Advice: Finding Investors For Hedge Fund

Anyone can make a 400% return in any given year. What people ultimately care about is not one years of performance but your ability to preserve capital in the long run, as well as your RISK PROFILE: Like if you’re yoloing BBBY using like 20x leverage somehow and made 400% it’s too risky for anyone to give you money to invest for. Long term basis.

If you remember Long-Term capital management they also made some killer returns but once their strategy went sideways the fund just exploded.

You’re going to have to convince people that you can made that return consistently and not just lose all their money. The fund I work at does not made anything close 400% but we have essentially never loss money in the the decades we’ve been running. Our sharpe ratio is something like 4.

As to getting meaningful capital that you can start a fund with, let’s say 50-100M, it would be really hard given your age and your return profile. The people investing in these funds have heard of these returns before, but they also heard of large busts. Institutions similarly are more risk adverse that chasing huge gains.

Make the same return for like a couple more years and then you can think about fundraising when you made a lot of money for yourself.

Return is not the only metric, it needs to be risk-adjusted. Get all your stats, and continue to perform for 36 months. Understand your strategy, its limits. 

Institutions won't take a look at you if your AUM is still small. Start with HNW first, go for tier-3 placement agents / broker dealer who could introduce investors to you (mostly HNW individuals & small family offices).

Then continue to perform and scale. 

Once that is done, you can start using Capital Introduction lines at Prime Brokerage (bulge braket banks do introduce Institutions as LPs to their HF clients). Then you can start build your institutional LP base. 

It could take years, if your strategy doesn't fail. But if you have preserverance and talent, yeah, you will get there. 

I'd rather go the conventional way, get Finance/STEM degree, land a seat at a HF, move up from there, promote to PM, then find a MM platform where all the infrastructure & investor relations will be taken care of so you will just focus on running your strategy. 

To echo other posters, the days of starting with $1mn and setting up shop are mostly over (unless you are coming from an established platform already with a track record). What is your process/strategy, why is it repeatable, and why would someone want to pay 2/20 for it? Are you hedging risk and generating alpha?  Just being someone who looks at stocks and tries to think smarter than everyone else is not a strategy and not a way to launch - well at least not if you want to scale to a real size. IF you want to manage money for a few small private investors and live off your returns, then it is probably fine (maybe 10-30mn AUM, and this is still super difficult, and raising money here will probably be nothing more than building a network like PWMs build their client base).

Investors who allocate large checks (even +$20mn) and are willing to part with 2/20 are looking for specific strategies with specific risk metrics to fit into a larger allocation of multiple managers running different strategies (a consequence of the Yale endowment model).. They allocate to tiger funds for long levered tech and access to privates (and mostly pedigree and other bs, which you won't have). They allocate to MM platforms for market neutral exposure and repeatable returns (and the infrastructure they have built to push their edge in doing so). They allocate to global macro for less correlation to markets and to profit off volatility (or risk premia or w/e else). They allocate to credit specialists, they allocate to biotech focused funds with doctors/phds who can analyze drug trials better than anyone else, etc. etc. They even allocate to SMID cap specialists that have restricted their AUM to maximize the strategies success. They don't usually allocate to people with an unrestricted mandate to invest in long equities based on the sole investor's judgement with no defined edge/process and no team. Now they sometimes do this, but these people are usually billionaires who started a long time ago and are famous already, or they are pedigreed senior analysts / PMs spinning out out of the former's shop, and usually seeded by multiple formers.

The best route to starting a fund today is to go to IB --> PE/HF --> HF --> start up your own HF with connections you made along the way and an existing track record. Even after this, it is extremely hard to succeed and scale. If you don't want to do that, I commend you, but you will need to hone in on your strategy/process so you can market it properly, and then run it for a few years with great returns (~3 years), and then maybe start to attract some interest. Can you live without a paycheck that long? Again, what is your strategy/value prop to earn a performance fee? HFs are a business, and like all businesses you need to look at the competitive landscape - what is your value proposition? 

Don't take this wrong way, but I don't think you are in a position to do this yet. There is enough information out there to learn what I said on your own (so many books/podcasts/articles/etc.), including networking with people who will tell you this (will be key for fundraising). You mention the series 65 and it is not relevant to running a HF at all, so that was a sign to me you should focus on learning more a bit. I would focus on getting experience at real firms first and becoming a better investor before even thinking of starting your own shop. Not meant to be condescending or to disparage you - I had the same desire in college to end up running my own fund one day. 

what do you mean by pedigree? working for a established fund?

The fund economics don't start to work until you've reached at least $100MM in capital though.
Why a hedge fund structure? How will you get a prime broker? Who will do your legal and compliance?
I'm not sure you understand what the expenses are...
Using a structure other than a hedge fund can help because you don't have scale at the moment.
If you are going to run such a small fund there are alternative paths you can take like becoming an RIA which may make more sense to look into.

Have you tried putting together a trading book and applying to hedge funds? What has been the response if any? If you can get a sleeve of capital allocated to you that is a well established path towards building the type of track record institutional investors look for.