do hedge fund managers invest their salaries mostly in their own hedge funds?

This is a core question that is almost always asked when funds are out raising money. And yes, it is expected in most situations that fund managers invest much of their liquid wealth in their funds. If a manager is not significantly invested that is generally a red flag to folks that are conducting due diligence on hedge funds (e.g., investment consultants, hedge fund due diligence folks at asset managers, etc...).

In my experience, yes, they almost always have their $ in their funds.

ok, interesting, thanks to both of you for the replies. and yes, makes sense

only the ones that want to continue being hedge fund managers.

Not most, as that would be pretty foolhardy... But some, definitely. The share varies quite a bit.

it depends...if u r raising money as a startup or smaller fund certainly investors expect you to be invested alongside them with a good amount of your net worth.

Well not their salaries... but I would never invest in a fund that didn't have something close to the entirety of the shot caller's money at stake alongside mine. Don't call yourself a chef if you won't eat your own cooking.

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

Bondarb:

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

as somewhat who has been involved with seeders that tend to fund smaller startup hedge funds it is almost a requirement that the managers at small shops be "all in" with their personal money. If you want to not put all your money in you need to have a good explanation as to why...like maybe because you need money for a very sick relative but certainly not because "i cant make rational decisions with my own money at stake"...thats not exactly the type of person you want managing money for you. People want the manager to be as freaked out about losing their money as he would be his own....so I dont think you'd do very well telling an investor that you wont put your own money in because it wont allow you to be sufficiently reckless.

Bondarb:

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

as somewhat who has been involved with seeders that tend to fund smaller startup hedge funds it is almost a requirement that the managers at small shops be "all in" with their personal money. If you want to not put all your money in you need to have a good explanation as to why...like maybe because you need money for a very sick relative but certainly not because "i cant make rational decisions with my own money at stake"...thats not exactly the type of person you want managing money for you. People want the manager to be as freaked out about losing their money as he would be his own....so I dont think you'd do very well telling an investor that you wont put your own money in because it wont allow you to be sufficiently reckless.

Your whole point is for small startup shops, who are relatively more desperate in attracting capital and building a track record, etc. It's just like poker, when you are short-stacked your only real options if you want to survive are all-in or fold. But this mindset doesn't apply in the same way when you accumulate a decent amount of chips. For a reasonable size fund, not putting every cent you own into your own fund is a tail risk hedge, and allows you to make other investments that might be inappropriate in a fund context, such as certain private real estate, etc. Not to mention setting aside capital for certain personal needs such as funding your kid's education, or whatever.

Bondarb:

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

as somewhat who has been involved with seeders that tend to fund smaller startup hedge funds it is almost a requirement that the managers at small shops be "all in" with their personal money. If you want to not put all your money in you need to have a good explanation as to why...like maybe because you need money for a very sick relative but certainly not because "i cant make rational decisions with my own money at stake"...thats not exactly the type of person you want managing money for you. People want the manager to be as freaked out about losing their money as he would be his own....so I dont think you'd do very well telling an investor that you wont put your own money in because it wont allow you to be sufficiently reckless.

Investors are just trying to counteract the 'heads I win, tails you lose' incentives associated wih performance fees. Makes perfect sense to me.

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

As someone who has been through the process of seeding I can't imagine this ever being the sentiment of an LP. I was pretty much told that the requirement was for my co-PM and I to show that we had our net worths in the fund (90% was the number given... for him it was a lot more significant than me). And that isn't just something for small desperate funds or something... if you look at just about any large fund manager I'd imagine most of their net worth is tied up in their fund and it's not perceived as reckless but rather as the complete opposite. If he thinks that his fund can outperform most if not all traditional investments then why wouldn't he put all his money in his fund? Should actually be rational if anything.

BlackHat:

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

As someone who has been through the process of seeding I can't imagine this ever being the sentiment of an LP. I was pretty much told that the requirement was for my co-PM and I to show that we had our net worths in the fund (90% was the number given... for him it was a lot more significant than me). And that isn't just something for small desperate funds or something... if you look at just about any large fund manager I'd imagine most of their net worth is tied up in their fund and it's not perceived as reckless but rather as the complete opposite. If he thinks that his fund can outperform most if not all traditional investments then why wouldn't he put all his money in his fund? Should actually be rational if anything.

Because he can be wrong? 'Thinks' is the key word here. If he knows with 100% certainty that his investments will outperform everything else, then yes he should put every cent he's got into his fund regardless of size. But being 100% certain here is bordering on irrational because he can't know the future obviously and to leave virtually no room for error is indeed reckless, IMO. Hypothetically, if there's a 90% chance he'll make 11% and a 10% chance he'll lose everything his expected value is still flat to negative. His chances/returns would have to be significantly better than that to have a good positive expected value. And as I've already said it's a tail risk hedge and his fund may not be able to do everything he wants to do with his money, such as private real estate or personal interests. If it's a smaller/newer fund then he may have to put his net worth into the fund to attract capital, and if it's a larger fund with an established track record the PM might feel more confident putting all his money into the fund but that doesn't mean it's necessarily the best decision. Diversification protects against what you do not know or can not know.

BlackHat:

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

As someone who has been through the process of seeding I can't imagine this ever being the sentiment of an LP. I was pretty much told that the requirement was for my co-PM and I to show that we had our net worths in the fund (90% was the number given... for him it was a lot more significant than me). And that isn't just something for small desperate funds or something... if you look at just about any large fund manager I'd imagine most of their net worth is tied up in their fund and it's not perceived as reckless but rather as the complete opposite. If he thinks that his fund can outperform most if not all traditional investments then why wouldn't he put all his money in his fund? Should actually be rational if anything.

Again, like I said, an investor is going to want many things. Some of these demands are reasonable, while others are dangerous and, in fact, expose the manager to all sorts of unpleasant eventualities down the road. In my view, this demand to be fully invested is one such.

Finally, I would add that I myself, for instance, would never dream of investing more than 50% of my compensation (let alone net worth) in the fund I work for. I know that it would be monumentally stupid of me to do so. In fact, I try to invest as much as I can outside of the financial sector, specifically to avoid excessive concentration. This view is further reinforced by my experience in 2008. I also know for a fact that the Grand Fromage of our fund is in a similar position. As I said, maybe if you're a) a young whipper-snapper, just starting out; and/or b) in need of seed capital, you may have a different view.

My Z$2c again...

Martinghoul:

BlackHat:

Going Concern:

Martinghoul:

I would never invest in a fund that DID have all or almost all of the principal's money at stake. I would have serious doubts about the said principal's ability to make rational trading and risk mgmt decisions.

Agreed. Would want a chunk of their money at stake in their own fund obviously, but close to all is just reckless.

As someone who has been through the process of seeding I can't imagine this ever being the sentiment of an LP. I was pretty much told that the requirement was for my co-PM and I to show that we had our net worths in the fund (90% was the number given... for him it was a lot more significant than me). And that isn't just something for small desperate funds or something... if you look at just about any large fund manager I'd imagine most of their net worth is tied up in their fund and it's not perceived as reckless but rather as the complete opposite. If he thinks that his fund can outperform most if not all traditional investments then why wouldn't he put all his money in his fund? Should actually be rational if anything.

No, it isn't rational, by any means... It's yet another manifestation of the common behavioral biases (optimism, overconfidence, attribution, to name just a few). There's a LOT of literature on the subject. And, to echo GC, there's always them "unknown unknowns", like Rumsfeld said.

Again, like I said, an investor is going to want many things. Some of these demands are reasonable, while others are dangerous and, in fact, expose the manager to all sorts of unpleasant eventualities down the road. In my view, this demand to be fully invested is one such.

Finally, I would add that I myself, for instance, would never dream of investing more than 50% of my compensation (let alone net worth) in the fund I work for. I know that it would be monumentally stupid of me to do so. In fact, I try to invest as much as I can outside of the financial sector, specifically to avoid excessive concentration. This view is further reinforced by my experience in 2008. I also know for a fact that the Grand Fromage of our fund is in a similar position. As I said, maybe if you're a) a young whipper-snapper, just starting out; and/or b) in need of seed capital, you may have a different view.

My Z$2c again...

If you were looking to raise seed money then you would indeed be investing more then 50% of your net worth in your own fund. That is the way it works....it isnt good for you as the fund manager but its usually what is demanded. Of course if you run a multi-billion dollar fund and are worth 10s of millions of dollars you wouldnt choose to do this, but at the outset it is basically a requirement. The debate was not about whether it is good for the principal but rather whether most managers invest in their won fund...the answer is yes and for smaller funds they are required to take very signifigant financial risk in their own fund in most cases.

The academic/theoretical argument for why you shouldn't be fully invested in your own fund is totally reasonable. But it's the same line of reasoning for why it's financially smarter to short the stock of your own company... but practically speaking, you aren't allowed to do that. Even though it's better for your own personal risk management, nobody would want to invest with a company whose CEO is short the stock much the same way as nobody would want to invest in a fund where the PM has his net worth with Fidelity instead. You'd probably want to go short the stock or invest with Fidelity

Bondarb:

If you were looking to raise seed money then you would indeed be investing more then 50% of your net worth in your own fund. That is the way it works....it isnt good for you as the fund manager but its usually what is demanded. Of course if you run a multi-billion dollar fund and are worth 10s of millions of dollars you wouldnt choose to do this, but at the outset it is basically a requirement. The debate was not about whether it is good for the principal but rather whether most managers invest in their won fund...the answer is yes and for smaller funds they are required to take very signifigant financial risk in their own fund in most cases.

Everyone happy?

Martinghoul:

Very well, so we've gone full circle to arrive at the most sensible answer to the OP's question. More specifically, the correct answer is, like in many other things in life, "it depends". To narrow it down more, if the manager in question is running a small(ish), possibly startup fund they will indeed invest most of their net worth in their fund (ht bondarb & BlackHat). If, on the other hand, the manager is running a mature fund with significant AUM they will probably NOT invest most of their net worth in the fund, although they will certainly invest some.

Everyone happy?

The other consideration is the type of strategy. If you have a broad mandate that allows for investing across asset classes according to a style that fits your own personal risk-reward objectives, then there's no real downside to investing everything in your own vehicle. If you're a competent risk manager running a conservatively leveraged, diversified portfolio, you're not going to "blow up," and it's not like you'd have any reason to trust another asset allocator to do a better job than yourself.

Now, if your mandate is to run a highly levered, moonshot strategy that has a meaningful chance of going to zero (i.e. the popular misconception of hedge funds), then sure it'd be crazy to tie up most of your net worth in the fund. But arguably it'd be crazy to invest in such a vehicle at all.

BlackHat:

The academic/theoretical argument for why you shouldn't be fully invested in your own fund is totally reasonable. But it's the same line of reasoning for why it's financially smarter to short the stock of your own company... but practically speaking, you aren't allowed to do that. Even though it's better for your own personal risk management, nobody would want to invest with a company whose CEO is short the stock much the same way as nobody would want to invest in a fund where the PM has his net worth with Fidelity instead. You'd probably want to go short the stock or invest with Fidelity

tempaccount:

I don't think it has that much to do with AUM. Think about the fair number of large funds that have ultimately transformed into family offices. Indeed, a hedge fund is often just a family office that accepts outside investors.

The other consideration is the type of strategy. If you have a broad mandate that allows for investing across asset classes according to a style that fits your own personal risk-reward objectives, then there's no real downside to investing everything in your own vehicle. If you're a competent risk manager running a conservatively leveraged, diversified portfolio, you're not going to "blow up," and it's not like you'd have any reason to trust another asset allocator to do a better job than yourself.

Now, if your mandate is to run a highly levered, moonshot strategy that has a meaningful chance of going to zero (i.e. the popular misconception of hedge funds), then sure it'd be crazy to tie up most of your net worth in the fund. But arguably it'd be crazy to invest in such a vehicle at all.

As to your point about no downside investing everything in your own vehicle, I am not sure I agree. There's an awful lot of assumptions you make about a single person's ability to manage risk, be conservative, diversify diligently etc etc. I have seen a couple of cases where this sort of approach went spectacularly pear-shaped. The reason was groupthink, pure and simple.

Only a portion are investing back into the fund. Investing most of your time and most of your money would be a bad risk diversivication...

I have a new anecdote about this in that i recently have had some deferred comp that i could index either to a US risk free rate, the overall fund's return i work for (about 20 managers), or my own return. I chose to index to myself...and there was no pressure as nobody cares. Maybe Im an idiot we shall see.