PMs - would you start a $50M equity L/S or LO fund if given the opportunity?
Hypothetical setup
Terms: 3y lockup, 2 and 20 fee structure
Team: you + 1-2 juniors at $120k base max (optional if not needed)
Strategy: whatever you're currently doing, just has to be in public equities
Questions
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Do you leave your current gig (assume PM or senior analyst) to do this? Why or why not?
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Why should an incremental investor give you money? Would you give money to another fund (under identical parameters) based on that pitch?
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If you answered "no" to 1 and/or 2, is there a level of AUM that will allow you to credibly say "yes"? What do you spend the incremental budget on?
I think it's more realistic to assume you won't get paid even the base comp. Even so, that's a good setup for many who can afford 3-5 years of no salary to sustain the biz. The answer to your question highly depends on your current job/comp.
Do you have children? How expensive is your lifestyle?
If you're partner/PM at a SM HF earning 2MM+ in a good year, that would be difficult to switch.
Launching has so many inherent risks - luck and industry timing can play an important role.
Important to note also that the setup you mention is very difficult to get. It's not that you can easily get these terms. You'll prob need a 7-10 year TR at a brand name fund or 15+ TR at a median fund to raise at these terms (or of course know some high net worth folks).
Thanks, agreed on all points to consider.
The real question I'm trying to answer is whether there are (m)any folks who believe they are doing something in public equities that:
1) they (and others) could credibly expect to generate alpha in today's world of the super platforms,
2) is replicable without the resources of a $1B+ fund, and if so
3) what minimum AUM scale they require to credibly deploy this process, and what they'd spend the budget on
I know a fund around that size (sub $100mm) that has consistently crushed every index for the past 5-10 years with zero tech exposure. It is him and his analyst. He focuses on microcaps that larger funds can't invest in and where there is little sellside coverage, so he has clearly found a pocket of market inefficiency that he is exploiting by doing traditional fundamental research. But the problem is that his strategy can never scale. But he has built a solid little business for himself and has done well for himself.
Have also heard of a few of these examples but they are never scalable. Is this Alta Fox?
Alta Fox is a ~$500mm fund now.
Assuming you can scale to $100-200M, would you really want much more as a founder?
Charge 1 & 20, let’s assume you can do ~15% annualized over LT with perf kick in over 5% and high watermark. Depending on vol profile, year-to-year outcome will be a bit different but you can roughly expect $2-6M p.a. Your capital base compounds and after 10yrs you’ll be managing $500M+. Of course doing 15% is no joke, but since you say that this is a real niche that can be exploited with consistency. Outer year returns might suffer since now you’ll have to graduate to more efficient mid caps, but at that point you’re likely worth $100M+ if you reinvested your capital into your fund and continued to earn fees on scaling AUM.
Total autonomy and after $200M+ you can prob start to hire an analyst or two. If you’re good at this, what’s the rationale NOT to do this and decide to hop around the pod world or lick CIO buttholes at large SM HF?
Not many are legit skilled enough to do this, I think. Or, if they're good at the pod game, they can make multiples of that in a single year and retire to be a racecar driver or cheese maker, if they enjoy that more than stocks.
Yes. My couple of friends who run small funds in that sub $500mm range have all stopped giving a shit a long time ago because they have made so much money personally. All of them, as I have mentioned in other posts, run a small team, underpay their analysts, and keep all of the incentive fees for themselves. Now all they do is invest in safe things and keep the gravy train going for as long as possible before fading into oblivion. Half the time they are on vacation somewhere (OK, that is only half true, but their intensity and drive is a quarter of what it was when they first started for sure).
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