Working at a hedge fund versus starting your own
I'm not a wall street guy, I'm an engineer. Over a year ago I started playing with MT4 and mql4 programming, and I've applied my engineering knowledge to develop a series of EAs I continue to improve. I applied to D. E. Shaw during this time, but got turned down (understandably so, since I have no wall street experience). So I've decided to set up shop on my own.
I recently created an LLC to manage my quant fund LP (yet to be created), and I'm already scheduled to take the Series 65 exam. While doing this, it struck me, why doesn't everyone do this? I'm sure that getting clients is tougher when you're not established, and it probably will be a pain to deal with the regulatory minefield on my own, but even with a few clients I can live comfortably on the management and performance fees if I don't have to share them with anyone else. So how can hedge funds get people to uproot their families and go work for them for a measly few hundred K a year and little job security when it's not that hard to set up shop on your own?
You and this guy should get together to form a super mega turbo fund:
http://www.wallstreetoasis.com/forums/financial-modeling-company-do-i-n…
Many people trade with their own money on things like OANDA. Most wouldnt start their own funds because funds are mainly for managing other peoples money, and most people dont manage other peoples money unless theyre managing a couple tens of millions of dollars of it or more in order to get the 2% +20% of anything over the whatever hurdle rate (usually 8 percent gains per year) in order to actually live off of the trading. Most people dont get tens of millions of dollars of outside investment because they dont have track records.
My question is, why not just open up a trading account with some service?
1) I think you might find the minimum AUM needed to support the expenses for a fund are higher than you think, if you plan to do it right.
1a) Most people in finance are used to a certain lifestyle (aka are wage-slaves) and that makes the minimum AUM to support expenses and salary for yourself a lot higher. You say "measly few hundred K a year" but do you really have a number in mind where you can earn that from your new fund? Also you underestimate the compensation of mid- and upper-level hedge fund professionals who are asked to "uproot families."
2) Working for a fund allows you to focus on your job. If I were on my own, I wouldn't have an ops team to close trades and do fund accounting for me, and I wouldn't have a CEO who is out trying to raise money, and I wouldn't have an admin who pays the bills each month, etc etc all of which takes time away from doing my real "work."
2a) There are a lot of different jobs in finance, and some people are suited for one particular job and not another. Quant is a little different, but trading, portfolio management, and investment analysis can require very different mindsets and skills. Not every genius equity researcher is temperamentally suited to run their own positions, and many talented traders couldn't read a cash flow statement to save their lives. Some people are also unsuited to work in a vacuum on their own without coworkers and bosses to regulate them.
3) As you noted getting clients is tougher (some might say "impossible" would be the better term) when you're not established and don't have personal connections to investors, and the best way to get established is to be a key member of an established fund. It leads to charging lower fees, paying capital raisers, and spending time presenting/marketing instead of actually running money.
3a) Because of 3), and the fact that many funds are structured as multi-portfolio/multi-strategy/multi-manager companies, it may make a lot of sense to be a senior analyst or sub-portfolio manager at a $5bn fund rather than the sole guy at a $50mm fund.
4) One advantage of being at an established fund (even a small one) is the access to services like research, prime brokerage, better execution and access to leverage and bespoke trades, etc from banks who aren't really interested in giving you the time of day when you're getting started. This can make a huge difference for some strategies (for example you really couldn't run a fund like the one I work with less than $250mm).
5) Believe it or not you may learn some stuff from working with other people. An autistic genius like Michael Burry may be better off on his own in a dark room, but most human beings can learn a lot from mentor-ship by talented, experienced people.
At the end of the day, running your own fund is the Holy Grail for a many (most? all?) hedge fund professionals, but fear of failure plus the reasons above keep a lot of people like myself in their seats working for others.
It's all about assets. I don't think you realize how difficult it is convincing people to hand you their hard earned money when you have zero experience.
Hey I applied to DE Shaw, too. Maybe I should also start a quant fund.
Thanks for your comments, Kenny. Well said. I understand that I will most certainly need a back-office to handle client account segregation, trade execution, regulatory compliance, statements, etc. I'm currently in initial talks with a major US bank that offers these services.
As far as getting clients, I believe that might be my biggest challenge. Luckily I know some high net worth individuals that may be willing to provide with some seed funding. I believe my strategy can function properly with just $1M - $5M of AUM. After building a track record for a year or so, then perhaps more clients might be interested. I'm targeting between $50M and $150M of AUM. This might be a couple of years out, so I'm obviously not quitting my job anytime soon.
Of course, I would rather go the easier route and work for a large fund, like you said in 3a, but because of my background no one will give me the time of day. It seems setting up my own fund and coming up slow is the only recourse left to me.
You're right. That is your only option.
In fact, any other engineers out there who want to work at a HF but got shot down on their first try/interview? F*ck it guys, just start your own. All you need is a handful of rich friends and a magic touch.
Not trying to be discouraging (ok maybe I am), but if I was forced into becoming an LP at a brand new fund, here would be my choices that would be out there:
Your "fund" - managed by an engineer, with no financial background, a series 65 license (woo!), and a few rich friends who apparently don't like their money anymore
Some other fund - managed by a group of successful prop traders who spun off and have all of the resources and knowledge from past experiences
No, you're right though. You had me at "I'm not a wall street guy, I'm an engineer".
Yeah, 'cause having a degree in finance makes you that much smarter than anyone else...
We had this running joke at my school that if you flunked out of engineering, there was always business school.
Oh yeah, and did Bernie Madoff have a degree in finance or engineering? -- just a thought.
I don't mean to piss off people here, I'm sure that there are plenty of smart, hard working finance gurus in these forums (after all, this is WSO), but when some kid one year out of school with a degree in finance doesn't have anything intelligent to say, I just can't help myself.
In my career I've learned that what degree you have actually means very little. It's knowing how to learn what you need to know and how to problem-solve that's really important. But then again, I'm just an engineer, what do I know?
With all due respect, what do you think is your edge that will allow you to beat the market?
The year of testing and development I've put into my EAs, along with continuous improvement going forward.
Bro, your alpha is gonna be redonkulous.
Who said degree? I specifically made sure to say "managed by a group of successful prop traders who spun off and have all of the resources and knowledge from past experiences". That's your competition. Those prop traders could be armed with GEDs for all I care, the point is, they have the background and the experience. The end.
OP what trade would you make and where do you see the dow going NEXT friday
Absolutely unrelated post: I think that this is a daring and bold move. Hats off to you, exciting endeavor imo. Don't let other people's opinions put you down.
This is a very ill-advised move. Do you really think that you have a good chance of making it big without any actual work experience with the markets? Would it really kill you to go work for someone else for a few years first? Your success rate probability would grow exponentially.
Thanks, Leidenschaft. I appreciate the encouragement.
Blastoise: I have no idea where the Dow is headed. It's up to the goons in Washington and how the mainstream media spins this whole debt ceiling thing. My system does not take a macro approach. Instead, it uses Monte Carlo analysis of the Forex market on a minute-by-minute basis. Most trades last a matter of an hour or two. Think arbitrage with non-zero risk.
Golini: Sure, getting my feet wet in wall street first would be nice, but my career so far as a nuclear engineer and project manager is not in line with what they're looking for. Besides, it's not like I'm quitting my job to do this, at least not at first. If I fail to secure any funding or if my system fails during the year of forward testing before going live, I'll just stay in my job, which is where I would have been anyhow, so I don't see much of a risk, other than the time wasted in setting everything up.
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