First, I want to thank a big user on this forum (who shall remain anon) for helping me with my situation at the time.
I am very interested to hear everyone's take in order to refine my belief on this subject, as my view is very much shaped by my personal experience.
For the readers who do not know, I resigned from my start-up hedge fund role to build my coaching business, which has been my long-time passion to help others identify well-aligned career path, save time and money.
I am not going into too much detail, but I left because of the firm’s lack of clear investment philosophy (literally every style that has been described in my previous article is a go at my old shop).
This week I want to discuss with you why I believe most of you should not consider working at a start-up hedge fund. At the very least, not as a first buy-side job.
I will vaguely weave my experience into the discussion points below to illustrate the issues I experienced. With that said, my opinion and experience reflect one of the tens of thousands of hedge funds out there, so it’s impossible to generalize.
Unattractive Compensation
Salary will be below market at a start-up hedge fund, which is then made up by offering a fixed % of fund’s incentive fee, a bonus structure that you don’t get if you work for an established fund as a junior person. The whole bet of joining a start-up is that the fund can grow its assets under management (AUM).
Inadequate Access to Resources
Because of smaller AUM, access to third party resources like sell-side research is limited – something that was valuable to me when working at an insanely high idea velocity environment where literally every company with a pulse is fair game to research.
Expectation Almost Always Grows Faster Than You Can Grow
Human resources are also lacking. I can imagine most start-up funds have this dynamic, where the firm wants you to function as an independently idea generating Senior Analyst ASAP but pays you junior analyst salary.
Zero Stability
Every start-up hedge fund is one blowup away from shutting down. In the last 2 years, we have seen many idiosyncratic events that the world has never experienced before, so you can imagine how difficult it is to be reactive to market regime changes constantly.
Even the best in this business cannot adequately position the portfolio for something like COVID outbreak or Putin’s invasion of Ukraine.
Disorganization
Hedge fund is a business as well. Without resources, the founder / Chief Investment Officer is almost always spread too thin, where she has to analyze stocks, manage portfolio, raise capital and deal with all the operational aspects (such as interviewing junior analyst and fund operation people, onboarding prime brokers, writing fund letters, etc.)
While the senior people have established personal investment process, the firm does not have an established process for junior people to function optimally and receive proper mentoring.
Without a clear organizational process (by the way, I can totally relate now running my own business) in place, it’s very hard to get leverage out of junior people because it ends up being a chaotic free for all – which impacts the quality of research, and worse, decision making.
Lack of Brand Recognition
Every high-profile hedge fund launch has the narrative of a star stock picker from a big hedge fund (eg. Tiger Cub, Moore, Druckenmiller, etc.) taking a few people from their old shop to start a new shop with sizable AUM at launch.
Unless you can hop on one of those trains as an outsider hire, most of us tend to source opportunities with funds that don’t have as much as a brand and are therefore subscale at start (hard to define “subscale," let's say $100 million).
Of course, the founder of these subscale start-ups always paints you a picture that they are on a trajectory to become a $500 million to $1 billion fund, but when you do the diligence, they have been at $100 million for 3-4 years, a giant red flag.
So without the right lineage such as a Tiger Cub, which I consider to be the only golden ticket to raise money in this business today and going forward, more often than not, you are betting on a dead-end fund where the most valuable thing you get paid on is real buy-side work experience.
Investing Skill /= Fund Raising Skill
One of the crucial diligence points in assessing a start-up’s ability to scale is whether the portfolio manager can raise money. It’s easy to assume the PM’s ability to generate alpha, given that’s how they became a wealthy individual and are able to start a new fund in the first place.
The ability to raise money requires a distinctively different skill from generating alpha. Entrusting money to someone else to manage by paying high fee is a big mental hurdle to overcome for investors (the limited partners, “LPs”). It’s 100% PM’s responsibility to convince the LPs to buy into the PM's vision of generating consistent returns. Large portions of start-up funds flake out because the PM is either a great investor or a great marketer, but not both.
Exceptions
With all that said, there are exceptions to the rules. It requires a deep diligence on the founder, the investment strategy, the lineage of the founder, the time in the stock market and many other factors to go into forming a comprehensive decision to bet a few years of your time for a shot at becoming a partner of a start-up hedge fund.
There was a great passage on WallStreetOasis that talks about the difficulty of making it big at a start-up hedge fund. Three things have to align for you:
- The fund has to grow: a function of PM’s ability to pick right stocks, manage risk and raise external money.
- You significantly contribute: a function of your philosophy alignment with the fund, firm having robust organizational process and your work ethic and intelligence
- Founder isn’t an asshole: which you have zero control, but you can do deep diligence on whether she is a fair person and whether people on her team on the prior shop got screwed on bonuses, etc.
If you are interested in learning more about professional equity investing (the "buy-side"), I have two other great articles for you:
+1 SB. I'd give you more I'd I could . I think this post is spot and is a great resource for many people who are interested in breaking in through a startup HF
Thank you so much! It means a lot.
I find this thoughtful but have a different view. While all these are issues one should diligence there are significant advantages.
1. Very hard to get a job at an established fund so being open to start ups significantly raises your odds. The industry is already brutal to get into and so most of the gross additions of new seats come at launch funds.
2. Potentially you have a chance to be mentored by and work more closely with a good investor in a small shop. This is an apprenticeship business in some ways - while not everyone good works for someone good, working closely for someone talented is the highest probability path to getting good yourself. And if you have skills and experience, even if there is not much brand, you'll be better positioned to get your next job than starting at zero.
The early stage nature can cut both ways. As discussed above, it can be no mentoring. Or it can be that the founder needs early employees to work out more than at an established firm (where they had huge budget to hire plug and play people), and focuses on training them more than if they could afford say, a bunch of experienced laterals. I have seen people whose resume would get screened out of traditional big shop processes can get a shot working for say $50k at a small firm and get well trained because the founder needs help ASAP. These people wound up with strong skills and this broke the chicken and egg issue of "can't break in because I didn't work at IB/PE/Big Brand."
Of course this depends on if the founder is a good investor and interesting in mentoring, which is key to underwrite.
3. Getting paid at a large fund usually has some level of politics and lobbying. You may be able to get a higher and more fixed % of the economics, which is very valuable if the fund grows. While the odds are stacked against you, bootstrapping to a big fund is still possible in public markets investing and I've seen previously no name funds make it that way even in recent years. It takes luck, business acumen and investing chops, as mentioned above.
4. You learn about the business issues in the industry first hand, which is helpful for the rest of your career. Knowing how the business side works, how to raise capital, etc, are important skills for the industry, especially if you ever aspire to launch your own firm.
Some of the happiest people I know in the industry are folks who joined a start up that worked out. They have good economics, feel proud of their contribution, got great hands on training, and learned a ton, and they have seats that they'd never be able to get via a headhunter because they helped build the business. On the other hand, as discussed above, probably the majority of these opportunities don't work out. The answer, I think, is that this is most attractive either as a way to break into the industry (if your relevant alternative is not having a seat and you don't have the resume for Viking) or if you feel confident in your ability to evaluate if someone is the kind of founder who can make this work. Thinking about how the person would handle all the issues above is a good component of that DD.
All of the above is good advice and none of it feels wrong to me, but I want to provide a different view.
Thank you so much. All these are really great points!
I did think my PM is a great mentor and a really nice person too. But the organizational issue was he became more focused on fund raising (which he made no progress) over time so I worked with someone else who was not a great mentor and a "free-for-all" investor with insanely high velocity, so it became, as someone mentioned, "lost a lot of hair" situation.
I will not regret getting a foot in the door - buy-side is still buy-side. More real than anything I have ever done in sell-side research, which has its own purpose in an aspiring investor's journey of course.
While a lot of people point to struggling on the business side and being distracted by as the reason their start up HF failed, I do think that's very often true. Your point to how this manifests indirectly in terms of loss of attention and focus, not just directly is an important one for people to understand, I think. Any convo with a start up fund should focus a lot on the business side and if they seem sophisticated about how to grow or at least be resilient.
I'd agree with most of this as well. One point I'd add in response to OP is that brand doesn't particularly matter; especially not anymore (RE: Tiger performance). How quickly a fund can drastically begin to underperform and receive public notoriety for it can swiftly change the trajectory of one's "reputation" or "brand," so I think it largely doesn't matter as long as you start to build a good track record. If you, an analyst, can point to value added ideas and trades you've been able to contribute regardless of the size or nature of the fund, you shouldn't have a tough time moving funds if the strategies align.
I didn't join a startup fund per say but did join a smaller < 10 person team fund and found it incredibly rewarding. From such an early stage though I think it's moreso about the seat you're in and where you can learn the most as quickly as possible vs. trying to join a large, established, name-brand fund for the sake of either pay or stability. Realistically, large multi-strats have just as much risk in terms of job loss should your pod's PM have 2-3 consecutively weak quarters, the same way that it's tough to grow as a start-up; I'd just argue that the entire industry has an inherently higher turnover rate due to performance across the board.
Would echo the inadequate resources part, that's where larger funds can build part of their edge. This is huge in certain sectors especially.
If you're < 5 years into a buy-side career and you find a very smart investor with a strong track record going the start-up route, you have some rapport/trust within your relationship, and there's line of sight to at least try and raise capital with a solid base (> $50m), I think the start-up hedge fund can be one of the more rewarding paths within the public equity sphere out there.
Removed for anonymity. Removed for anonymity.
These are good points. In terms of moving to a new role if you need to - I suspect headhunters won't be very useful, and they certainly weren't for me (as I had an unconventional CV). I think your best bet is networking directly with peers and other buyside folks rather than hoping the phone will ring. But my experience on both sides of the table is that people are happy to have a convo if you seem smart. You probably will be underpaid relative to peers unless the fund really takes off - then it might flip if you contribute and get treated fairly. I liked to remind myself that since I didn't have the CV to get a job at a prestige firm right out of school, getting upset about a short term gap wasn't really relevant to my actual alternatives, and I hoped it would work out over time.
In terms of the best investors working at big firms - I would say there's more of a spread. There are some amazing big firm investors I know as well as some mediocre ones. I've been around long enough that many funds people would have died to work for when I was coming have disappeared (York, Paulson, ESL anyone) or been significantly impaired, so having those roles doesn't guarantee success. Likewise, going through my network, there are some great people at less well known shops - some small, and some that have ground it out to be medium sized. Buffett picked two guys who were relatively unknown to succeed him. I knew one in his prior life and respected him a lot. A lot of the funds people admire today had many years being small. Also, being a good investor, a good business person, and a good mentor are different. If you get the first and the last, you may not get what you want, but you may get what you need. Picking a place where you can really develop as an investor is the most important thing in my mind.
I think all your points are valid. I mainly want to offer ways to think about the smaller funds since for many (including myself breaking in) the relevant alternative isn't a seat at Viking. A major point is that doing the transition to being a PM, managing people, raising money, ops, etc, is hard. You have to underwrite all that at a smaller fund.
Horrible idea - Did this for a year and lost a lot of hair in the process.
Good that I didn't have much hair to work with in the first place
Why don't they raise funds prior to bringing on a team? Seems like they are building funds backwards.
Haha, this is a great question! I can say is, I was hired because they did a raise, but the fund is still small.
In PE, having a team built out makes it easier to raise. Guessing it's similar for HF? There's also a period for onboarding and training new people, building out process, etc...pretty normal to hire ahead?
Most allocators want to see that you've invested in a team (resources) to expand bandwidth and ability... in growth motion it's almost like the chicken vs. egg conundrum of "do I hire analysts and then raise? Or do I raise then hire?" Some allocators want to see commitment of forward trajectory... typically AUM correlates with team members (sometimes but not always)
this is accurate as someone that recently got laid off from a startup fund. Surprise surprise we were long tech and founder was a former VC that hired a few public equity guys.
Ooof, you have me at former VC hired a few public equity guys. Welcome to The Land of MtM
Haha deja vu, same situation just happened with me. VC esque PM that has no business running a public portfolio went balls long tech (concentrated) and is now down >50% from peak...bye bye analyst job. sometime the idiocy in this industry is shocking...how can such dumb people get so rich?
What are your guys' career plans now that you're not at the startup funds? I am joining a startup fund soon that has had a healthy raise and I am currently interning at an established fund so curious what plan B would be considering I will have only ever had buyside experience (albeit very educational, hands on buyside experience).
when I was entering the finance world, the word "smart" was thrown around a lot. I usually think of it in a finance context as someone is a shrewd negotiator or investor. Doesn't neccessarily know everything but sharp and resourceful enough to sniff red flags. My boss was called "smart" since I joined the fund, now all the people who praised him suddenly went quiet.
Did the latest season of Billions air before or after this PM added to his positions...
What PM have the most success then? Them running the fund alone until they show return then hiring a team? I know Ray Dalio did it out of the nyc apartment, but Im not sure if this could be replicated today. What do you guys think?
I am not big on prestige, but the halo effect of Tiger lineage is too hard to ignore. If it's a start-up, I would have only wanted to bet on anyone with a Tiger lineage like Mala, Brennan, Grant, etc.
Makes sense. How does one even get with tiger these days? Roles seem limited.
Not directly related to the thread but what percent of the incentive fee can/should u negotiate when joining a startup fund?
I think 5% is not unreasonable.
Curious on when an analyst typically gains enough leverage to ask for a % of the economics? Does it take external recruitment success before you can negotiate?
I wouldn't even join a start-up if I wasn't offered % economics.
This is why most people should just work for a pod. Minimal logistics and operational energy needed and good infrastructure and resources. Plug and play.
Yea, I can't speak for others. If I worked at a pod shop, I would have voluntarily left in a day.
I would hate working at a pod, but then again would hate shorting in general
Well, your AM designation says it all. Good life!
Just started at a 5 year old fund. Thank you for this.
Also AM, so different struggle I hope.
Disclaimer come from FICC world where we deal mainly with data and not so much sellside contacts.
As someone who has worked at larger and smaller funds/family office setups. A lot of this is true and for sure not the first job to start on buy-side of things. You are 100% correct about the Tiger thing heck even certain MM on your cv people make fun of Tiger etc on here lots lately but reality is this industry works that way and pedigree and fundraising go hand in hand.
The main issue when taking this leap, is one you need to understand whatever your style is, you will need to adapt and almost downsize for the time being. Likewise if things start to go well you need to have a plan to fund raise and have the idea of how to grow the business always on your mind. This gets daunting, but as you said lots of larger funds full of aholes who are daunting as well. Coming in as a Associate PM of course is different but even the jr analyst needs to have this mindset truly, cant chase strategies that do not fit and cant sleep on chances to grow.
As for resources/organization…While some people see it as a pain of clutter, I truly preferred it. I was able to use exactly the resources I wanted, I built all my models and tools how I wanted. I know the full architecture, costs, maintenance etc of all my strategies. So while I do not have infinite resources who build onto like Dalios economic machine, I have finite resources to build my own version my way.
That all said, the main reason I answer headhunters typically is knowing fundraising/growth is always a concern. And the “economics” of a large fund in a good 3 year run are hard to match. Then after a few chats I remember how many assholes exist in larger firms and how many more factors could cause mediocre year where economics suck.
Grass always seems greener end of the day both gigs have issues.
Would you classify a spin-out , around 4years old, spunout from (bluecrest/mlp etc) with 3-4 billion USD in AUM to be a new/startup fund?
Or for that matter , would you classify Exoduspoint to be a new/startup fund?
Anything past $1 billion is not a start-up. So the conversation ends here.
Dick is right that is not a startup at all. That said those 2 funds have way different cultures and path to PM.
Anyone leaving an MLP with that sort of AUM behind them is basically in the same "Tiger category" discussed.
I know multiple people who went down this path in various asset classes / strategies (some fared well and others didn't) and learned a lot from watching their journeys unfold. The observations I have that I think would be additive:
1. Startup hedge funds are a winner takes all game. If you have to ask whether your are part of a winning team, you are probably not. But if you are, it can be an incredible opportunity. Remember that at large hedge funds the founder is reaping most of the profits for adding virtually no value day to day, but because they took risk many years ago; that value gets unlocked when you are helping start a new company.
2. I work in quant, which has different dynamics than what the OP describes. Small quant funds have two really big advantages relative to more established players: (1) the best quant strategies all have very limited capacity, and you can be overweight them at a small fund, and (2) most big funds will not pay you for obvious strategies that they are already trading at max capacity, but you can get compensated for trading them at a small fund. With Rentech being the exception, I've found the general rule of thumb is that (after a few years of experience / above a nominal AUM amount) the larger a quant fund is the less money you will make there.
3. Most founders of startup hedge funds are desperate to hire good people, they are always spread too thin. They obviously can't pay very high cash compensation. For whatever reason (mostly because the industry approach for giving firm equity is lacking - especially relative to Silicon Valley's model), the default is for founders to give inadequate upside exposure via compensation. If you are considering one of these jobs, negotiate, you have a lot of leverage. Negotiate for upside rather than cash (if you are interested in short term cash, don't work for a startup hedge fund).
4. Disagree with the OP on the importance of being a "great marketer". In the hedge fund industry, performance is key, allocators are just performance chasers. After clearing a reasonable AUM figure (a few hundred million) and having baseline marketing ability, very few funds consistently deliver solid numbers (10-15%+) without growing to become behemoths. The reason most startup funds don't succeed is not because they are mediocre marketers, but because their performance is mediocre and not good enough to create excitement. When evaluating a startup opportunity, primarily focus on a PM's ability to generate alpha if you are long term greedy (though it is important to recognize a baseline marketing ability is required, they cannot be terrible at it). They can always learn (or hire for) the marketing part of the business, but the alpha part is much harder.
5. Pay close attention to the fee structure the founder is raising money at. Stay away from meaningfully discounted fee structures, that is usually a big red flag, and sets the business on a difficult trajectory. On the contrary, having an average fee structure of 2/20 or better is a big green flag. For the few people I know who went to work at startup funds, this metric correlated 100% with their success.
Thank you! 4 and 5 are great insights. I have heard argument #4, that makes sense.
Allocators FOMOing is real - It's my personal preference to not associate with capital that piles in when things are good, knowing the same capital will stampede on their way out when things aren't. So I will avoid letting my bias trying to counter this argument.
It's a matter of personal risk tolerance. If you want to hide in the herd, startups aren't for you. If you want more responsibility and want to see the real effects of your decisions, no better place.
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