A friend of mine asked me to join his 1-man hedge fund in Florida. He's got Zero formal experience in hedge funds, and everything he claims to know is self-taught. He's put about $1M into it, and has some small investors, I believe with about $3M AUM. It's a simple long-short fund and he claims he's made about 30% returns over the last year. He said he's done all the registrations with SEC and passed the required FINRA tests, but it seems like starting a fund like this is out of reach for just some random guy.
I don't work in Finance, but he says he could teach me everything I need to know about it and work as a partner. I know coding decently well and working in business analysis/PE for a bit, but I think there would be a very steep learning curve.
On a scale of 1-10, how delusional is this? Is there any real possibility that someone could make a tiny hedge fund like this work? I try to be optimistic about things and never underestimate people, but it seems like a stretch. He and I both don't mind working 80 hour weeks to make something work, but if I could get some insight from anyone in the field about the prospects of doing this, that would be greatly appreciated.
If he truly has all the required back-end stuff up and running, it can absolutely work and be lucrative. But you need to treat it like you would any other startup in any other industry. Only this is likely even riskier.
There are lots of questions that need to be asked though.
As far as fees go: Who are these LP's? How many are they? How sophisticated are they? What is the fee structure? 1/15? 2/20? Is he trying to raise more money? Or just grow the current fund?
And for your friend: What does his work experience look like? Does he have any experience in finance at all? Does he have a degree in a STEM field that can give him an edge in the markets? Is he getting his sell-side research from r/WSB? How does he choose investments?
That's just a starting point, but assuming there are no red flags it is doable if you have enough money lying around to sustain yourself for a few years.
That's not a hedge fund that's a dude managing money for some of his other buddies lol $3m is nothing. You would basically be working for free because there are no fees coming off an "AUM" that size. Even if he's charging 5% (which he's not unless his investors are idiots) that's only $150k to split between the two of you. There's no way he's raising money from serious investors if he's "self taught" and has no formal experience, so there's no chance of him scaling AUM through fundraising. You'd be better off getting an entry-level job in almost any finance role because no one is going to take a track record (even if it were 30%/yr for 2-3 yrs) from such a tiny capital base.
No, would not waste a thought on this. Completely waste of time and would require you to dip into your own savings to sustain yourself. Not developing a track record any real firm will respect. Limited growth prospects, if any. You are vastly better off working at an established firm and gaining marketable skills in addition to references from a reputable employer. Especially in this market, this would genuinely be one of the dumbest career decisions I can think of making.
Why in the world did someone downvote your post? Everything you said was obviously true.
I've come to accept that it's often less about what I'm saying but how I'm saying it.
Hard pass.
Like any other startup, the point isn't to make a huge amount of money on Day 1, but to grow the business and within 5-10 years have something far more substantial. Just wanted to get insight on how crazy it is to start a Hedge fund with 1-2 people and make it semi-big over several years' time.
One guy who is self-taught with zero formal experience in hedge funds isn't launching a "start-up". He's managing money for friends. This isn't a serious venture and shouldn't be considered one. The point IS to manage and make a huge amount of money on Day 1 because that's what serious investors expect when allocating capital. There is no "ramp-up" phase for funds with no infrastructure, technology, or proven systematic alpha.
Incredibly hard, especially since you said neither you nor your friend have any formal experience doing this. Only way to survive is to get bigger (at least a few hundred million but realisiticly you'd need at least a billion) but with no pedigree, nobody is going to give you real money so how are you ever going to grow? (Even a track record of 30% returns for a couple years is not particularly impressive at a $3M aum, especially if you can't afford an auditor to verify it). Only way this works is if you can distinguish yourself with like 100% returns for a couple years, and even then, that doesn't save you, it just gets someone to notice you enough to *maybe* invest some real money.
If you're actually serious about starting a fund -- try taking your 2 person hedge fund startup to a pod show like Millinium. They'll cover expenses like rent and market data and audited reports and compliance reporting, so at least you can focus full time on trading. And if you can do well, they'll increase your risk limits to let you trade more.
How is it going to be any easier for Izzy to give them any capital? What a terrible take.
Hey, at least I gave the guy a clearly defined path with a (small but) non-zero chance of success. Not impossible that he could network his way into a pod shop and be allocated a small risk limit. Low odds of success, but still better odds than his original plan to join his friend's $3m startup hedge fund...
I think there's actually higher likelihood of grouping together 2-3 HNW investors that are friends with your rich uncle than to get past an MM's business development with credentials such as those.
For a biz dev guy at a MM to vouch for a resume like that for a PM role is career suicide: his bosses will instantly question his judgment.
If the talent isn’t there, it’s completely insane.
If the talent is there, then it isn’t.
Itsweird to me to hear a HF discussed in a business/startup context. Sure it’s a business but its only purpose is to take money from other market participants in a highly competitive, zero-sum competition.
So the only question is can you beat the market reliably, ie do you have an edge on the market that’s hard for others to obtain.
All the business-building type questions, I don’t think really apply.
LOOOL
Would you get on an airplane with a self taught pilot?
I would run, and fast.
Hahaha this is a great analogy
10/10. Don’t do this
his AUM is less than my PA. that's not a business.
has nothing to do with working 80 hours a week to make something work. this mentality alone proves u two yahoos have no idea what is going on. ur better off starting a HVAC business where working more hours might actually be correlated to success of the start-up.
That’s just a guy and a Bloomberg Terminal.
Obvious answer is don't do it, but to act as the devil's advocate, the conversation reminded me of this essay/interview and if anyone else knows where to find it please share the link! (Pretty sure it came from the circle of posts in MITIMco's emerging managers network).
Anyways, the way the industry has changed over the last few decades, there is a serious bifurcation between "institutional level" launches, and the long tail of everything else. You will not be part of the institutional league, and will never build it up to that level. But there is another level - which the author of this letter referred to as the "doctor setting up his own private practice" in a small town, or like a lawyer setting up a small practice vs joining kirkland ellis (or building the next one). You can operate it at semi-breakeven level, and maybe a small profit, purely for the love of the game. On this board we highlight the paths to making millions per year, an outcome that is incredibly difficult even for the most talented of us. There is an outcome where you two run this fund in the $5mn $10mn while making a modest profit and enjoying your craft, and mostly bootstrapping everything. There are tons of partnerships out there that do this, and a "hedge fund" may be a bit of a misnomer as these days it primarily refers to the institutional level product/asset class, which you will not get to (maybe a .000000001% chance). Your situation really is "just a guy with a bloomberg" (although probably a cheaper option in all honesty). If anyone knows the letter that talks about these tiny emerging managers running their investment partnerships for the sake of the craft and not because it has a real chance at scaling, please share!
I would advise not to, simply because you are at a point where real experience will help you down the line, and you are putting all of your learning/mentorship in this one person's hands, and you will lose most of your future marketability. I wouldn't go into it thinking this thing can turn into the next ~$250mn emerging manager. Success probably means you guys can grow to $15mn after 2-3 years, and then maybe $50mn is a hugely successful outcome. That does not mean you should not pursue it, but it does mean you should clearly think through what you want to do, where you want to be, and whether or not this aligns with that. You are risking everything on this one person - who you admitted is self taught, so its basically a straight no. Future roles at larger shops are out of the question, but roles at similar emerging managers could honestly be a real path. With how lean the team is, additional fund flows are just not a reality (because of lack of pedigree/size/differentiation, and lack of time/experience on your guys' part - he won't have enough time to focus on fundraising while researching and doing everything else, nor would he even know how to).
Also marc rubenstein has a good article on the topic:
https://www.netinterest.co/p/so-you-want-to-launch-a-hedge-fund
Yeah this job sounds completely retarded. So many red flags. A lot of people have already informed you how there is zero bonus pool/upside given the incredibly low AUM and low chances of success for a self-taught HF PM. I'll go even further and say there's a 10% chance the firm's principal will be indicted by the DOJ at some point in the future. You don't want to be involved with it
Here's a very classic example of how a nano AUM south florida hedge fund justifies its expense ratios (through scamming its investors): https://www.sec.gov/litigation/complaints/2020/comp-pr2020-193.pdf
The advisors to the fund are Finance Professors at UM and despite having no knowledge of the fraud, are still being sued for their pro-forma involvment. Not only is there no upside but there's quite a bit of potential downside as well working for such a place.
A one man HF in FL?
That’s a Ponzi scheme, for sure, at some point.
Might play devils advocat a bit. I’m usually on the other side of these things, but there are people like this out there who have been successful. The lack of formal training is a concern because I do think it’s hard to really understand what’s going on without that. But if the returns are legit, it could be an opportunity to do well, but obviously with huge risk. What if OP joins this fund and puts in some of his own money and makes excellent returns? Assuming you get paid a decent starting salary, could start putting some money in if you believe in the strategy. Plus this is probably better work experience from a cerebral perspective than lots of other jobs. Difficulty is getting passed the sketchy aspect when selling to future employers, but way more engaging than most starter jobs and would definitely learn more. Gives you a story to tell too
Haha bro a good rule of thumb in the industry would be to never be optimistic without deep research and always underestimate (margin of safety)
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