How do you know if a less well-known fund is good?

Big_Muffin's picture
Rank: Baboon | banana points 113

There's a big tendency on WSO to gravitate towards the most visible, well-branded and prestigious opportunities. Everyone knows about the big guys.

How do you all go about diligencing opportunities at less well-known funds, especially if there's little to no info on WSO? Also, if a fund hasn't been discussed on WSO, is that a red flag? There are lots of opportunities that fly under the radar but I've found WSO to be pretty comprehensive.

Comments (18)

Jan 16, 2019

Track record of the founders. That will tell you all you need to know.

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Jan 16, 2019

Research who the founders are would be the best guess. Where did they work before they started the fund or their track record. Get info of their fund through a Bloomberg terminal if it happens you have one at hand.

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Jan 17, 2019

Plenty of good guys running smaller places.

Happens for a variety of reasons. I would guess the top 2 reasons why guys don't run big funds is the founder suffers from two issues
1). Not a salesman to raise funds - which is incredibly common
2). Not good at managing people. Again common.
3). Dislikes running a larger organization. Potentially because they like investing/trading more than managing an organization.

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Jan 21, 2019
traderlife:

Plenty of good guys running smaller places.

Happens for a variety of reasons. I would guess the top 2 reasons why guys don't run big funds is the founder suffers from two issues
1). Not a salesman to raise funds - which is incredibly common
2). Not good at managing people. Again common.
3). Dislikes running a larger organization. Potentially because they like investing/trading more than managing an organization.

Yes. And
4) Wants to remain an alpha producer as opposed to an asset gatherer

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Jan 17, 2019

Nothing bad about small funds. Sometimes you can make a lot more money managing a smaller fund because your strategy works best within that AUM range.

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Jan 17, 2019

If you can get a hold of their quarterly / annual letter, focus on their investment philosophy and process. See how they think about risk and what's a compelling idea to them.

Also look at the founding members' lineage - usually they come from / got seeded by big buys - e.g. if you respect Howard Marks or Joel Greenblatt or Seth Klarman, and the founders used to work for or got seeded by these big guys, then I'd think they are good funds.

Jan 17, 2019

Load of guys running under 500m who make a killing. Run the numbers... 2/20 on 200m assuming 5% returns equates to approx 4m management and 2m performance fee. If there are 3-4 guys running the money, 1-2 in ops, and 1 office assistant... and if we assume 1 CIO, 1 senior, 2 junior investment, and then the ops are COO and junior... the guys making decisions will be comped.

Offshore liffe

Feb 6, 2019

I think you're ignoring the huge fixed overhead of running a hf. compliance, rent, bbg, etc. plus anyone who seeded them is in a founders class that pays very low fees if any and gets a huge part of the 2/20 that isn't part of the founders class. that 6mm might only be 1mm after taking all that into acct. some say 100-150mm is needed just to run breakeven.

Jan 17, 2019

Yes for simplicity. Breakeven is highly strategy dependent, as are other costs. Some things are surprisingly expensive, others cheap.

Offshore liffe

Jan 17, 2019

Is the appeal of working for a big shop for branding down the road where if you're successful at investing it's easier to raise capital for your own shop versus coming from a smaller less well-known shop? Just wondering how much I should care about big brand name vs. under the radar smaller shop. Coming from a banking background I gravitate towards the big names.

Jan 18, 2019

It's going to be easier to open your own shop if you come from a well-renowned megafund for two reasons:

  1. You normally have access to clients who are bigger. If you build a good relationship with them you might open up your own shop, primarily with this clients/clients network of money. If your PM is managing his own money or family money, then you opening your own fund will be mutually exclusive. That's not the case if you work for 200 investors.
  2. A strong brand name is important in the initial funding rounds. It's easier to back someone who's a Tiger cub or who "worked directly under Steve Cohen" in NY/Greenwich than someone who worked for a small no-name fund in Houston under Dill McOilson. That is not to say that it's impossible to find funding, but it makes it quite a lot harder in a, already very competitive, market.
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Jan 19, 2019

This is a very interesting reply. I'd want to clarify a few things you said.

1/ you mention big names are great for raising funds down the track. But a lot of big funds have explicit contractual obligations that prevent this.

2/ a lot of roles at brand names are silo'd. At quant funds you could be working on data science, software, portfolio optimization, risk, alpha generation etc. and there is an intentional division of labor so no one single individual can walk out the door with the crown jewels. I think it would be much easier to get a cohesive view of the whole investment process at a small fund

2a/ Even at fundamental shops, as size increases it gets harder and harder to get your names into the book and its also harder to show how you've contributed directly to PnL

Don't get me wrong, I think having a big brand name is great. But I would rather think that being able to show that you have directly contributed to a book's performance, whether as a quant finding signals or as a fundamental analyst finding new names to add to the book is a bigger sell than a big name.

I think it would be more advantageous to join a strongly performing 'no-name' fund than being a cog at a big shop. Of course, these are my thoughts and I'm curious to hear your perspective on these issues.

Not sure what your b/g is; but if you have experience in the space what would you say is the best way to transition to a PM role? Frankly I don't see a lot of quants from the big shops being in a position to setup on their own.

Most Helpful
Jan 18, 2019

Great questions.

1: You're not getting out of the contractual obligation regardless of the size, unless you're working with amateurs. Even small hedge funds will have long NDAs and restrictions on who and when you can approach former clients.

2: Agreed, but that is only if you work at a large quant fund. Most HFs are not primarily quant and if you work closely with PM in an event-driven, L/S, or any other strat you will gain a good understanding of how they build the investment thesis and the case.

2a: Again, this is a double-edged sword. It might be harder to show your actual PnL contribution, but you're still part of a winning team. It's the same reasoning on why certain groups within IB is favoured over others for HF recruiting. Everyone knows that the analyst from GS TMT didn't source all the deals him/herself, but if you're part of a winning team it's easier to justify hiring you. As an investor you're (usually) given limited information about the actual strategy and the workings of it. The difference between a good or absolute shit fund raising can sometimes boil down to the PMs resume.

I don't have experience in the space myself, but I've worked in institutional sales and my former roommate works at a tiger cub fund.

I think you're logic is correct and it's probably the reason why so few quants break out to launch their own fund. The quant space is also heavily saturated these days and differentiating yourself from the megafunds is incredibly hard. Positioning yourself to be a HF PM is something I wouldn't care about too much. If you're successful enough you'll get your chance - but personally I think most people in here have a better shot at participating in the Olympics. Unless you're family is UHNW - in that case, anything is possible.

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Jan 21, 2019
QuiltEmerson:

Positioning yourself to be a HF PM is something I wouldn't care about too much. If you're successful enough you'll get your chance - but personally I think most people in here have a better shot at participating in the Olympics.

I think you really overestimating the difficulty of becoming a PM and really-really-really underestimating the difficulty of making it to the Olympic team.

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Jan 18, 2019

You sure? Never forget the Hungarian skier in the women's halfpipe, 2018.

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Funniest
Jan 22, 2019
Mostly Random Dude:
QuiltEmerson:

Positioning yourself to be a HF PM is something I wouldn't care about too much. If you're successful enough you'll get your chance - but personally I think most people in here have a better shot at participating in the Olympics.

I think you really overestimating the difficulty of becoming a PM and really-really-really underestimating the difficulty of making it to the Olympic team.

https://www.theringer.com/olympics/2018/2/21/17033...
lmfao

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Jan 17, 2019

There are backdoors into the olympics.

Not saying they are easy. But how many kids take up fencing in high school? 1000 kids per year in America? So then a relevant prime age competition pool or 10-15000? 10 member team so a 1 in a thousand shot?

If you have higher drive to make then most competitors then you would only need to be a one in 50 talent?

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