Do you need to be a market genius to start a hedge fund?
So do you really need to be a Bill Ackman, Ken Griffin, George Soros... in order to have a successful hedge fund? Do you know/or are you someone that started a hedge fund that does very good?
i have never started, nor worked in, a hedge fund, but since i have an account on this website i think that makes me qualified to answer your question.
in short: maybe?
Well it depends what you're trading and niche is. Someone who trades currency will need to have a more global macro point of view as opposed to someone who trades natural gas. if it's natural gas, you should understand what effects gas market, the pipelines, weather, the effects of increased role of LNG to American natural gas and it's possibly of making natural gas trade more like a macro product like oil... will this increase volume in the basis markets to send excess gas to LNG exports? Maybe there is a way to make money off this? You have to keep thinking. Every day you have to find ways even if you're wrong. You need to keep an open mind. now the financial products like swaps, futures and options. How it's traded? What are my risk? Worst case scenario? Delivery risk? Curve risk? How is it traded year after year due to seasonality? Obviously someone who runs a gas hedge fund or an oil hedge fund is not going to trade like a vol hedge fund. It all depends on where you niche is. If you're a hot shot oil trader and you were making half a billion a year and you start a new fund entirely focused on rates and you have no idea how the rates market work... I ain't giving you my money.
Bill Ackman is a market genius?
Can you imagine if you really were Jim Simon. That be hilarious...
As someone who has managed a book at a successful HF and knows/has met plenty of people who have done very well in the business for a long time here are some of my thoughts...
No. One does not have to be a genius to have a successful hedge fund. You need some edge though (or convince people you have some edge, and then hopefully you get lucky for a few years). And that edge could be as simple as a sticky family money that starts you off, or technology, or dealing in microcaps, or insider trading, or whatever. It could just be size and history.
But if you look at one of the main things these guys (and plenty of others) have in common is that they started a long time ago when HFs were new and hot products. Investors were literally throwing money at them, markets were less competitive. In other words, the space was relatively new. Plenty of them were not necessarily super experienced investors or traders and/or came from modest backgrounds and certainly did not have the risk limits that are the norm today. They could lever to the hilt, take significant draw downs (with the promises to investors of outsized potential returns) and operate much more freely in less competitive, less transparent markets. This means that a number of strategies, especially when levered could make you a lot of money.
This is not to take anything away from these individuals. Some of them are or were very talented traders/PMs/business people.
Today is a different story. Starting a HF isn't so hard, but keeping it running and finding reliable investors is. Investors are also generally not willing to put up with significant draw downs which means it's tough to buy when things in the market don't look so hot (unless you have sticky/nice investors or are a distress/ss fund).
The asset class as a whole has not performed over the last decade (for reasons that have been mentioned to death). Seriously, why pay 2/20 (or more like 1/20 or 1/15 or whatever) when Vanguard or whatever index tracker is nearly free and has crushed HFs for the last decade? Institutions are starting to ask themselves that question or asking if they can do certain strategies internally (I'm not sure that's the answer)... yes, I understand "risk adjusted returns" and "sharpe/sortino ratios" but as a number of folks in the business have told me "you can't feed your family on sharpe alone." Investors are asking themselve, essentially, why buy a Ferrari when a Corolla has outrun it?
It is just so competitive. Investors have choices and they know it. What differentiates one HF to another? You need to be able to show it, or hoodwink investors, or convince a big reputable (not necessarily smart) investor to give you money, do ok/well performance-wise and others will come in.
Costs are much higher. A number of these guys didn't have things like post-Madoff compliance, and regulations to deal with. That means they could literally be like 3 dudes with a Bloomberg in a garage trading stuff and dealing with assymetric advantages or in less competitive markets. Things like compliance and legal costs, especially post-Madoff have skyrocketed and investors demand much more compliance. That means systems need to be put in place and a fair few non-revenue generating staff need to be hired. All of that is expensive, which raises start up costs. Which gives big/established players a huge edge because they can not only pitch their long established track record, multiple share classes, celebrity (plenty of investors would be thrilled to have Griffin/Ackman et all personally visit them if they will cut a check), and of course ability to COMPLY with all kinds of policies. These funds can also hire armies of IR staff to scour the world for capital. Smaller funds simply can't do that. Smaller funds will also pay more for margin/leverage, which means higher cost of capital, as well as have to pay more trading commissions. Since they are smaller, they are not as big volume customers, right, which means they can't negotiate the same low low trading costs. All of this adds up.
In other words, it can be done, but it's hard to stay in the game.
This is not that comprehensive but hopefully it is a helpful start for you, OP. I shall let others chime in to add to things that I may have missed, or some nuance.
Basic probability: let's say 1 billion imbecilles are in the market. By betting random, a handful of them will be billionaires.
Not saying that Ackman or Soros were just lucky, but you can't underestimate the randomness of life.
Someone asked Buffett if you need to be smart, and he said investing isn’t a game where a guy with a 160 IQ beats a guy with a 130 IQ.
People have since taken the quote as evidence that being smart isn’t so important. But consider his choice of IQs for the example. 130 was his low number.
So even Buffett, aka Mr. McDonalds, aka Mr Cherry Coke, the man who sells his humble Average Joe image harder than anyone in history . . is implicitly admitting you should be pretty smart.
I suspect being very bright is almost necessary and at least a big advantage. The big differentiator is whether a very smart person can still be humble enough to attack their own thesis and do the work.
I’ve been in meetings with a few of the guys behind LTCM, and they are all brilliant but even today they are not humble. They speak with great certainty about how markets work, and any decent critical thinker can ask questions that cause them to stumble because they are so sure of X that they didn’t even consider Y. They have a very rigid set of beliefs and their brain shuts down when forced to think differently. That kind of genius is great for incremental engineering (ie making a plane engine 5% better), but it’s not good for something creative like beating other smart humans in a trading game rife with information asymmetry and biases and strategic iterations and so forth. You need to be a lot more humble and patient to win a game like that.