Four college kids started a hedge fund. Should I invest?

TBT: Originally posted August 2012

One of the biggest problems with having large corporations as clients is that there’s so much crap you’re not allowed to invest in actively in order to prevent any potential allegations of insider trading. There’s also a bunch of rules and paperwork that, honestly, few bankers have time to keep track of.

As a result, a lot of bankers just stick their money in ETFs (or a nice piece of Hamptons real estate) and forget about it. (I admit it, most of my money’s in ETFs right now.)

But let’s face it, we all know that you haven’t made it until you pay more in capital gains tax than in ordinary income tax. Passive investment is boring and is largely for betas and scrubs whose 401(k) is their largest source of liquid capital ( psssh!).

So as you start to accumulate capital, if you want to get those big returns, you eventually have to find someone to manage things on the personal investment front for you.

This isn’t easy. No-name firms and individuals deliver inconsistent results and are sometimes shady. Bulge bracket firms deliver consistently shitty results and are consistently shady. And you're never gonna get personalized attention unless you've got $50m+ (which I don't have) or you are one of the larger clients in a small shop.

To this end, I've been doing a little due diligence lately, and thanks to this article (http://nymag.com/daily/intel/2012/10/worlds-most-oblivious-hedge-fund.h…) I uncovered a real gem that I wanted to share with you guys.

Presenting Lumina Investments (http://www.luminainvestments.com/), a group of college kids from UNC (but UNC Wilmington, not UNC Chapel Hill). And one guy from East Carolina University. (I always thought the Carolinas were divided into North and South, but I admit being a tad fuzzy on those southern states.)

Anyway, Lumina provides “global macro event-driven investing,” which sounds like a pretty good idea. Of course, they’re not the only global macro shop out there. So what are Lumina’s points of differentiation?

Well, one of their goals is “performance during macro events,” which I take to mean that when something is going on in the world, they try to make money on it. That’s the kind of thinking I want in the guys who are managing my money. So far, so good.

But that’s not all. They also aim for “capital preservation during non-event environments”. By “capital preservation”, I assume they mean that they don’t come to work on slow news days. I would hazard a guess that they switch over to “capital preservation” mode during midterms and finals as well. Overall, I approve of this. If the guy who manages my money doesn’t know how to make money in a steady market, I don’t want him trying.

But more importantly, I can’t find a single thing on their website I disagree with. Listen to the CEO, Elliot Carol, who says in big screaming quotes on the front page: “Right now, macro events are driving the market. We believe this is the new normal.”

Now, anyone who was around 10/20 years ago would probably also say that it was the old normal. But let’s not split hairs. This is a pretty sage statement for a 21-year-old.

Let’s check out the head of investor relations, who says, “When it comes to investor relations, Lumina’s primary goal is to maximize transparency between our investors and the investment team.” Now here’s a man who knows what investor relations is. Nicely played.

I read the quote where they admit to having less than a million dollars under management, so I was still a little wary of handing these kids my money until I saw that two of them have passed the Series 65. There’s a picture of them wearing actual suits (and even gold tie clips). And there is a Firm CRD number proudly displayed at the bottom of every page. So you know these kids are serious. At least serious enough to have paid the $300 CRD fee to FINRA.

You gotta admit, these kids are douching way above their weight. I wouldn't be surprised to see this level of douching out of Dukies or UNC-Chapel Hill, but Wilmington? I bet panties are dropping all up and down the Carolina coast. (Hopefully not all of them are size XXL from WalMart.)

The only problem is that I can’t tell exactly what Lumina Investments is. Apparently the director of research and investments, Zach Cefaratti, said to the reporter, "We’re not playing around here. This is a serious hedge fund, doing serious and big things. This isn’t a joke."

But after the story, the firm said on Twitter: “To clarify, Lumina isn't a hedge fund, it's an IA firm. We don't turn on the lights w/o asking our compliance guy.”

But, regardless of what they are, the press believes in this "serious hedge fund" and the "serious and big things" they are doing. At least, the hometown press does. A quote on Lumina’s webpage from the Greater Wilmington Business Journal says, “Both innovative and conservative, these young men believe that their strategy will create long-term success.” So the hometown paper reports that these kids believe in themselves. You can't get much more glowing praise than that.

But what do folks from the big city think? Well, no less a personage than Kevin Roose (New York Times alum, writing for New York Magazine) says, “We don't typically provide investment advice, but trust us on this one: Get on the ground floor, if you still can.”

At first I had a suspicion that Roose’s quote was meant as sarcasm since it was the last line of a not-exactly-glowing article, but I was reassured once I saw that Lumina had stuck the whole quote on its front page as an endorsement from New York Magazine.

I don’t typically take investment advice from journalists, but maybe Roose is onto something. These kids have a really unusual combination of traits. Youth. Passion. A website designer. A passing familiarity with investment buzzwords. The balls to wear contrasting collars while still in college. And a near-total lack of self-awareness that promises, if not outsized returns, at least an outsized opportunity for entertainment.

I’m thinking of calling them up this week and asking what their minimums are. It might be worth it to become a client just so I can watch the fun. What do you monkeys think?

 

What frustrates me most is their simple lack of ability to present themselves in a serious manner. Being young/inexperienced is no excuse for poor presentation. If they spent a little more time thinking about how to pitch their strategy and how to portray the details on their site, people wouldn't be laughing at them as hard.

I'm all for taking risks and making mistakes, but without common sense the risks and mistakes can dig a deep hole that's difficult to get out of.

 

Some other neat thoughts about Lumina: 1) They have $2 under management but the investment minimum is $100,000 2) The actual 2 owners of the fund aren't mentioned... ever 3) They never identify what asset classes they invest in 4) This has to be kind of common for douchebags... how'd they get so much media exposure? 5) Is this the best Wilmington can do?

I hate victims who respect their executioners
 
BlackHat:
Some other neat thoughts about Lumina: 1) They have $2 under management but the investment minimum is $100,000 2) The actual 2 owners of the fund aren't mentioned... ever 3) They never identify what asset classes they invest in 4) This has to be kind of common for douchebags... how'd they get so much media exposure? 5) Is this the best Wilmington can do?

UNC-W is a pretty underrated party/beach school. So it has that going for it...

"For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."
 

This is exactly what all macro investors are like. I've never met an intelligent (or successful) one in my life; these kids fit right in.

Buying undervalued businesses never goes out of style.

All I care about in life is accumulating bananas
 

"No-name firms and individuals deliver inconsistent results and are sometimes shady. Bulge bracket firms deliver consistently shitty results and are consistently shady."

I laughed. Also, I've signed up for their newsletter each time I've seen this mentioned in a WSO thread... so I'm currently at three.

GBS
 

Why is everyone hating on these guys?

  1. They had the balls to go out and do something and try to make something of themselves.

  2. Bill Ackman started a hedge fund straight out of Harvard Business School and people laughed at the idea. Pretty sure no one is laughing now.

  3. Sure, they have $2 dollars in AUM but that's not to say it will be there forever. If they can show results from their own returns, they may have a better shot in getting more AUM.

  4. WSO should support these cats because we're all typically young and at that age where we're trying to make it and stand on our own two feet.

 
madmoney15:
Why is everyone hating on these guys?
  1. They had the balls to go out and do something and try to make something of themselves.

  2. Bill Ackman started a hedge fund straight out of Harvard Business School and people laughed at the idea. Pretty sure no one is laughing now.

  3. Sure, they have $2 dollars in AUM but that's not to say it will be there forever. If they can show results from their own returns, they may have a better shot in getting more AUM.

  4. WSO should support these cats because we're all typically young and at that age where we're trying to make it and stand on our own two feet.

It doesn't take balls to just ignorantly jump into something. I'd respect them a lot more if they had put their time in and had a atleast a couple years in the industry under their belt.

There's a big difference between what Ackman did and these kids. First he had work experience, and second, HBS MBA is in a different ball league from these guys.

 
whitemamba1309:
madmoney15:
Why is everyone hating on these guys?
  1. They had the balls to go out and do something and try to make something of themselves.

  2. Bill Ackman started a hedge fund straight out of Harvard Business School and people laughed at the idea. Pretty sure no one is laughing now.

  3. Sure, they have $2 dollars in AUM but that's not to say it will be there forever. If they can show results from their own returns, they may have a better shot in getting more AUM.

  4. WSO should support these cats because we're all typically young and at that age where we're trying to make it and stand on our own two feet.

It doesn't take balls to just ignorantly jump into something. I'd respect them a lot more if they had put their time in and had a atleast a couple years in the industry under their belt.

There's a big difference between what Ackman did and these kids. First he had work experience, and second, HBS MBA is in a different ball league from these guys.

I'd add that Ackman actually had a legitimate strategy when he started Gotham.

All I care about in life is accumulating bananas
 

If this thread was serious bankerella automatically just lost all credibility

hey guys, let's all invest on what people tell us instead of stuff like track records or investor experience! makes a lot of sense bankerella! u fucking idiot

 
Best Response
Press0:
If this thread was serious bankerella automatically just lost all credibility

hey guys, let's all invest on what people tell us instead of stuff like track records or investor experience! makes a lot of sense bankerella! u fucking idiot

If you had any inkling that this thread might have been serious then you lose all credibility.

"For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."
 
duffmt6:
Press0:
If this thread was serious bankerella automatically just lost all credibility

hey guys, let's all invest on what people tell us instead of stuff like track records or investor experience! makes a lot of sense bankerella! u fucking idiot

If you had any inkling that this thread might have been serious then you lose all credibility.

Just goes to show how little respect and faith I have in bankerella. some girl with almost 2k posts constantly trying to get attention from college and high school kids on an internet msg forum? Pathetic.

 

Ackman didn't have experience.

“Everyone told me it was a really stupid idea to start my own hedge fund right out of business school,” says Ackman of the idea. “That’s how I knew that it was a good idea.” His father was opposed to the idea and encouraged him to get some more experience before starting his own fund. It didn’t matter what anyone said, Ackman was going to do it anyway. He was “daring to be great.”"

Ahuja, Maneet (2012-05-01). The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (Kindle Locations 2708-2710). John Wiley and Sons. Kindle Edition.

  1. Just because he went to Harvard Business School doesn't mean automatically he would be better than these guys. I went to Stanford's bookstore and looked at all the books within the Business School. All of them were really simple books (i.e. Benjamin Graham). Just because you go to an elite school doesn't mean you have the exclusive knowledge.
 
madmoney15:
  1. Just because he went to Harvard Business School doesn't mean automatically he would be better than these guys. I went to Stanford's bookstore and looked at all the books within the Business School. All of them were really simple books (i.e. Benjamin Graham). Just because you go to an elite school doesn't mean you have the exclusive knowledge.

Reading all the same books as a Stanford grad != being a Stanford grad. You know those people who guide you and give you insight? The professors? Yeah... kind of an important thing.

This to all my hatin' folks seeing me getting guac right now..
 
Cruncharoo:
madmoney15:
  1. Just because he went to Harvard Business School doesn't mean automatically he would be better than these guys. I went to Stanford's bookstore and looked at all the books within the Business School. All of them were really simple books (i.e. Benjamin Graham). Just because you go to an elite school doesn't mean you have the exclusive knowledge.

Reading all the same books as a Stanford grad != being a Stanford grad. You know those people who guide you and give you insight? The professors? Yeah... kind of an important thing.

I recently graduated from a school in which one of our professors created Portfolio Theory. But Goldman Sachs and J.P. Morgan aren't recruiting at my school. We read the same books and have high quality professors. Only difference? One says on a piece of paper Harvard College. It's like me buying a pair of Ray Ban sunglasses and expecting I'm getting something different than a non-brand pair of sunglasses. In reality, it's the exact same thing beside the brand.

 
madmoney15:
Ackman didn't have experience.

“Everyone told me it was a really stupid idea to start my own hedge fund right out of business school,” says Ackman of the idea. “That’s how I knew that it was a good idea.” His father was opposed to the idea and encouraged him to get some more experience before starting his own fund. It didn’t matter what anyone said, Ackman was going to do it anyway. He was “daring to be great.”"

Ahuja, Maneet (2012-05-01). The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (Kindle Locations 2708-2710). John Wiley and Sons. Kindle Edition.

  1. Just because he went to Harvard Business School doesn't mean automatically he would be better than these guys. I went to Stanford's bookstore and looked at all the books within the Business School. All of them were really simple books (i.e. Benjamin Graham). Just because you go to an elite school doesn't mean you have the exclusive knowledge.

No, but going to HBS definitely gives you a ton of contacts who you can leverage. Also proves that youa re capable of SOMETHING atleast. What have these kids done to do that?

 

Ok to get things straight two reasons Ackman and these clowns are not in the same league

  1. He had just graduated from HBS and was not at the second best school named UNC
  2. Ackman had experience and previous work...not one of these three even mention any work experience at all..not even worked for Uncle doing X or something..not one shred of past experience mentioned
 
hockey1316:
Ok to get things straight two reasons Ackman and these clowns are not in the same league
  1. He had just graduated from HBS and was not at the second best school named UNC
  2. Ackman had experience and previous work...not one of these three even mention any work experience at all..not even worked for Uncle doing X or something..not one shred of past experience mentioned

Please view my previous posts. You're incorrect.

 
madmoney15:
hockey1316:
Ok to get things straight two reasons Ackman and these clowns are not in the same league
  1. He had just graduated from HBS and was not at the second best school named UNC
  2. Ackman had experience and previous work...not one of these three even mention any work experience at all..not even worked for Uncle doing X or something..not one shred of past experience mentioned

Please view my previous posts. You're incorrect.

You sir are either one of the three founders or an idiot. How can you honestly think this whole thing is laughable. I applaud and encourage innovation and entrepreneurship but I reserve the right to laugh at you if your knowledge and experience are both non existent. Regardless of the Ackman comparison, these three are clowns and I would fully support someone from a non name community college with a legit strategy and knowledge over these kids. College has nothing to do with it. It's their oblivious nature and lack of strategy that causes them to lose credibility

 
hockey1316:
Ok to get things straight two reasons Ackman and these clowns are not in the same league
  1. He had just graduated from HBS and was not at the second best school named UNC
  2. Ackman had experience and previous work...not one of these three even mention any work experience at all..not even worked for Uncle doing X or something..not one shred of past experience mentioned

  • Ackman never wore a tie bar

  •  
    hockey1316:
    Ok to get things straight two reasons Ackman and these clowns are not in the same league
    1. He had just graduated from HBS and was not at the second best school named UNC
    2. Ackman had experience and previous work...not one of these three even mention any work experience at all..not even worked for Uncle doing X or something..not one shred of past experience mentioned

    Regarding #1: Easssyyyyyy there buddy. UNC-Greensboro is no slouch.

     
    sonibubu:
    hockey1316:
    Ok to get things straight two reasons Ackman and these clowns are not in the same league
    1. He had just graduated from HBS and was not at the second best school named UNC
    2. Ackman had experience and previous work...not one of these three even mention any work experience at all..not even worked for Uncle doing X or something..not one shred of past experience mentioned

    Regarding #1: Easssyyyyyy there buddy. UNC-Greensboro is no slouch.

    Chapel Hill or bust, chief.
     

    Pretty hilarious that you're comparing these three to Ackman, because other than having some vague familiarity with finance, these kids have nothing in common with him. If you're proud of them for "daring to be great" or whatever other platitudes we have for people that do things unconventionally, that's one thing. But endorsing their "macro event driven" investment strategy based on zero historical data? Ackman had over $50 million 6 years after getting his Harvard MBA (after magna cum laude at Harvard); these kids have yet to graduate from a school no one outside its campus knows exists. Ackman took large stakes in Target, Borders, and a plethora of undervalued real estate; these dudes are hoping to get B's on their upcoming intermediate accounting classes, and replied "upper division finance, man" when asked what asset classes they favored. Ackman wasn't a virgin; ________.

     
    CaR:
    Pretty hilarious that you're comparing these three to Ackman, because other than having some vague familiarity with finance, these kids have nothing in common with him. If you're proud of them for "daring to be great" or whatever other platitudes we have for people that do things unconventionally, that's one thing. But endorsing their "macro event driven" investment strategy based on zero historical data? Ackman had over $50 million 6 years after getting his Harvard MBA (after magna cum laude at Harvard); these kids have yet to graduate from a school no one outside its campus knows exists. Ackman took large stakes in Target, Borders, and a plethora of undervalued real estate; these dudes are hoping to get B's on their upcoming intermediate accounting classes, and replied "upper division finance, man" when asked what asset classes they favored. Ackman wasn't a virgin; ________.
    1. I get what you're saying but try to replace these three with someone more articulate. Would they be really that far off from any other event-driven hedge fund?

    http://en.wikipedia.org/wiki/Cornwall_Capital

    1. Ackman is exceptionally smart and I'm not taking that away from him but does that make him a great investor? I think it takes balls and smarts to be a great investor. These three certainly have balls but only time will tell if they have smarts. We've haven't even seen what kind of returns they can get, it's premature to judge. If I would of told you the Vikings would be 4-1 by this part of the season, your feelings would the same as this.
     
    bankerella:
    But that’s not all. They also aim for “capital preservation during non-event environments”. By “capital preservation”, I assume they mean that they don’t come to work on slow news days. I would hazard a guess that they switch over to “capital preservation” mode during midterms and finals as well.

    LMAO!! B'rella is the queen of trolling~

    The Auto Show