I have some connections and was able to get close to 500,000 in soft commitments. I have my own investment strategy and working for someone else implementing strategies I don't believe in sounds to me like a waste of time. The only benefit I see for me in being employed in the Industry (IB, PE whatever…) is to add to my resume to impress potential investors that I know what I'm doing.
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Btw, I am looking at starting Luxemburg fund which will cost around 20k to set up.
Short answer: it's a bad idea. A very bad idea
To quote myself from this thread (which has other good comments you should read if you're seriously thinking about this) about a guy joining his friend's one man hedge fund, you would be the OP's friend in this example. This is a bad idea and not going to help you differentiate or look serious to investors, if anything it completely takes you off the track to ever managing "real" money unless you somehow put all of that $1m into the next Facebook at seed or some equally unlikely outcome that's impossible for you to optimize for. $1m is not a hedge fund, it's a larger than average PA for some of the professionals browsing this forum. You will have no real track record to raise off of unless you somehow raise friends & family money over time to get serious AUM, but if you had a network capable of that you probably wouldn't be starting at $1m so the point is moot.
Not sure what you mean you worked for someone else "implementing strategies" - was it a real HF analyst role or not?
Where you working on idea generation?
Where you managing any sort of P&L?
What do you think your edge is? You haven't shared much of your background other than not having done IB/PE, so my guess is you are a) from within industry w/ relevant exp related to a particular sector/asset class, b) just working in your HF role, which if your answer to any of the above 3 questions was no, is not helpful, or c) another student who just finished their summer internship, feels like hot shit, and after reading how some of today's titans got started 40+ years ago with a few million and a dream thinks they want to do the same (which is impossible today).
Sorry to rain on the dream, but I think better that than encourage you to go off and try to unprofessionally manage a small chunk of change that will achieve nothing even if you got 5x-10x in a few years but would undoubtedly leave you in a shitty spot if you lost 100%. The asymmetry of risk/reward here for your own long-term career viability is so off it's not remotely worth thinking about IMO
Hey man, first thanks for the detailed reply!
I have 2 questions for you if you don't mind:
1) I did read about successful managers who have started with a few million and scaled real quick. Why do you think it is not possible in today's environment? What has changed in that regard?
2) I tought of working in the industry while I manage this (indeed) tiny amount to build a track record. Would that make sense? Or should I not bother since it's a small money base and might not be taken seriously by future investors even if I perform well?
Thanks
1). Generating alpha has become significantly harder today vs even 10 years ago. If you don’t understand that already, it’s a problem.
2). You won’t be able to work any serious front office job and manage a fund. Glossing aside the compliance issues, how could you spend the amount of time required to beat the market while working a serious job where you could learn?
Or, you could also learn some valuable skills for future money management aspirations? And get more connections which will aid that goal. Lol
It's an unfortunate byproduct of the undergrad recruiting hivemind experience that everyone starts to believe that getting experiences are just nice little pins to knock over on a resume, instead of going into them with a real thoughtful goal.
When I decided to launch my own firm on the PE end of things, I received feedback about it being a dumb idea. I didn't have that much money and we made it work. I did have a track record of building/selling companies though. We also started off by doing small and messy deals where we had a ton of edge.
But, I think the problem with hedge funds is that they require huge scale from the onset and do not have dynamics that make scaling all that doable unless you start with ~$250m+.
The others in this thread made good points too.
I think you should consider an asset class that lends itself to going from close to 0 -> $$$ more easily. It's REALLY tough in HF nowadays. You pointed to examples of hedge funds, but that was back when the asset class was tiny compared to what it is now. Not remotely comparable really as the dynamics are very very different.
Don't give up on doing something entrepreneurial though. Just think of a better idea where you can have REAL edge. Starting a fund is usually not a great idea btw...I don't think they are very good businesses in general for a number of reasons.
Thanks for the reply.
I do not want to give up the entrepreneurial vision, and for me, that vision is based on a specific investment strategy taught to me by a very experienced mentor. I will need a way to be able to invest long term in public markets, on my own discretion, and be compensated based on my performance.
The only two options I have in mind are either:
1) to start my own fund, build relationships with capital raisers and find big individual investors.
Or:
2) work my way up to a PM role in a big asset manager and receive a big enough allocation with performance-based comp attached to it. Then maybe break out on my own.
About PE:
IMHO, I think that PE just became very popular recently, and in general it's much easier to convince people that you have an edge since no fund is quite the same as the other.
In PE, there is no single standardized and uniform way of comparing different funds or even calculating fund performance (IRR, NAV, P/L etc.) since assets are not marked-to-market and there is a variety of asset types even within a single fund.
I believe these two points account for the relative ease of scaling a PE fund comparing to a HF.
This question has been asked a million times before and every time we always reply that the odds of success are virtually zero. But hey, you know yourself better than we do; so if you really believe you have the knowledge and contacts to pull it off, then go for it!
But I will say that if you really had the knowledge and contacts to pull it off, then you probably wouldn't need to ask this question to random people on the internet. You'd be in a position to ask your mentor, or your former boss, or your relative who's a partner at a HF, or a former coworker who already started his own fund, or someone like that.
Adding to the discussion, if one were to be serious about bootstrapping a fund (as even working in the industry, you're not allowed to advertise your track record in a lot of cases):
1/ how would you obtain an audited track record (just interactive brokers pro a/c?)
2/ how long of a track record would you use before you start raising
3/ what would be your financial structure
4/ who would you contact? Is there a list of family offices, hnw investors, first loss platforms, seeders etc
Was thinking about the same thing. Hopefully, more people chime in. Maybe set up some sort of incubated fund that gets their filings audited?
Absolutely. There are some pretty low cost fund structures if one is willing to invest a bit, and you can have an independent auditor to calculate your NAV for less than 5K annually. It takes a bit more searching but the solutions are there.
Some people here don't understand that ~80% of fund growth comes from aggressive marketing and find-raising. You don't have to beat the market to be successful, you just need to be able to articulate your investment philosophy clearly and build trust with investors.
I have contacts who are partners at multi-billion funds and FO who never beat the market but cater to their investors preferences and risk appetite.
People like their strategy and most importantly trust them. That's really all that matters in most cases.
Honestly, if the entrepreneurial itch is that strong, you're better off starting a VC fund/angel group than a HF even though the odds are just slightly better. The real issue isn't your initial lack of capital or investment thesis, it's the fact that you don't have an established fundraising flywheel. What exactly is your strategy to meet and close LPs, from HNWIs to institutional investors? If you have a true and tested process and secret sauce to do this then go right ahead, but I highly doubt you do, since you wouldn't be starting off with less than a $1M in the first place. As someone who has a tremendous amount of firsthand experience, let me tell you that the vast majority of people drastically understate the true difficulty of fundraising. It's one of the hardest, most frustrating processes in probably all of finance
True about fundraising being hard; but also everybody here also massively massively massively underestimates how much back-office work a hedge needs. People think they're going to open a one-man hedge fund and spend all their time stock-picking. Except until you get enough money to hire a back-office team, you're going to spend 70% of your time working on answering investor questions, SEC compliance reporting, negotiating leverage terms with your broker, reviewing the broker statements and calling the broker to figure out why its missing a trade you thought you made, reviewing each trade confirmation again to make sure nobody fat-fingered a mistake in the price, working around issues in your trade entry system once you realize tracking your pnl in a spreadsheet isn't good enough, negotiating with vendors to get datasets and research, trying to figure out what to do when you realize your broker is giving you crappy execution on your trades cause they think you're too small to notice, etc etc. You're competing against traders at big firms who can spend 90% of their time thinking about trading cause they have a dozen people in back-office to handle all those details -- how are you going to compete with them when you can only spend 30% of your time thinking about trading?
And then there's still the issue that even if you spent 100% of your time thinking about trading, it's still really really really hard to come up with good trading ideas. Far harder than most monkeys here think.
That's why it makes way more sense for the OP to start a VC fund than a HF because there are platforms like AngelList, which takes care of most back office operations for emerging funds for a pretty reasonable fee. However, the downside is that since the barriers of entry to starting a VC fund isn't particularly high, there are a lot of frankly shitty funds out there chasing the few good deals, so the competition in the early-stage is an absolute blood bath. Basically, don't start any type of fund unless you have a rolodex of LPs capable of writing 7 figure checks that you can quickly knock off before you even start. Juggling fundraising with everything else is mission impossible and completely insane
I'm not so concerned by this, I've seen several one or two person hedge fund launches that abstract away the admin layer by outsourcing this. There are services available and they're not expensive (relative to what you'd pay for data anyway)
This is a well established formalized process...
All in cost for the first year without cutting corners is around $250,000. Not including the costs of ongoing service providers or operating expenses which you are going to want to capitalize over time and have investors bear the cost. The total process may take upwards of 2-3 years depending on your incubation fund returns and how much investor capital you desire.
If your process is successful you could apply to MM platforms yet the idea of a "one man" hedge fund is a misnomer for many people who consider it. If you are simply trading in a personal account on behalf of your friends and family it isn't a hedge fund. More importantly this is not legal advice but if you have to ask you are likely to lack the ability, the network, or the experience to do it on your own even with the capital. Formally registering with regulatory groups and complying with various regulatory measures, obtaining a prime broker, engaging in trading methodologies not available to the retail public etc...should be the goal if this is serious; otherwise you could just launch a small registered investment advisory shop instead.
Before even setting up an incubation fund, would it be possible to ask for friends and family money based on a personal a/c track record? What about using a personal track record to source a cornerstone investor, then setting up the incubator fund.
Yes to both but there are limits that may vary based on jurisdiction and your fund formation process. For the sake of simplicity I left that out.
I'm not a legal advisor but I've been on this path before. There are law firms which hold business development events to cover this type of information that you should seek out.
Anyone seriously thinking of this should really think about any established partners in the space (brokerages, institutional investors...) and apply to a new manager program of which there are many.
Alternatively, kill it at work and get seeded by your company so you can use someone else's operations to support your process.
Hey mate, I set up a few funds myself and I while I encourage you to do that, I would suggest not setting up the fund in LUX since audit, legal etc. fees will eat up your returns. In LUX it is not worth it unti you have at least 3 million, I would start in another country like Spain or Italy where those costs will be much lower. Also potentially do not start with a UCITs fund, where you'll fine minimum AUM requirements as well, look into FIL vehicles.
Hi, I'm referring to a Luxembourg SLP find structure. It costs around 24K to set up approx. 15K in yearly operational costs.
UCITS is obviously not an option.
Are the costs in Spain/Italy lower than that?
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