What's keeping you from starting your own (small) HF?

Unlike private equity where you need years to nurture relationships, public markets investing is something you can do as soon as you feel like you know the ropes and have found some kind of success in the field. You can even start with $200K --- realistically you have more as your start capital --- and take some leverage to boost your returns, if you REALLY pick stocks well.

IMO setting up infrastructure may not be a huge concern if you are a fundamental investor and just manually place orders with your brokers. All you need is a laptop and internet. Maybe a buddy to start it with. 

Anyone chiming in? 

Comments (12)

Most Helpful
Jul 5, 2022 - 7:31am
Shadows, what's your opinion? Comment below:

If u want to trade personal money, u can. But very risky, u will have a down year someday for sure.

If u want to setup a true HF, I think you highly underestimate middle/back office + legal/compliance. Setting up a fund and getting agreements from local regulators is a pain.

Then u also have to set up the structures in a proper way (either a LP or a fund/investment firm) so u need layers, if u see long term u have to build a tax efficient structure top, so again more legal costs.Once u have done this u need to hire at least 1 MO/BO people, and 1 compliance guy.

U also have to set up an ISDA with a prime broker to take leverageU have to setup a custodian if u want to trade cashU have to find a company to validate the NAV of the fundTo trade u need to setup things with a few brokers and/or banks

If u want outside clients u need at least an office and a sales person. But most institutional clients want an autonomous risk officer and a board overseeing the company

Plus all the standard pain of having a company like an accountant and all the administrative stuff

Jul 5, 2022 - 8:21am
GoingToBeAnMD, what's your opinion? Comment below:

I've looked into this and I think you're woefully underestimating the startup and BO costs. This was a couple years back now, but when I looked at it, the startup costs alone were like 1 million and the ongoing fees were something in the 200-250k range. So you have to be prepared for that before you're ready to even think about soliciting for clients. 

Starting an ETF might be a little quicker and less expensive - I've looked into that too - but that's a whole other ball of wax. 

  • 2
Jul 5, 2022 - 8:39am
herzyherzy, what's your opinion? Comment below:

Most has been highlighted but people largely forget hedge funds are businesses... like any other business the start-up costs and everything from fund admin / custodian / prime / trading costs are pretty substantial... typically these are costs that can be absorbed by management fees, so take 1.5% multiplied by AUM and you get a rough ballpark of gross "revenues" to cover costs, not withstanding what you'd ideally need to live on (base salary). Not entirely sure what these costs look like now but just knowing what a Bloomberg seat costs per year is pretty hefty (> 10% of a $200k asset pile). Then getting real, attractive leverage at those levels probably isn't as easy, borrow on shorts won't be cheap, and then yes like you said "pick stocks REALLY well." Most hedge funds on the fundamental side at least are getting slaughtered this year. What's your edge? And "edge" simply cannot be "nimble and small," has to be something replicable at scale.

More realistic setup would be ~$10m minimum, probably closer to $50m AUM to be comfortable and covering costs with no issue. Bear in mind the AUM/allocator environment as well... if you're managing < $500k, most larger institutional money managers aren't writing checks for less than that and aren't going to be willing to be > 50% of your investor base. Just something to keep in mind - at the smaller levels it's going to have to be your own / family & friends / returns based AUM growth. Might be stickier but also a bit more pressure I'd say to generate returns.

Something I've yet to see highlighted and this ties into the edge comment I made... what's your track record? Any schmuck with $200k can try to generate returns and some guys probably found a bit of success from ~2012 - 2019... the last 3 years have more or less highlighted a fierce shift in alpha generation among some of the top managers. The days of levered ARKK long / shitco's at ridiculous valuations seem to be behind us to some extent. What are your risk parameters? How do you manage a drawdown? Not saying this isn't a solve-able question and problem, but these are answers and process-type obstacles that need to be sorted. If the $200k is your own, then who cares? Lever up and trade whatever you want but a "hedge fund" by definition is structured in a way to generate outperforming and "sustainable" (I put this in quotes as the industry has recently not been able to achieve this) returns, net of fees. The base-line infrastructure costs are enough to discourage at the sub-$1m level, but beyond that developing an edge and process likely costs both mental and paper capital, too.

  • Analyst 2 in IB - Cov
Jul 5, 2022 - 10:31pm

A professor of mine mentioned "your strategy must be scalable" when I was attending his class. He didn't elaborate. 

What exactly do you mean by scalable? If I buy and hold, does it matter? 

Jul 6, 2022 - 12:15am
dickthesellsider, what's your opinion? Comment below:

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