How Difficult Would It Be to Start A Hedge Fund After Two Years As Analyst?

It will probably be difficult to gain the relevant amount of experience from two years. Hedge fund start ups require you to prove that your stratergy works by handling your own capital for quite a while otherwise you'd have a hard time finding investors. You'll also have to touch up on marketing and business managment skills prior to the launch.

May I suggest watching "The compound's" interview with a young hedge fund MD on YouTube. It should answer a few of your questions.

Good luck!

There are really only 2 hard parts to starting a hedge fund (there are lots of things you'll need to do...but only 2 are "hard")

1) raise money 2-5 million dollars is usually the bare minimum, depending of the potential returns of your strategy...could possibly be much much more. 2) a strategy that can generate at least 200k/year of profit to the manager (thats you).

if you think your strategy can make 20-30% per year with max 10% drawdown (thats a home run) then 2mm * 20% = 400k. Assume you get 20% of the 400k = 80k to you

So, 2mm is gonna me too small...you'll need 5mm to start so that if you make 20% investing, you'll get paid 200k (which you will use for all firm expenses, in addition to your salary)...so keep asking more investors to invest in you. This really is the hard part.

Your 1st investors will get preferable terms 0/20 probably. You get paid nothing if you don't make investing returns.

Then after 1 year of actual returns managing investor money, if you really do make 20%, you'll be able to go on the road and try to raise 50mm of investor capital...and this 50mm will be 2/20 terms...you'll make 1mm/year just sitting on the money..plus 20% of investing profits. Everything you plan on doing is to get to this point, where the real money is made. You'll need a story to tell investors, to distinguish you from every other hedge fund who also wants that investor $$.

lots of other stuff needs to happen, but sure, you can start with an account at interactive brokers with a couple million bucks. When you get big enough (50 million is the minimum i think) then you can open a prime broker account with Credit Suisse.

For tax reasons, hedge funds are structured as 2 entities 1) LLP partnership 2) LLC management company

investors write a check to the LLP partnership. your LLC mgmt co also has a % ownership in the partnership (assuming 20% performance fee...then 20%) and the mgmt co makes the investing decision s for the LLP. For tax reasons, you never want more than 99 members to each LLP partnership. This is why as hedge funds grow, their tax bills increase...they need to keep creating new funds/LLPs so they never have more than 100 partners in a fund (i forget the tax rule, but its out there..a penalty for size). You need this structure to make carried interest...its annoying, but otherwise your tax bill is sky high.

So anyway, you'll need this structure...it doesn't cost 50k to create...you can do it with legal zoom and 2-3k on the cheap at forst. If you want to take in non-US investor $, then you''ll need a caymen LLC for non-US investors to invest into (costs you 3k to setup)...and then the caymen LLC invests into your Deleware LLP entity. annyoying as fuck...but it is what it is.

If you only have US investors to start, then you could just open an mgmt account with interactive brokers...but that limits what you can invest into (for example, no swaps).

You'll need to get registered as an investment advisor to take in investor money...thats not cheap..and its annoying. You can work from home to start...lots of small funds start out that way..and use a wework rented office conference room for the rare times you need a physical location to talk with investors in person.

I would advise first working at a hedge fund for several years and build a network of potential investors who would trust you their money. By this, you will also be able to drop at least couple millions of your money to your fund maintenance before you would have actual investors.

I worked until recently at a law firm in the UK, structuring hedge funds, including start-ups. As a rule of thumb, we used to say that you'd want $50m of capital to break even. (It was once more like $20m, but the compliance and operational costs are much more than they used to be in the good old days pre-2008.)

So why is that different to the $2-5m others have mentioned? One thing is that I think it's probably about what you want the business to really be. For a proper set-up that is going to be able to attract meaningful external money, you need other staff and credible infrastructure, and of course that means costs. So your AUM needs to be higher to support the running costs. If you want to be much leaner operation - a person in a room who is trading your own money and family/friends money, with more or less the same strategy - then that is a very different concept from a business point of view. You need much less capital to get going, but you aren't going to attract meaningful external money while you look like that.

It's possible to graduate from one to the other, and we used to see a few of those. They didn't call themselves a "hedge fund" before they stepped up, but that was the route in. (Perhaps it's harder to raise capital without the time spent building the contacts? Not my area.)

The other thing is that hedge funds these days often start out running a loss, so they don't often start with the break-even AUM. It's hard to get money until you have a track record, so this is often the only way. But this usually involves people coming out of investment banks with capital to last them for the first 2-3 years before they start getting proper money in. And even then, I wouldn't see anything below $10m at the lowest end.

There might also be differences in the London and US markets. Maybe it's still easier to launch a hedge fund in New York from your bedroom and get serious investors? That isn't my understanding, but others might know better. And the firm I worked for didn't work the one-man-bands, who presumably don't spend much on expensive lawyers like me, so maybe I'm missing a bit of the picture there too.

In recent years we also saw far fewer people coming directly from investment banks to start their own funds, because the restrictions on prop trading by the banks meant they weren't generating as many people with the right experience. On the other hand, hedge funds these days are larger and more institutional, so it's more common to see people coming out of hedge fund positions to start up their own firms. (Before that, they have most probably started their careers at the banks.)

You asked for guides, here are two I found when I did some research: Mergers & Inquisitions, Hedge Fund Law Blog

Here is a similar discussion on WSO from a couple years back: Starting A Small Hedge Fund

I found nice guy music for you https://www.youtube.com/channel/UCMmt12UKW571UWtJAgWkWqg

Can you convince a platform fund to let you run some capital?

I know places that got started with less. Generally you are using significant amount of leverage and also hiring smart kids to work only on commission out of college. You have to consider training and all that but it is doable if you aren’t trying to do anything prestigious. I am also commenting on this after you explained that you are more thinking of a prop trading firm. I’d say one of the hard things is finding someone with a 24 if you don’t have one yourself. You will need them to register and be fully covered from a compliance stand point

Ask Bobby Axelrod.