Starting a HF

I have been in a healthcare SM HF for the last five years and considering moving given lack of upward mobility. I have considered the range of options - another SM HF, MF, MM, and everything in between. One option I have not considered seriously is starting my own HF. My biggest concerns are:

  1. I don't have a LP rolodex (might be the biggest barrier)

  2. I have to setup HF infrastructure - legal, finance, compliance, and trading

  3. I have to hire every single member (which I will enjoy but it will be time consuming)

  4. Lack of experience in setting up HF incorporation and infrastructure documents

Are these valid concerns and are these the reason why some capable HF folks decide not to start their own fund?

Can we outsource parts or all of this work. For e.g.,

  1. LP rolodex: are there consulting agencies that help approach LPs to raise capital on a risk basis (i.e. raise 100m and take 1-2% cut of the raise)?

  2. HF infrastructure: I know part of this can be outsourced - e.g., controlled or finance function

  3. Headhunters to recruit

  4. Known legal firms that help HF startups

Have you guys seen this being done in the past?

Comments (22)

Aug 10, 2022 - 1:10pm
snones, what's your opinion? Comment below:

At a startup HF right now. 

1. Yes those are called placement agents, but there's no guarantee they can get you $ - if you don't have a couple years of solid performance, fundraising will be pretty tough.

2. Yeah you can and should outsource legal, compliance, controller etc but it's going to cost you, which means your breakeven AUM is going to be pretty high especially if you're hiring several people

  • Research Analyst in HF - RelVal
Aug 12, 2022 - 1:20pm

I previously worked at a startup fund. I wouldn't underestimate the difficulty in scaling a fund to a point where the economics make sense (> $250mm). The biggest barrier is LP rolodex. It's a vicious cycle where you need AUM to be taken seriously, but can't get AUM without having AUM... You really need someone (family office, fund of fund, etc.) willing to take a chance and cut a $50-100mm check and you will have to give them extremely favorable terms (equity, revenue share, etc.). After that, you can start raising from other investors.

If you have a 3-5 year track record of outstanding returns it will be a bit more feasible, but still won't be easy by any stretch of the imagination.

Aug 13, 2022 - 8:38pm
desousa, what's your opinion? Comment below:

If you have a 3-5 year track record of outstanding returns it will be a bit more feasible

How would one go about starting their track record? I've read from various posts on here that your personal account has little to no importance to potential investors, regardless of the amount of capital. Also, what would you consider "outstanding returns"?

Semi-related question - Is it realistic for a successful (non-professional) trader to start their own fund?

I'd imagine not having industry connections or a college degree would make it exponentially more difficult, given your lack of credibility, to raise capital. Although my counter to that would be how good are your returns, how good are you at risk management etc..

If you have a better track record, better risk management & better returns I'd assume a potential investor would be more inclined to allocate funds with you vs someone with a degree.

Anyway, sorry for the barrage of questions but if I can get them answered without creating a topic on its own I figured I'd try. Thanks! 

Aug 13, 2022 - 9:31am
druckmiller, what's your opinion? Comment below:

Same boat.

Working at a small shop. Exit opps are go to a bigger shop, go to sell side(highly unlikely, only if I blow up) or start my own.

Really leaning on my own. Only thing I need is collateral to post with counter parties and a bit of regulatory bs.

Aug 13, 2022 - 10:29am
MMPM, what's your opinion? Comment below:

Unless you have a sterling pedigree/track record, launching your own HF is not realistic. 95% chance you struggle with $5-50mm AUM for 3-5 years and eventually shut down as you fail to scale and the economics are just not there. That path used to be very doable 20 years ago, but allocators and regulatory barriers have raised the bar materially.

Aug 13, 2022 - 9:24pm
wso_user, what's your opinion? Comment below:

Do people really do $5mm AUM? That seems nuts especially since if you have done halfway decent in your career one should have saved more than that personally 

Aug 14, 2022 - 6:17am
MMPM, what's your opinion? Comment below:

Most of these guys start with $5-10mm friends and family money thinking they're special and after a great 3 years of performance, allocators will give them capital. Most of the time, even if performance is good, allocators won't care because the fund is too small and lacking in infrastructure. But guys keep trying because they hope they'll be the unicorn that pulls it off.

  • PM in HF - Other
Aug 14, 2022 - 8:47am

Would say #1 is too hard of a barrier to break for most people, this is why MM are so popular now.

Know a few people who started with $5-10mm as mentioned, but 50-80% of that capital was their own, so we talking people with 10 years experience in a PM role. From there in 5 years grew 3x and were good.

Know a total stud PM who started with 100-150, 15% was his own money. If you are like that guy guessing you are not on wso asking this.

Aug 14, 2022 - 9:14am
m_1, what's your opinion? Comment below:

The hardest part of what you mentioned is the TEAM.

You can't outsource hiring to a headhunter. 

Building culture, hiring the right team, etc is incredibly difficult. 

I've hired hundreds of people and still feel bad at it. Ask any entrepreneur that has built something to good ebitda #s and they'll tel you the same thing. 

Hiring is a joke when you have the power of a 10+ year old HF with billions of sticky AUM. 

MUCH harder when you're a start up. 

How do you get the guys that want to go to Balyansy when you have a sliver of their AUM and need AAA tier talent?   :-)

Raising capital isn't *that* bad provided you have somewhat of a track record and are willing to pound the pavement hard enough. The right team - especially if you can get them interested pre raise would make your life much easier. 

RE: team think through possible cofounders and pitch them. Piggyback on their track record and skill sets. Even Blackstone's founder had to use an older cofounder partner to piggyback on!!! 

Most Helpful
Aug 14, 2022 - 11:51am
hominem, what's your opinion? Comment below:

I have no personal experience but I have watched friends start their own funds:

1. Started with $10mm from his personal network. He now runs $2bn. In his late 20s when he started. Entire team is 5 people.

2. Started with $10-15mm from his personal network. He now runs $300mm. In his early 30s when he started. Entire team is 5 people.

3. Started with $5-10mm from his personal network, including some of his own. He now runs $300mm. In his early 30s when he started. Entire team is 4 people. 

4. He started with less than $10mm. He runs $1bn. He was in his mid-20s when he started. Entire team is two people (this is not a joke, seriously).

I can also tell you about countless other friends / friends-of-friends that started but then shut down. Based on these data points, most shut down not because of poor performance but because they couldn't raise enough capital to get to scale that they were happy with (i.e., instead of running $500mm, they were running $50mm after five years). They all grew impatient after 4-5 years and felt like it was a futile chicken-and-egg problem that they couldn't solve for (i.e., need to be big to attract capital but can't get big if there is no capital). 

So, in the end, like others have pointed out, odds are against you. But it is also all about your own expectations. 

Aug 14, 2022 - 12:04pm
dickthesellsider, what's your opinion? Comment below:

Great data points. For the 4 success stories, were these all one-man shops until they got to reasonable scale or were there juniors who waited that long (5+ years) for the reward as a partner for joining at the start? 

Aug 14, 2022 - 6:02pm
hominem, what's your opinion? Comment below:

None of them had analysts at launch. I forget the exact timing but it was several years before they could even afford bringing on an analyst. 

Interestingly, none of the funds actually needed analysts that early on, particularly when budgets were so tight. But, again, going back to the chicken and egg problem, they all felt compelled to hire one to show prospective investors that they were a "real" instituonal fund or at least in the process of becoming one (as opposed to being just a dude with a Bloomberg working out of an office above a donut shop).

  • Investment Analyst in HF - Other
Aug 14, 2022 - 3:27pm

Could you share more about their setup at launch?

  1. What prime brokers were they working with at inception? GS/MS/BAML/etc. or managing from alternatives such as Interactive Brokers (I know it has its HF platform). Wondering whether it's feasible to work with prime brokers with $10M size.
  1. How long did it take for them to scale?
  1. Were they classic L/S equity or different/more niche strategies?
  • Intern in AM - Equities
Aug 16, 2022 - 12:46am

what were their backgrounds? did they start at a HF after college or transition from banking/PE/other? Do you think a person from a Multi manager HF had a better likelihood of branching out than from a single manager HF?

  • Analyst 1 in IB - Cov
Aug 16, 2022 - 8:30pm

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