1-person Hedge Fund
Seeing alot of ex. SM/tiger cub analysts (early 30s types) starting small, non-institutional funds (think $1-10 million) that are basically their PAs with 1-2 FO type LPs
- Why? Is is because they have made enough $ to invest their own PAs and not work
- what is the benefit of this vs. going to a pod? More aum vs. less constraints i guess, but if MLP is offering you $1bn to manage market neutral that feels more attractive than managing $10 million of F&F money? Or is it hard for these guys to get MM capital because of diff investment process
- what is the prospect of these funds scaling over time? I assume allocators are focused on sharpe ratio/beta adjusted returns which makes it difficult for high net funds
Starting a small, non-institutional hedge fund with $1-10 million, often funded by personal accounts (PAs) and a few friends-and-family (F&F) LPs, is becoming more common among ex-SM/Tiger Cub analysts in their early 30s. Here's why this trend is happening and the dynamics at play:
Why Start a Small Fund Instead of Joining a Pod?
Control and Independence: Managing their own fund allows these individuals to have full control over investment decisions without the constraints of a pod structure. Pods often come with strict risk limits, mandates, and oversight, which can stifle creativity or flexibility.
Personal Wealth and Risk Appetite: Many of these individuals have already accumulated significant personal wealth, giving them the financial freedom to take risks and invest their own money. This setup can feel more rewarding than working under a larger institution.
Difficulty Accessing MM Capital: Multi-manager (MM) platforms like Millennium or Citadel may not align with the investment processes of these individuals. If their strategies are less market-neutral or don't fit the MM mold, securing capital from these platforms can be challenging.
Potential for Higher Upside: While managing $1 billion at a pod might seem more attractive, the upside is capped by the pod's payout structure. Running their own fund, even with less AUM, offers the potential for greater personal financial rewards if the fund performs well.
Challenges and Prospects for Scaling
Scaling is Tough: Allocators, especially institutional ones, focus heavily on metrics like Sharpe ratio and beta-adjusted returns. Small funds often struggle to meet these criteria due to limited resources, lack of track record, and higher volatility.
"Valley of the Shadow of Death": Funds with less than $30-50 million in AUM are often in a precarious position. They lack the infrastructure to attract institutional investors and are vulnerable to redemptions, which can destabilize the fund.
Building a Track Record: The primary goal for these small funds is to establish a strong, consistent track record. If they can demonstrate alpha generation over time, they may attract larger allocators and scale up.
Niche Strategies: Smaller funds can focus on niche or less scalable strategies that larger funds can't pursue. This differentiation can help them stand out and justify higher fees.
Why Not Just Take MM Capital?
While MMs offer significant AUM and resources, the trade-offs include: - Constraints on Strategy: MMs often require strict adherence to market-neutral or low-risk strategies, which may not align with the individual's investment style. - Lower Autonomy: Decision-making is subject to oversight, and the PM's role can feel more like an employee than an entrepreneur. - Payout Structure: The payout at MMs is typically a fraction of the profits generated, whereas running their own fund allows them to keep a larger share of the upside.
In summary, these small funds are often a bet on independence, flexibility, and the potential for long-term growth, even if the path to scaling is fraught with challenges. For some, the trade-offs of joining a pod simply don't outweigh the benefits of running their own show.
Sources: Do you need to be a market genius to start a hedge fund?, Why are hedge funds usually started by 1 person?, Hedge fund / active manager haterade?, Q&A - Tiger Cub Analyst, AM vs HF: The Business of Our Business
Personally not seeing this but if it were true:
If you have enough money to DIY your own hedge fund, I cannot think of a single reason why you’d want to work at a MM platform. You’d have total work and personal freedom, worth more than any bonus would be worth.
Think most of them are low 8 figures max, most are not running a full institutional HF (more F&F types) and assume could swing at pod to get to 9 figures?
Yeah but there’s no reason to trade away TOTAL freedom to make another $50-100mm over the next few years when you already have $50mm+.
I cannot think of anything the additional money would buy that’d be worth giving up being able to do whatever your feel like whenever. Can spend time with family, on hobbies, insane travel, non-profit boards, anything you wanna.
Past having enough money to retire early (F.U. Money), gotta minimize headaches and maximize freedom to live a better life.
“The man is the richest whose pleasures are the cheapest”
Henry David Thoreau
You left your last job (either voluntarily or not) but you're still too young to retire and you have to do something to spend your time. Your self identify involves being a big powerful trader, and you're too embarrassed to tell your friends you don't work anymore, better to tell your friends (and yourself) "I run a small hedge fund" even though it's really just managing your personal account for a couple hours a day.
dude you're a developer (saw that you worked at automatic trading firms). This thread is about fundamental SMs, and analysts don't rely on your code systems to make money.
This is me.
Building an independent track record and writing yourself a call option on one day (hopefully in the not so distant future) scaling with institutional capital under a strategy of your design, without trading away economics to a seeder.
Zero chance I would ever work for a pod so this is the only path for me. Betting on myself.
HF sr analyst here - DM me? Question for you
out of curiosity - what is the typical path to become a SM/tiger cub analyst in your 30s with this type of money? what school, first job, etc?
If you have to ask, it ain't gonna be you
I mean, it is a genuine question, and as someone who has no chance of doing this, I was just genuinely wondering what a hypothetical path looks like for people who worked harder in high school/college than I did.
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