Best path for starting a successful hedge fund in 5 years


I have an interesting question for you guys and want to hear people's opinion on which path might be better. I have a feeling that everyone will say path 2 but just wanna throw it out there.

The goal is to start a hedge fund in 5 years and lets assume that when I start this fund I will be able to raise $20 million regardless of which path I take.

path 1. Go to a public accounting firm and work until time to start hedge fun. Job would consist of audit and tax work on hedge funds or pe firms the entire time.

path 2. Start off as an analyst at an investment bank. then try to switch to someone else's hedge fund for a few years then start my own.

While I feel like the obvious answer is path 2. The reason I pose this question is because if I take path 1, I feel as if I will get a good understanding of the industry (albeit as an outside) and I know that I will definitely have more free time which I would devote to developing my fund's investing/trading strategy and studying up on the markets so that when time comes I can perform well. Also I will potentially be exposed to different strategies through auditing and doing tax work for the funds that could give me good ideas.

Please remember when answering the question, you are assuming that I will be able to raise the $20 million in 5 years regardless of which path I take. Also I know thats not a huge amount of money in the hedge fund world. But it would be a start and if I charge 1/20 and can make 15-20% returns I could earn $800k to $1mil in my first year.

Now I know this all sounds nice and realize that A) I would have to actually get the money and more importantly that B) I would have to make 15-20%. But since we are disregarding A in this situation, the real question is which of the two paths would give me the best shot of performing the best as trader in 5 years.

Also would your answer change if the analyst position was at BB as opposed to a boutique firm.

Any insight or just general thoughts would be greatly appreciated.



Comments (27)

Nov 19, 2009 - 7:07pm

I too share this dream. I actually started by researching various managers for example Eddie Lampert of ESL Investments (has been compared to Buffet), David Tepper of Appaloosa Management, etc. They all started at a trading desk at a large bank. Lampert worked under Robert Rubin in the late 80's at GS and Tepper worked at GS in their junk bond department. Its evident that the best managers, were "mentored" at a young age at top firms and left to start their own before they even hit the age of 30.

If we follow this model, it means that you have to learn a philosophy/strategy inside and out in order to generate consistent returns. Once you have your strategy rooted in, the tough work begins. These people, besides having a mentor, had connections to real sources of money. Lampert got seed money of $28 million from Richard Rainwater (whom he met on Nantucket) and introduced him to the Dell family, the Tisch family (Loews), and the Ziff family. Who ultimately grew his fund to upwards of $3-700million level.

Finally, he had the talent to rack up returns from passive equity investments (value driven) during the 90s. In the early 2000's he bought 50% of Kmarts debt and took it out of bankruptcy. He found that the value of the appraised stores (real estate value) were much higher than anticipated. So Lampert sold 5% of the store base to Sears and Home Depot for $900million. He finished by converting the debt to equity and became a billionaire. The rest is history...merged Kmart with Sears and became a multi-billionaire.

Mar 22, 2015 - 5:24am

Not too correct you but as life long investor in Appaloosa since the day it opened it's doors in 1993 Davids most formative years were at Republic Steel, where he really learned the in's and out's of the credit side. He hated his time at Goldman although he did save their high yield desk and then he took off with Jack Walton to found Appaloosa. Mr. Walton left in 1995 after some traumatic events. they are up 10% for the year so far though. Probably hands down the best investor in the world.

Nov 19, 2009 - 7:31pm

Not to be rude, but it's not even a question, choose path 2. You won't learn anything about hedge funds or private equity funds by auditing or doing tax work for them other than how they compile their own internal financials or pay taxes...useless and completely unrelated to investing. Unless you have no investment related options, then I would absolutely not take path 2. Full Disclosure: I took path 2, but got lucky in 2005 to get into an investment role, and would easily take path 1 looking back on it.

Nov 19, 2009 - 7:54pm

It's definitely path 2, not because it's more prestigious, but because the first job is shit. You won't learn anything doing it. Accounting can be a path in to hedge funds, but option 1 will put you on a road you do not want to be on.

It shouldn't even be a question.

Nov 19, 2009 - 10:40pm

Why is this a question? It's like asking, I'm interested in being a pilot, which of the following should I do:

1) Work as the bloke who changes tires on jets
2) Join the Royal Air Force

Nov 20, 2009 - 1:02am

I share the HF dream as well. Why wait? Let's get a WSO HF together, toss some scratch together, get an office, and let the returns speak for themselves...bootstrap it Paulson style.

And PiperJaffrayChang can be the head PM.

Now we're talking!

Nov 20, 2009 - 2:28am

Appreciate the responses... I definitely figured that these would be the answers that I would get. Nevertheless still figured I would ask. Plus its always entertaining with some of the answers. Please feel free to keep them coming. Really curious to see if anyone argues for path 1 or will at least attempt to (any takers).

Nov 20, 2009 - 7:56am

If you feel you have the skill to earn consistent returns, then save 100k and invest it for 10years so that you have a track record. Hopefully by then, you will have met wealthy individuals to schmooze into managing their money. Or just find an advisory firm that uses the strategy you're interested in. Usually, the owners don't plan on handing the reigns over, so you'll eventually be forced out to start your own.

Nov 20, 2009 - 10:22pm

I love the comparisons.. As far as the Marv Albert one... How about its like Mark Jackson saying he could coach in the NBA because he's watched alot of games and played in them as well.. I guess I lose you with the no playing time but the playing time I would get would be during the free time that I talked about in the OP.

Anyways path 2 is definitely looking like the path. But I definitely like the comments and please keep the coming if you so desire. Still wondering if I can get a taker for path 1.

Remember it may be a stupid rich or uncle or something of the sort but we are assuming the $20 mil is guaranteed in 5 years either way.

Nov 21, 2009 - 1:16am

definitely path one. With Bernie/Allen/ and that lawyer gone, we need a new and improved ponzi scheme. Who better to start that than someone who knows accounting and audit inside and out? Knowing how to invest certainly won't help you with that, because market neutral larceny doesnt require picking stocks. Start with 20mm, grow to a few billion. You won't need to work for returns, you just make up the double digits and cover your tracks.

Nov 25, 2009 - 6:44am

Also there was an article about 3 months about a future lampert, some kid at UCLA or some other ok California school who is running a $3 mm AUM hedge fund while hes finishing his part-time.

IIRC, he was at Pomona. Running HFs part-time while in school is unusual, but not as unusual as the article implied. I also wonder about the very fact the article ran; seems to me that would have violated SEC HF advertising rules.

Dec 2, 2009 - 4:31pm

I doubt there is one solid HF out there started by a guy whose sole experience is 5 years of audit/tax work. There are very legit PMs who got their start in the Big 4 but they ALWAYS have a tremendous amount of experience elsewhere, either moving to a corp. finance role in industry or into IBD/HF/PE as an analyst.

Path 2 is way, way more likely. In fact, you're more likely to start a successful hedge fund after working as an attorney than after being an accountant. This being because people from IBD have most of the accounting skills required of a PM in fundamental HFs whereas a former lawyer has an entirely different skillset which can be very relevant to certain strategies.

Dec 6, 2009 - 11:02am

What you have to do is eliminate both paths....because it will never happen. Starting a hedge fund is tough but if your good it will happen.

I saw quentin taratino on t.v. and prospective movie directors were asking him what their chances of making it were. He told them go out and make a cheap kick ass movie like reservoir dogs and you will make it....and you know what he's right.

What you have to do first is learn how to trade. Learn...the only place to learn is Wall Street. It sounds like yo9u didn't go to an Ivy league school. So that option is out. What you have to do now is learn to trade on your own.

What you should do is develop a track record on 20k- 100k. This can be scaled up to 20-100 million. Develop a track record for a year.....develop connections to money (which isn't that hard to do). Network in the right areas. You have to be able to sell yourself. Not only do you have to be a trader you have to be a sales man.

Main thing----you have to be a good trader and produce money....if you can't do that then give it up.

Dec 7, 2009 - 12:23pm

Applying the strategies you want to use to your own PA is a great way to create a 'track record' / have investment ideas to talk about. I would advise against trying to do this without a job though. Big 4/IBD are great places to network and you'll get more leverage from that than by just trading/investing on your own. Besides, I'm not sure how you can live off a 20k-100k personal account.

Jan 9, 2010 - 4:24am

I suspect lots of people dream of getting rich trading.

Question: isn't the biggest initial challenge to get seed capital? Surely investors (especially institutional investors, or any accredited one) are harder to impress than just 2 years of grunt work at an investment bank.

The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
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