Family office transforming into hedge fund
Hi all,
I'm currently at a large mega fund in their special sits shop (6 / 7 years into my overall career). Will be joining the carry pool soon + expecting a big pay rise.
A family office is looking to recruit me to join them as an analyst (employee number 3). They have around $500mm - $1bn in capital to deploy. Multi-strategy but long bias (can play across the cap structure, do activisim, do PE etc.)
PM comes from a reputable shop ($50bn+ hedge fund) and I know of him from reading some of his activist letters / have asked friends that worked in that shop for their views. He left his old shop due to structural changes.
Idea is to get a good track record over 3 years then raise external capital.
My question is whether there are precedents for a situation like this? They are saying once they raise external capital, I can become a Partner (assuming I am good) and get a cut of the profits. Comp wise: Will be flat to where I am today (excluding incremental inflation bumps) until they raise external capital (hoping to make single digit mm by then).
I feel like I'm missing something (beyond the fact that I have to be good). How can they screw me over? Where can he fail? How easy is it to raise external capital for single managers?
It feels like I'm basicaly going all in on this PM.
Thank you all!
Based on the most helpful WSO content, here are some insights and considerations for your situation:
Precedents and Considerations:
Raising External Capital:
Investor Preferences:
Potential Risks:
Compensation and Career Growth:
Key Questions to Consider:
Conclusion:
While the opportunity to join a family office with the potential to become a Partner is enticing, it comes with significant risks. The success of this venture is highly dependent on the PM's performance and the ability to raise external capital. Carefully weigh the potential rewards against the risks and uncertainties before making your decision.
If you need more detailed advice or personal experiences, consider reaching out to professionals who have been in similar situations or consult additional WSO threads on related topics.
Sources: What should I know before starting a Hedge Fund?, Independent/fundless sponsor and Family Office surge, Family Office Private Equity, Work at a Start-up Hedge Fund? (Generally) A Bad Idea, Starting a Private Equity Fund/Firm
How confident are you that you truly will be lateral comp wise? It’s easy to think you’ll be able to achieve the same results elsewhere but that’s not always the case. The last thing you want is to jump ship for what seems like a lateral move and then struggle immensely because of office politics, technology, market access, etc..
Yes there is potential big upside, but what if this guy strikes out? Then you’re at ground zero, for no fault of your own. And if you fail because this person fails then it will still taint your record. Be careful about these big moves, people will make big promises and give you grandiose visions of what can be, but talk is cheap, and failure could mean you destroy or significantly impact/setback your career.
Think about the risks carefully, yes pay off for success is high, but you truly need to envision how you would feel if you failed. Is the cost of failure worth the slim chance of success?
You are absolutely right. I'm basically going all in on this guy (whom i've only met briefly through the process).
Ill need to think about it.
That sounds like a huge gamble TBH. Even switching platforms is a big risk, that’s why PMs as for such a big guarantee to make the switch. I don’t know the details of your situation but from the sound of it this seems like a huge gamble, and a suboptimal choice compared to other potential options.
Good luck to you no matter what you pick.
Wow
I’m currently an allocator and have been at a few different shops. I’ve also been a PM, so have seen both sides. I just want to let you know that most times raising money is usually brutally brutally hard. Sure your upside is high if the 3 year track is good and there are no politics and the company is honest and if you raise money (I’m sure I’m forgetting a bunch of things). But that’s a lot of IFs.
it continues to amaze me how many PMs have a naive attitude towards the realities of raising money. LPs like me may be dumb but we see EVERYONE’s track records and we gossip (everyone in finance in every space gossips). You’d be surprised how often the variation between firms in similar strategies is not much and how often we cross reference with each other. We are axed to say no, just like a PM is often axed to say no to a trade.
There is a reason good fundraisers/IR people get paid a ton. There is a reason David Rubenstein is an equal partner at Carlyle. It’s not just fancy lunches and events. It’s a real grind.
YMMV but just a heads up. Good luck.
I've watched a lot of David Rubenstein's interviews on YouTube, and he doesn't really come across as charismatic, which is a surprise given you would think - naively, perhaps - that such a trait would be essential for raising capital, not to take anything away from him
edited since comment got cut off at bottom.
Remember that he joined the industry at a different time. Co-Founded a firm and positioned Carlyle in a different way. Focused more on defense. Hired ex heads of state. Had the insight of having those people at AGMs. “When you have people like that at your party other people want to come to your party” - genius.
It was a different era for sure and he’s incredibly smart, clever and worldly but certainly not charming. I’ve spoken to him on a 1v1 basis for twenty minutes and I can tell you that at that point he was still spending 200-250 days a year on the company PJ hustling for dollars (amongst his other pursuits). Not glamorous by any means.
But we all have to remember this game across all verticals has gotten so much more competitive.
Fundraising SUCKS
Thank you for the color.
This is very helpful. As a junior / mid level investment professional, I have no visibility into how difficult raising capital is. My fund leverages our existing brand name so it is "easy" but as you pointed out, there are a lot of ifs.
Seems like a more more exciting than your current opportunity. Do you think you learn more leaving or staying?
To me at least (I get bored easily) this could be the real attraction. Not the money upside or whatever but learning something new, experiencing something new etc. only the OP knows.
OP here. I'm learning a lot at my current fund + strategy and we are looking to move into other spaces as well (so even more learning). Progression is fast and I like the team (and they like me too).
The I guess the question for me is whether I want to continue with special sits (private / public 75 / 25) or move to this shop (private / public 20 / 80).
Hard pass on a sub $1B family office with hopes of raising external money lol. I currently work at such a family office and am under no delusion that it would at all be possible to raise sufficient capital elsewhere. The best family office situations I’ve seen are exactly the opposite; you allocate to startup funds on top of running your own strategy, with the goals of 1) diversifying your risks and 2) poaching ideas from smart PMs without career risk. We just don’t say we run our own book when we join as LPs. You’d be surprised how well you can cultivate for ideas this way. Don’t join this clown show of a pipe dream.
Thanks for the color here. I think their strategy is to go to other family offices like yourself and raise capital from there.
The key question is whether this PM actually has the ability to attract such capital.
Also need to make sure the existing LP base won't pull money out.
Is this an aus ex-media FO? If so, should be easy to raise from other FOs
Well you can’t raise a fund from family offices only so if that’s as much clarity as you can get from the PM and partners about their potential fundraising plans, this is a big fat zero.
Sounds like you need to spend 99.9% of your time diligence 1) the cross-asset dynamic others have mentioned here and 2) the actual reputation of the PM in question. Whether you have the right contacts to do so is another story. imo this is all too iffy hand wavy, particularly on top of your recognition that going from mostly privates to mostly publics is not straightforward at all
From a broad sense, you can always go back to big investment funds and the typical corporate life. You will never starve, you will be able to afford kids, etcetera. If you try and fail, your life, legacy, and kids lives will not change.
If you take the risk, you will feel excitement again, you may achieve a life you always dreamed, and you leave a better legacy. When it comes to Americans making amazing money on Wall St, it's almost always worth the 'risk.'
That said, ask if you think this PM is really exceptional and would be able to raise external capital. Decision largely depends on your confidence in that. Secondly, do you think you will be able to perform better with less red tape at the FO, or do you think you will perform better at your current place with market access, technology, built in processes and teams helping you, etcetera. Once you know the answer to those two, you have your answer on whether to make the move, but only you can answer those, not us.
I don’t agree that you can always find your way back into the big funds. Maybe if you run a highly differentiated novel strategy (which let’s be real doesn’t really exist these days), many funds will judge you for leaving to take a shot at a new shop and failing to make something of it. I don’t think many would admit to this, but there’s certainly a decent amount of career risk in leaving an established place and then coming back as a senior hire. Hedge funders like to pretend they are all about taking risks, but you can clearly see through the BS sometimes. It highly depends on the strategy and area, though. Feels like anecdotally quant guys move a lot and don’t get punished for it but the L/Sers definitely do. Don’t know much about special sits
'High career risk' is a bit of an exaggeration. I never said it will be easy to make your way back, and I agree some people will dislike you moved to a family office for sure.
But just because it may be difficult, I would be extremely surprised if he couldn't land something of the same caliber. And moving from one fund to another fund to be a potential partner is still staying in the field and provides valuable experience and perfectly understandable, which is different than quitting to run a juice shop in the Bahamas. Some may even see him in higher regards for being potential partner level.
Id make the point that cross capital structure family office type funds aren’t a good fit for most LP pools. They don’t have a product which fits into a bucket like ‘credit special sits’ or ‘equity L/S’ which justifies close to 2 and 20. Fundraising will be possible but tough. All the cross capital structure funds are dead or dying with the exception of a few credit first funds (exceptions being funds like Elliott, farallon)
Spot on in so many ways. Markets have changed since these players have come as well. More crowded, more tech, zero rates etc. funds like Farallon survive because they are huge and because they sit as a median fund in LP portfolios which are bloated. Which means the LPs don’t fire them. Nice way to get paid. Don’t mean they are making returns though. I say this as an ex Farallon investor…
Good color here.
The upside/downside is likely out of whack on this trade. You're going from a blue chip seat that is presumably very stable with a relatively defined career path. Given the blue chip status, opportunities such as this will always be available. If you make the move now and this doesn't work our for variety of reasons you're ability to transition back to a blue chip role with be greatly diminished - most next steps would be fairly up hill at that point other than similarly sized small firms. Yea sure it can also work out and you capture all the upside. But again, you will have plenty of upside the more time you spend in your current seat. Moves like this should be made because 1) you've saved enough money to where your career trajectory doesn't really matter anymore and if you flame out who cares, or 2) you need a major lifestyle change and thus are willing to take the brand drop.
thank you - this is excellent color.
OP - did you end up taking the job? Why/why not?
OP here.
Having spoken to many people (as well as everyone's contribution here - Thank you all very much), I decided it was too early for me to move. I'm at a very clear inflection point in my seat where things will materially change in the next twelve months (and things are decent).
As an investor, the risk reward doesn't make sense because I'm trading 100% upside (95% guaranteed) for unknown upside that can be materially better than 100% (but is it 10x) for (sub 50% PoS).
I think a couple of points that weren't raised include how as we become more senior, we start "investing" less and start dealing with more "politics" and hence if you want to continue to be an investor (which i love), it is natural to move to a smaller shop where you have more control over your destiny. I'm not at the point in time in which I'm feeling the heat from the politics but I do see it from my own PM.
I think the morale of the story is to not get FOMO on such seats as they will appear and in time, I'll be ready to take the leap.
For me personally, it was a tough conversation to have because this is the first time I've ever actually rejected a job. Historically, it has always been move wanting to move to a new shop whether laterally or to the buyside.
Thank you again for all your advice.
People on WSO are so risk averse it is incredible
It’s not about being risk averse. This “family office hedge fund” just ain’t it. The strategy and fundraising plan are big fat zeros given what we know so far
Has nothing to do with risk aversion, its just a horrible trade. Best case you are equal to or even worse off the current seat / future exit from current seat. Worst case you are significantly disadvantaged. Thus, no upside capture only downside potential.
Wait my bad I thought this new seat would have much more upside, if not - makes no sense
You don’t say
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