Interview with 'That Analyst that Joked about Starting His Own Fund'... and Actually Did It

tt1254's picture
Rank: Senior Orangutan | 377

The following is an interview with tt1254, an analyst who quit and started his own fund. He is also available to answer your questions, ask away.

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  1. Tell us a little bit about yourself:
  2. Recent graduate from undergrad who started an equity fund after a year or so in s&t at a bb. Was ultimate goal since second year of undergrad and having interned in m&a, s&t, pe, realized investing in public markets best fit. First stock buy was VV (same as SPY) on Sept 1st, 2008.

  3. What experience/class in school best prepared you to start your own fund?
  4. Econ 101 - less about supply/demand curves and more about incentives that drive human behavior. Psych 101 is a close second.

  5. What experience outside of school best prepared you to start your own fund?
    For me, it was reading and learning econ/finance on my own time - started with the classic market wizards, intelligent investor to the less well-known (and often more interesting) Mackay's Madness of Crowds, Guttman's Credit Economy. Ended up going to library a lot and reading a bunch of less-useful books as well.

  6. What motivated you to leave your job to devote your full time to this?
    Always wanted to invest and realized job then (s&t @ bb) would be a very roundabout path to investing in equities. That + plus a belief that equities could be a possible outperformer in the next many years served as catalyst.

  7. What is your basic strategy? What do you like to invest in? what's your specialty? What is your AUM? How old is your fund?
    Value investing in equities. Like to invest in companies with an emerging competitive advantage. Generalist. Very small fund which launch in May of last year (2012).
  8. What type of person is best fit to do what you do? What are some required skills / characteristics?
  9. Still just getting started, but so far most important has been self-discipline. Market doesn't care what you are doing (unless you are Ackman...), and so hope has no place for any position.

  10. How common is this for someone to leave their analyst role to start a fund? ie 1%? 5%?
  11. Turnover in general is pretty brutal- think 50% of class (bb s&t) was gone in 2 years. A few leave for startups

  12. What is one thing you wish you knew when you first started out?
  13. Plans are super-important and meant to be broken.

  14. Can you elaborate on this?
  15. Fund start best example - wrote out basic plan Before quitting, from service providers (lawyer/acct/primes, got first meeting/quotes etc.) to rough aum goals, people to call, and of course which investments/strategy to follow. Had plan in place months before trigger. Of course, as in most businesses once leaving new problems arose and timetables for aum, people had to change - got investors I didn't expect, didn't get ones I did expect. The key was having a framework for handling these changes (even if just a word doc), so that when the expected happens(bad/good), wouldn't skip a beat (too much). After all, if a potential investor whips out the checkbook and asks for next steps or asks where you domiciled, better be prepared...

  16. Where do you see yourself ( and your fund) in 5 years? 10 years? Any interest in an MBA or jumping to a buy side gig?
  17. 5-yrs: doing same thing with 10x aum. Little interest for MBA (opportunity cost), buy-side if this doesn't work out.

  18. For someone who wants to do this while in college or as a young professional as a means to break into the buy side, how can you best harness this experience into a job?
  19. Find a semi-worthwhile investment (hard), learn as much about it, buy it, record/review why you bought, held, sold.

  20. What is your typical day like?
  21. 90% reading filings, organizing thoughts/investment theses on paper, 10% monitoring positions.

  22. How many hours a week do you put in?
  23. 60-80 but not really an accurate barometer bc don't have have to do anything. Decide for myself how much time to spend researching one idea vs managing current positions (sometimes reduce/increase based on new info). Most of time debating in my mind at gym/car etc. what to do. So can be as little as 40 when don't see cheap things to buy, 100+ when many things to look into (and those can be most interesting times!).

  24. Do you have employees and/or partners? If the former, what advice do you have for managing employees?
  25. Nope, outsourced most ops outside to focus on investing.

  26. Who do you outsource to? What types of ops do you outsource?
  27. Best example: use interactive brokers as broker (bc small fund) and so they provide 99% of the tax docs. Else I'd be filling out Form 8949 myself for schedule D now. Ppl with personal accounts know what I'm talking about :)

  28. Since you are an entrepreneur/business owner, how much time do you spend thinking about your own business / entrepreneurial mindset vs thinking day to day work of filings/positions?
  29. Still trying to balance that - bottom line is that it depends on whether market is active. I.e. first week of this year long mkt thesis played out, so thought about meeting more ppl/updated marketing presentation (banking memories!) so 80-20. Last summer it was 0-100, all day trying to figure out which securities shouldn't care about Europe (answer: most usa securities! J). For me though, it's less about fills than about whether to reduce a position if there is (irrational) selling to be had, etc. I'm in mostly liquid securities (e.g. aig) so getting a decent price is not hard.

  30. Anything else you'd like to share?
  31. I'm the junior analyst who you'd talk stocks and joke w/ about starting a fund - just happened to take the next step.

  32. What is the link to your blog?
  33. http://leverageforthought.blogspot.com/

Comments (27)

Apr 1, 2013

Are there any resources to read up on market history for both the recent past and several decades back?

I find that the most difficult part as a student getting into investing - having a sense of what happened in the past and connecting the dots. Would be awesome if I could see several interepretations of historical movements and work from there.

Apr 1, 2013

couchy: still looking myself, but one book which was good in this area was The Partnership: The Making of Goldman Sachs by Charles D. Ellis. It's a lengthy read and is focused on Goldman, but shows how the market changed over the years, from when traders were at the bottom of the totem pole to goldman sachs trading corporation. covers 1920s to 00s I think.

Apr 1, 2013

Bet the ranch on ATHX if you like 500% returns.

Apr 1, 2013

where do you typically find investment ideas?

1) are they from the news? if so, what are you looking for? is it quantifiable?
2) or do you find ideas from actively monitoring a universe of stocks you already understand?
3) stock screeners?

Apr 1, 2013

ed

Apr 1, 2013

BTbanker: I don't like 500% returns :)

Couchy: all of what you say, 1) any news outlet such as barron's, etc. to get an idea (but lowest hit rate for usefulness imho). 2) am generalist, but one idea often leads to another - for example in 2010's bp spill was looking at deep-water drillers beaten down by bp fears, led me to see other forms of oil/gas production -> tight oil/bakken shale in nd -> expanding production - > mid cont refiners 3) finviz, morningstar are some good ones

ull hear this a lot - buy good companies (high roic) at good price (p/e ev/ebitda p/fcf peg) etc. Shaughnessy's What Works on Wall Street is a good primer on why some of these metrics work (and how well on agg basis)

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Apr 1, 2013

ed

Apr 1, 2013

CBS: fair enough, this is more like a startup in first yr than "fund". A "hedge fund" though is just a legal structure that avoids registration etc., though the connotation this decade is something more grandiose. Depending on state, don't have to register as IA (federal registration only for very large funds) (http://www.dfi.wa.gov/sd/investmentadviser-state-s...) and therefore don't need series 65. Fund is LP and still just building track record for now (only friends family $ to start).

Rather not say aum/performance to stay away from general solicitation rules. Yes, a cop-out out but a legally mandated one (until at least jobs act more understood/fleshed out)

(Note: not legal/investment advice. please do own research).

Apr 1, 2013

As a day trader (fx) for about 2.5 yrs, I get asked these (in variations) a lot:

"What are your thoughts on HFT's?" (supplement rigged market, algo, robots etc...)

You primarily US market and what sector?

How is your fund setup broker, legal, and technology wise (may not be at the legal yet)?

Do you have any active capital raising (idk if this is part of your 3rd party ops)?

Fund. v. Tech (generic yes ik)?

You setup shop in a primary like NY, London, Boston etc..?

(i have a few more, but may be private)

Thanks

WSO Vice President, Data
@JustinDDuBois

Apr 1, 2013

What do you think the minimum AUM a fund can have for the fund manager to make a living?

Apr 1, 2013

You mentioned that ~50% of a BB S&T class is gone after two years. Besides startups or the few that venture out on their own, where do the others tend to end up?

Apr 1, 2013

Commuter:
rarely day trade, and haven't been around long enough to really see how markets traded pre-2007 unfortunately. Can definitely see how HFT can hurt day-traders and large institutions who have to move large size, but it is sometime tough to draw the line of "fairness." If a buy-side algo slices a 10k order into 1k buying in 1 sec increments and another algo picks up on it and buys ahead, is that different than a buy side trader manually buying every 10 secs and another human picking it up and buying ahead?

Now, there are the flash-orders (sp?) which are displayed to certain firms before others, and that is something I'm not a fan of simply bc an exchange is by construction meant to be a competitive market-place for all?

Primarily us market, rather not say much more about own infrastructure except that it's pretty bare bones. Most funds these days want lawyer for docs, fund administrator, prime broker (I have Interactive Brokers), acct (for audit/tax). I personally think the institutionalization of these funds is exactly why returns are/will be lower going forward as a whole, but more a hypothesis than a conclusion.

Mainly just friends/family now.

70% fundies, durable competitive advantage, 30% technicals, supply/demand.

Shop is outside main finance centers - too expensive for now.

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Apr 1, 2013

Packmate:
Short answer: I've usually read > $10mm if you want to have serious infrastructure/be credible to pensions/insurance/endowments (which are most ppl's targets these days).

Longer answer: it depends on how much infrastructure you want.
Usually, ongoing expenses prior to headcount for institutional can reach 100k (20k for fund admin, 20k for audit/tax, 20k for marketing, 20k+ for lawyer representation) or so per year, after 50k to start (20k for fund formation docs, marketing etc. other).

So let's say you have $10mm with 1% mgt fee, that's 100k pre-tax and depending on the tax structure can barely cover operating costs. That's before salary, employees, bloomberg, office, coffee etc.

If you have 20% performance fee and have a 20% year, that's 4% or 400k, pretty awesome. But then if you have down year, you are hosed - hence the wild years that managers may have.

It's also why I've heard the phrase: "banks are made to mint a 1,000 millionaires, while a hf is meant to mint 1 billionaire."

Apr 1, 2013

cooldurg:
all over the place - one went into film, one biz dev @ tech company, really I didn't see a pattern when non-finance. Actually, would imagine is the same at many first for young entry levels - ppl often don't find footing for first few years after college

Apr 1, 2013

Great interview. Just a couple random questions:

Do you use leverage or plan to at any point?

Was there a particular catalyst that made you take the leap to start the fund?

Apr 1, 2013

Simple: sparingly, net exposure usually between 50% to 150% net long.
Catalyst: a couple, but one is that around the time I was thinking of quitting was 1) finding an unusual amount of investments I liked in the market and 2) had a strong belief that the usa equity market could actually be a great place to invest in in the next few years. As such, I felt compelled to try it. So, essentially the fund is a partially a career-levered bet on the us equity markets :). Odds already tough enough, but figured now was good a time as any.

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Apr 1, 2013

what should somebody do if they want to find out if they're cut out for trading (handling stress n all that), but don't have enough money to open their own account?

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

Apr 2, 2013

Was this interview conducted via text message? What the fuck.

My name is Nicky, but you can call me Dre.

    • 1
Apr 2, 2013

wolverine: One common way i hear is poker/betting games for trading - the point is to have money at risk with a mathematical and psychological component and having an idea for why betting 50% of your capital on each hand is usually a bad idea :)

    • 1
Apr 2, 2013

aempirei: apologies for poor grammar - I am trying to maximize usefulness/word ratio!

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Apr 2, 2013

Question about turnover in BB S&T. For people that DO want to stay in the field, what is the turnover like? Especially in terms of layoffs. I know trading is known for high turnover but what are the real numbers like (%? I know you mentioned 50% stay after 2 years but you also mentioned that most of those people felt they were not suited to the industry and left on their own)

Apr 2, 2013

yjishere: can only talk about junior ppl, but think it was ~10% who were fired/laid-off, but mostly in early years you are safe if you are doing good job (read; your boss/team thinks you are helpful, good to be around etc.). Too cheap to just lay-off en-masse usually. Those who were laid off early usually had a decent reason (e.g. just couldn't pick up the concepts even from training).

    • 1
Jun 3, 2013
tt1254:

yjishere: can only talk about junior ppl, but think it was ~10% who were fired/laid-off, but mostly in early years you are safe if you are doing good job (read; your boss/team thinks you are helpful, good to be around etc.). Too cheap to just lay-off en-masse usually. Those who were laid off early usually had a decent reason (e.g. just couldn't pick up the concepts even from training).

For those laid off/fired, any idea where they ended up? How about those that left on their own? Why did some have trouble picking up the concepts?

Jun 3, 2013
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