I mean, one toils and toils to get into IB and then try to transition to a HF role which has a single digit chance, and even a lower chance to make it to PM. I'd rather slog off begging for investments into my fund than continue on this path to be honest.
| +43 | HF Start-up salary expectation | 16 | 4h |
| +23 | Undergrad Hedge Fund Programs | 13 | 7h |
| +23 | Navigating pod politics | 7 | 2d |
| +20 | Recruiting from Low-Quality Fund | 2 | 1d |
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| +15 | How hard is it to go from a large L/O to a Hedge Fund (Either L/O or L/S) | 4 | 15h |
| +13 | HC or M&A IB Group for HF | 7 | 3d |
| +12 | The 8 MNPI control gaps SEC examiners keep flagging | 0 | 4d |
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It's become very difficult to raise capital. Even accomplished PMs can struggle to raise 80-100m
World has changed radically. Its not the 90s-2008 anymore... back when it was a cottage industry and more like the wild west... Where reg FD hadn't been as big of a thing yet, passive investing wasn't around really, and all the money was managed in LO equities or your next door broker, so the active L/S strategy was a slightly more innovative product with somewhat more differentiation, and they were gunning for bigger absolute returns or from less mined over niches, and they capitalized on work + information that was harder to do if you weren't plugged in to the right places. So your one off stock picking / obscure investing talent had a bigger shot at an entrepreneurial endeavor that also had massive scale if it worked out right. If it didn't, they escaped with a couple years of fees or maybe a big home run swing. Essentially made their money quick and retired.
Now its very much an institutionalized asset class, and LPs can easily rip apart strategies, simply play the benchmark for pennies, replicate their exposure to different strategies for pennies (TQQQ or Tiger?), and also the access to information / commoditization of basic analyses has leveled the playing field drastically.
The last 5-10yr especially has been quite difficult, with 0% rates and passive reinforcing the winners + spread of information making outperformance vs. benchmarks more difficult, AND we have been through a bull market where a lot of shorting ended up as mostly a drag. Very different market structure and return environment.
Its also quite expensive to set up shop. MITIMCO loves the whole boot strap thing, but its a VERY long road to scale through this way, and see the other issues. Otherwise you likely need to be seeded by a huge check of like $75mn? $100mn? $250mn? to get started in the real institutional landscape. Also need a 3-5yr track record to win your next big checks, and you can't have one LP bigger than 30% of fund because you are seen as at risk of shutting down when they pull out. Also the fund of funds landscape is much smaller because fees on fees was insane most of the time, PODS basically do their job way better anyways, and this used to be a huge flow of AUM for the industry. Also institutional LPs suffer from group think and chase strategies AFTER they do well, but in this day and age, that means market neutral is the only thing people really seek out with large checks.
Market neutral platforms only work when you have a lot of talent putting up different sharpes, and a very tight risk model. Even then, no guarantee (see the recent launches and lower tier pod shops). So starting a shop or platform like that isn't easy - you're basically competing with citadel/etc. and the infrastructure requirements to compete and pay for talent are huge. A single manager market neutral with tight limits, well it kind of kills the purpose because you want 100 teams with different sharpes, but hey there are some who are dabbling with this model.
So what does this all mean... the people who used to have a shot at starting something will instead just go to the pods. They don't have to worry about running a business (huge suck on their time and focus), and will get $1bn to knife fight it out if they are talented. Sure the economics aren't AS good as being the founder, but its close enough risk adjusted for starting your own shop to get a chance at winning % on PnL if you are talented.
This is the evolution of the world, and I have no idea where we will be in 10yrs from now. My sense is there will always be a place for talent that wants to do things their own way, but doesn't want to adhere to the pod structure. Maybe thats a naive perspective idk.
Can people consistently put up attractive absolute returns through a cycle (+15% CAGR over 10yrs), differentiated enough from just buying a levered index / factor? Can people do this while still shorting and not have it be a huge drag? If its primarily LO, what fees do they deserve?
Agree with this but would add that many/most types of sophisticated institutional LPs that have historically invested in HFs don’t invest in pods, so it’s not really pods taking over existing LP share necessarily. It’s more incremental flows completely out of the industry from those existing LPs.
So what type of investors are putting money into pod funds, in your opinion?
I have heard anecdotes that back in the day a senior analyst could just show some allocators a handful of detailed research reports they had done on names and walk out with money for their long/short equity start up.
Bullsht. It was less hard than today, but it wasn't a layup like that.
I talked to my friend's dad about this and he said back in the early 2000s there would be a start up fund every week that salesmen were trying to build relationships with -- this world was just gung ho. LPs just didn't know how to probe the way they do now. At that point, having a quant or risk team was still a novel thing and was not necessary to run a several billions in L/S equity or credit.
TQQQ and on a geometric mean I outperform 99% of HF on a 5 and 10 year period
so what's the point
Raising is much harder than ever. There were a couple hyped SM launches from the past couple years that went nowhere, weren’t able to raise even with pedigree/track record.
How much of that is poor returns as opposed to hard to raise?
Which ones?
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