Cheap startup costs (geography) cheat code for HF success?
Hi everyone,
I'm based in a European country where the startup costs for a long/short fund come out to roughly €30,000 in total (this includes all expenses such as KYC, legal fees, accounting, etc.), with ongoing yearly costs of around €15,000 (covering fund administration, ongoing compliance etc.). Additionally, there is an extra cost of about €200 per participant. Based on my calculations, this setup requires only about €500,000 in AUM to break even on a typical 2/20 fee structure. The only investor requirement is a minimum investment of €100,000.
However, I’ve also seen forum discussions advising against launching a fund until you secure millions in commitments, citing the need for a robust back office for compliance and other reasons. Some sources mention startup costs of at least €250,000 for a long/short fund.
Is there really such a vast discrepancy in costs? And isn’t the scenario in my country, as I’ve described, actually quite favorable? I’d appreciate any insights or experiences you can share regarding this or whether i am missing something big.
Thanks!
Nobody pays 2/20 unless your performance is absurdly good.
You also are not factoring cost of research, bloomberg, factset, stuff like that. You probably need like $50M AUM to be able to cover costs and take a modest salary yourself.
I am using $ below because my keyboard doesn't have EUR but it's all basically equivalent anyway...
Let's put it this way. A more realistic fee structure would be something like 0.50% management fee + 15% carry over an 8% hurdle rate = 80bps if you are making 10% a year (putting aside that nobody is going to pay you 80bps to make them 10% a year over the long run)
$50m AUM = $250k management fee + $150k carry assuming you earn 8% = $400k in fee income. Take out your $15k overhead = $385k. Then add probably $50k of research, bloomberg, etc. costs (this assumes you're running VERY lean) = $335k income left. Also assumes you aren't paying for office space and are running this out of a bedroom (don't know how you're getting $50m AUM without an office but I digress). In a bad year, kiss that carry goodbye and your income is $185k.
Point being that if you're good enough to raise $50m, you probably could make a greater sum just working at a scaled fund. I am an analyst at a LO and earn more than $335k and have 0 of the risk or headache associated with having my own fund and having to sweat it out for my income every year. Sure I don't get the entrepreneurial aspect/control over investment process that you get at your own shop. But that's what a PA is for.
Caveat all that with if you're a phenomenal investor and can put up good numbers year after year then yeah start a fund. But take your $500k AUM breakeven and 100x it unless you can find a lot of money from unsophisticated people that you can fleece with high 2/20 fees..
Thank you!
A lot of what you are saying makes sense, however, that is all considering you, A. Run a strategy that actually needs all that expensive data. If you manage to run a l/s strat without and manage to model things like mkt/factor risks exposure yourself without these vendors and did well then i see no reason you need them. And B. you indeed have a fee structure similar to the one you described, however I think this is very geographically dependent, the majority of the funds located in my country run a performance fee w/o a hurdle rate (this is based on information I received from the fund adminstrator that oversee about 50bln in funds here).
Institutional investors are never going to commit millions of $ to a "guy with a bloomberg and a dog" type of HF (and you don't even thave the bloomberg). That happenned in the 90s and 2000s, but not anymore.
If you will be marketing your fund to friends and family, sure you can go ahead with your lean structure. It'd be a stretch to call it a HF, but you will be raising tens of thousands at a time, not millions.
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