At What Stage of the Game Do Investors Come to You?
We all know that an inexperienced hedge fund manager, with no track record has a tough time attracting potential investors. At what stage of the game do potential investors find YOU? Would a 5 year track record, with 20%+ annualized returns and $5 million AUM be enough, or not even close? Since marketing laws regarding hedge funds are very strict, I imagine raising capital is based almost entirely on track records and previous connections to high net worth individuals and institutions. So, people calling you up, with no previous contact, must be a pleasant surprise.
You really want your own fund, don't you?!
I was thinking about starting a hedge fund when other kids were trying to figure out the risk arbitrage opportunities available in Pokemon cards. It's an obsession.
The romantic idea of starting from scratch and trading until you've got a great track record and all the investors come beating down the door is part of hedge fund mythology, but most funds get started with a fair amount of seed capital committed from people whom the higher-ups have had experience with at their previous shops.
Not many people (like zero that i have heard of) have investors approach them. Usually when you want to start a hedge fund you either use pre-existing relationships to get seed money or you hire a capital introduction person whose job is to find investors for you. In the "glory days" pre-crash it was really easy if you had a good background...all the big firms had great capital intro guys that would work with their prime brokerage groups and would help new funds get set up. Ie if you were a well-respected buyside person and wanted to start your own fund you just call your sales guy at someplace like GS, Bear, Merrill, etc and they would put you in touch with prime brokerage who had all sorts of services to help you get introduced to investors. Nowadays the process is much more difficult but its the same concept...you need a track record (or at least a good story) and somebody with a good roladex who can introduce you to capital.
Thanks for the replies.
I'm not necessarily referring to seed capital. I was more referring to a hypothetical scenario in which I have $1 million+ to start my own fund to get it off the ground and establish some sort of track record. I know Pabrai started with $1 million and worked his way up from there, although $300 million AUM doesn't really qualify him as legendary, YET. Also, Buffet started with a relatively small capital base, and didn't really have an assortment of Wall Street connections, being all the way in Omaha. I'm still sold on the idea that this is a result driven business.
Buffett had 100k in net worth by the time he graduated college. His Wall Street connection was Ben Graham.
Is it the same in HFs as it is with PE where smaller funds typically hire an outside placement agent (such as a BB or smaller specialty bank) to help with your relationship management and to help you plan your roadshows and make intros, etc?
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