with a reputable law firm (and ongoing representation) is between $60,000 and $100,000 and 6-month lead time. Now, you can get it done cheaper, but then you'll have other problems. Post-Bernie Madoff, people are doing additional due diligence and if anything smells funny (or cheap), they won't go. I'm an analyst at my firm and potential investors asked for my biography; and I have to have a notarized certificate of graduation on file in the office. That's how thorough things are getting.

After that ex CEO at Yahoo who could blame

Bearearns's picture

nameback: So, some of you are

(Orangutan, 275
 
Points)
 on 6/1/12 at 11:46am
nameback:

So, some of you are aware from my posts that I'm trying to start my own hedge fund. Yes, it's a bit ambitious for someone with a stats background and no finance experience to try to launch a fund, but we have a great system so we're going for it.

Anyway, I just wanted to post that we raised money for the management company's startup costs, and have started getting all our docs done. We'll be launching on August 1st. Whether we have our seed capital by then is an open question, but we're on our way.

Many people have outlined steps of the process. Could you give a breakdown and perhaps what you found as your biggest challenges? Thanks

nameback's picture

esbanker: out of curiosity:

HF
 
Points)
 on 6/1/12 at 11:52am
esbanker:

out of curiosity: is there a minimum $ requirement to create a HF? and what are the legal differences between a HF and a traditional investment fund?

i know i could google this, but since we are already on the topic...

There's no minimum with regards to how much money you want to manage -- you could theoretically launch a fund with $50,000 in AUM if you wanted to. However, the minimum that we hope to launch with is $2,000,000 because at that amount, the 2% management fee will cover overhead (administrators, accounting and tax) for the year, although we have some extra money for overhead if need be.

As to the organizational expenses to launch a fund -- the most bare-bones you could do it with would run you about $15,000 for a boutique law firm. We raised about $60,000, and went with a boutique law firm that will run us about $20,000. The rest is for unexpected costs, first year overhead, and fundraising. They're fairly well-known and respected though for a small firm, and we researched them and found generally positive reviews.

rls's picture

JoshFi7, I reckon that he

HF
(Orangutan, 367
 
Points)
 on 6/1/12 at 12:10pm

JoshFi7, I reckon that he hasn't reached his biggest challenge yet- raising money. For an unknown manager with no background or experience in finance, to say it will be a herculean undertaking would be an enormous understatement. There isn't enough back-tested data in the world to easily overcome those odds.

I don't mean to be a downer, but 90% of hedge funds fail (they are small businesses after all). And they fail for operational reasons which are oft associated with not having enough money for continuing operations. Even if an investor is interested and willing to put money in a fund, they will hesitate if they don't think you have enough management fees to be self-sustaining. I'm assuming you'll be doing 2/20.

Question for the OP: How much money do the principals/partners have in the fund (assuming you are not alone)? That will be a very important question from potential investors.

Bene qui latuit, bene vixit- Ovid

rls's picture

nameback: esbanker: out of

HF
(Orangutan, 367
 
Points)
 on 6/1/12 at 12:09pm
nameback:
esbanker:

out of curiosity: is there a minimum $ requirement to create a HF? and what are the legal differences between a HF and a traditional investment fund?

i know i could google this, but since we are already on the topic...

There's no minimum with regards to how much money you want to manage -- you could theoretically launch a fund with $50,000 in AUM if you wanted to. However, the minimum that we hope to launch with is $2,000,000 because at that amount, the 2% management fee will cover overhead (administrators, accounting and tax) for the year, although we have some extra money for overhead if need be.

As to the organizational expenses to launch a fund -- the most bare-bones you could do it with would run you about $15,000 for a boutique law firm. We raised about $60,000, and went with a boutique law firm that will run us about $20,000. The rest is for unexpected costs, first year overhead, and fundraising. They're fairly well-known and respected though for a small firm, and we researched them and found generally positive reviews.

You hope to launch with 2 million? That's pretty lean. The first year you'll have $40,000 to run the fund. Assuming you have quarterly management fees (.5% per quarter), that's about $10,000 a quarter. That's not much. Your fund administrator alone can charge $10,000 a quarter. That's before you include your lawyers, accountants, or auditors. Not to mention employees (although I guess you could not pay yourself), offices (assuming you have one), insurance (perhaps not), and general expenses (paper, research, electricity, computers, etc.). Unless you have some arrangements with your service providers, the math doesn't make sense to me. What are you doing differently?

Bene qui latuit, bene vixit- Ovid

nameback's picture

JoshFi7: Many people have

HF
 
Points)
 on 6/1/12 at 12:14pm
JoshFi7:

Many people have outlined steps of the process. Could you give a breakdown and perhaps what you found as your biggest challenges? Thanks

I mean, there are really two challenging parts, and the rest is just bureaucratic legwork.

(1) Developing a strategy that's unique, offers high returns, and is robust.

We're quants -- my partner and I are both statisticians -- so our main focus was and is developing our proprietary trading system and making it as versatile and robust as possible. It's been about a year of non-stop development and we're hardly done; there's still so much more to squeeze out of this system. This is obviously more specific to quant funds -- but in a way, I think you'll have an easier time starting a quant fund as the proverbial "two guys in a garage" than a qualitative fund, because your strategy is independent of things like pedigree, and its track record doesn't depend on experience, discipline, etc. Just set it running and wait for results.

(2) Raising AUM.

This is by far the harder part. It was easy enough to raise $70,000 from friends and family for a test fund to start building a track record ($5,000 here, $2,500 there, etc). And raising $60,000 to start the business wasn't terribly hard either. However, raising $2mil is another beast entirely. First of all, almost all fund of funds, institutional clients, and even most family offices are off-limits to you right out of the gate. They have too many screens. "We don't invest in quants." "We don't invest in anyone with less than $50mil AUM" "We don't invest in anyone with less than a three year track record." Even many seeders don't want to be the first investor in a fund.

So really, you have three targets from hardest to easiest: Seeder funds, family offices, and high net worth individuals. Then it's simply a matter of networking and getting your materials in front of as many people as possible. Cold calling funds, attending conferences, using your personal network, etc.

Our personal story went something like this:

I started creating trading models for fun last summer, and as some of them started looking particularly promising, I ended up putting more and more time into the hobby. Before long, the workload was becoming increasingly difficult to manage and the math was becoming quite complex, so I enlisted my friend who is getting his PhD in statistics.

We worked diligently for about three months before deciding we had something strong enough to test in the real world -- so we raised some money from friends and family. That took maybe a month to raise $70,000. People were generally eager to give it a shot, and we had prepared some nice materials that were pretty convincing.

Then there was sort of a doldrums from December 2011 through March 2012 -- just letting the system run and accumulate a track record. Then, we decided to revamp the model based on the results we'd been seeing and the lessons we'd learned so far. So we went about creating a new system based on the old one -- and in the process were able to dramatically boost returns and versatility. That took about a month to get to a place where we were confident in our revisions, though as I said we're continually evolving the system.

We then decided to try to raise money to launch a proper fund. We started by tapping everyone in our personal network who might be able to introduce us to HNW individuals, and then by attending SALT and other hedge fund events. It took us about another month to raise the $60,000 for business expenses, and concurrently about a month and a half to select a law firm and begin the process of setting up the fund.

nameback's picture

rls: You hope to launch with

HF
 
Points)
 on 6/1/12 at 12:18pm
rls:

You hope to launch with 2 million? That's pretty lean. The first year you'll have $40,000 to run the fund. Assuming you have quarterly management fees (.5% per quarter), that's about $10,000 a quarter. That's not much. Your fund administrator alone can charge $10,000 a quarter. That's before you include your lawyers, accountants, or auditors. Not to mention employees (although I guess you could not pay yourself), offices (assuming you have one), insurance (perhaps not), and general expenses (paper, research, electricity, computers, etc.). Unless you have some arrangements with your service providers, the math doesn't make sense to me. What are you doing differently?

The administrators we're looking at have scalable fee structures depending on AUM, and would run us closer to $12,500 for the entire first year. That leaves $27,500 for audit and tax, and, in all likelihood our first audit will be a 16 or 18 month audit, instead of doing one six months after launch.

Legal expenses are coming out of the $60,000 we've raised for start-up costs, as are any unforeseen expenses the first year related to legal or administrative costs.

There's only two of us who work in the fund (me, and my partner), and we're paying ourselves only out of the performance fee until the fund is large enough to pay a salary out of the management fee. We both work out of home, so there's no office overhead of any kind.

Bearearns's picture

Thanks for response. One

(Orangutan, 275
 
Points)
 on 6/1/12 at 12:21pm

Thanks for response. One question investors may ask is how fund handles different time frames.

2007-8 bear market.

chop of 04-06. tech bubble and burst and also how fund performs when small caps out perform, foreign equities, large caps etc.

Almost a way to diversify themselves and understand drawbacks of what appears to be a great system.

nameback's picture

rls: to say it will be a

HF
 
Points)
 on 6/1/12 at 12:27pm
rls:

to say it will be a herculean undertaking would be an enormous understatement. There isn't enough back-tested data in the world to easily overcome those odds.

Amen. We know it's going to be incredibly difficult, but we think we just might be able to pull it off. It may take us a year or more to raise the money, but we think our system is worth the effort. We've done 11% so far this year, and if we can finish out what is shaping up to be a shitty year with somewhere between 15% and 25%, we think that may just be impressive enough of a live track record to get some people interested.

We also have some decent personal connections. My partner's uncle manages the Soros Open Society Fund, for example. And then there's the random stuff you would never expect -- like my roommate (who is an exotic dancer) having Andrew Lahde as a regular client of hers and telling him about my fund, or my friend who is close friends with Matt Damon and Ben Affleck.

Personally, living in LA I'd really like to reach out to the entertainment community, as they're not exactly known for being particularly conservative with their finances. It's tough to break into, but if I can pull a few good connections, it could be a good source of AUM for us.

Question for the OP: How much money do the principals/partners have in the fund (assuming you are not alone)? That will be a very important question from potential investors.

100% of gross assets to our names. Not much in absolute terms, but it's all we have.

Aldrich IV's picture

Good luck to you man. I

O
(Monkey, 36
 
Points)
 on 6/1/12 at 4:30pm

Good luck to you man. I admire your courage.

killfrankgoreshead's picture

Please keep us updated. I

(Baboon, 106
 
Points)
 on 6/1/12 at 5:35pm
nameback's picture

Some updates on overhead

HF
 
Points)
 on 6/5/12 at 3:01pm
happypantsmcgee's picture

Good luck man, thats awesome.

O
(Almost Human, 9,621
 
Points)
 on 6/5/12 at 3:12pm

If I had asked people what they wanted, they would have said faster horses - Henry Ford

FundRadius's picture

All the best Nameback,

EN
(Chimp, 6
 
Points)
 on 6/6/12 at 9:11am
Bondarb's picture

Congrats on getting this

HF
(Neanderthal, 2,286
 
Points)
 on 6/9/12 at 3:57pm
Cries's picture

Would you mind sharing what

IB
 
Points)
 on 6/9/12 at 6:34pm
nameback's picture

Bondarb: Congrats on getting

HF
 
Points)
 on 6/10/12 at 12:17am
nameback's picture

Cries: Would you mind sharing

HF
 
Points)
 on 6/10/12 at 12:21am
Macro Arbitrage's picture

What type of quantitative

HF
(King Kong, 1,369
 
Points)
 on 6/10/12 at 1:02am

"I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine."

nameback's picture

Macro Arbitrage: What type of

HF
 
Points)
 on 6/10/12 at 9:36am
nameback's picture

So we just got out of an

HF
 
Points)
 on 6/10/12 at 3:02pm
BlackHat's picture

What kind of investors are

HF
 
Points)
 on 6/10/12 at 3:20pm

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

nameback's picture

BlackHat: What kind of

HF
 
Points)
 on 6/10/12 at 8:12pm
watersign's picture

Any opportunities for

(Baboon, 131
 
Points)
 on 6/11/12 at 9:51pm

alpha currency trader wanna-be

nameback's picture

Got our foot in the door

HF
 
Points)
 on 6/14/12 at 12:57am
UnclePanda's picture

This is an awesome story

 
Points)
 on 6/14/12 at 7:06am
AK Senator's picture

Few questions about your

(Chimp, 1
 
Points)
 on 6/16/12 at 12:13am
nameback's picture

AK Senator: Few questions

HF
 
Points)
 on 6/16/12 at 12:29am
nameback's picture

Honestly, it's starting to

HF
 
Points)
 on 6/23/12 at 5:51pm
BlackHat's picture

nameback: Honestly, it's

HF
 
Points)
 on 6/23/12 at 6:04pm

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

WallStreetOasis.com's picture

nameback: Honestly, it's

EN
(Human, 12,074
 
Points)
 on 6/23/12 at 6:14pm

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nameback's picture

BlackHat: nameback: Honestl

HF
 
Points)
 on 6/23/12 at 6:28pm
nameback's picture

WallStreetOasis.com: nameba

HF
 
Points)
 on 6/23/12 at 6:31pm
BlackHat's picture

nameback: Thanks for the

HF
 
Points)
 on 6/23/12 at 6:34pm

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

nameback's picture

BlackHat: I'm not the best

HF
 
Points)
 on 6/23/12 at 6:40pm
WallStreetOasis.com's picture

nameback: BlackHat: I'm not

EN
(Human, 12,074
 
Points)
 on 6/23/12 at 6:57pm

WSO Conference 2013

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Bondarb's picture

nameback: WallStreetOasis.c

HF
(Neanderthal, 2,286
 
Points)
 on 6/23/12 at 9:47pm
Macro Arbitrage's picture

nameback: Macro

HF
(King Kong, 1,369
 
Points)
 on 6/24/12 at 12:17am

"I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine."

nameback's picture

Macro Arbitrage: Machine

HF
 
Points)
 on 6/24/12 at 1:27am
nameback's picture

Bondarb: This kind of

HF
 
Points)
 on 6/24/12 at 1:31am
numnum's picture

I'm confused about why people

 
Points)
 on 6/25/12 at 6:09pm
WallStreetOasis.com's picture

numnum: I'm confused about

EN
(Human, 12,074
 
Points)
 on 6/26/12 at 9:01am

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Asatar's picture

Reading this is fantastic, I

O
(Neanderthal, 2,032
 
Points)
 on 6/26/12 at 10:50am

See my other WSO blog posts>

nameback's picture

So Larch Lane got back to us,

HF
 
Points)
 on 6/26/12 at 10:19pm
discrete's picture

i am sure that you're aware

PE
(Baboon, 118
 
Points)
 on 6/27/12 at 10:17pm

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