How to build HF track record that is worth anything?

shshshlomo's picture
Rank: Chimp | 12

Hi, if I want to run my own shop one day but wanted to establish a track record to show investors, what would the best way to get about that be? Currently a CEO in the biotechnology field but I'm absolutely fascinated by equities. My goal is to build a reputable track record. What steps should I take? Thanks in advance!

Comments (11)

May 31, 2015

You need to get your results audited by a CPA, preferably, a reputable one (eg, big 4).

Best Response
Jun 1, 2015

[If you want to get institutional investors:]

Pool your own money along with whoever you can convince to let you invest on their behalf. If you can reach the scale where you can afford the six-figure cost of forming a proper GP entity, get it set up and registered properly (likely a multi-vehicle structure: i) a Delaware Limited Partnership for the fund, ii) a Delaware Limited Partnership for the General Partner of the LP, and iii) a Delaware LLC as the General Partner of the General Partner). Get the friends, family, coworkers, or whoever else gave you money into the fund as LPs.

(Edit for clarity: the cost mentioned comes from using a BigLaw firm, not for actually registering with the relevant regulatory bodies.)

Have your performance audited by a legitimate firm. Big 4 can be prohibitively expensive when managing a tiny capital base; respected regional firms like BDO or Berdon are acceptable affordable alternatives. None of these will be cheap, but you get points on two fronts: firms of that stature have strong reputations, and you convincing them that you're worth taking as a client is a signal in itself. Show at least 10 quarters of performance, and then do your best to identify and get in contact with institutions with mandates for emerging managers.

[If you want to run money for friends and family (joking, the 'FFF round,' or 'friends, family, and fools'):]

Depending on the sophistication of the investor, you may be able to get away with simple brokerage account statements, but the safest bet is to create business banking accounts, institutional brokerage accounts (you'd be surprised at how low the AUM minimums are for bulge bracket desks to take you as a client), and have your numbers audited. This is simply a good governance protocol, and if you get a few million to manage, over a few years (with good performance) your capital base will swell from appreciation plus your investors wanting to plug in more and telling their friends.

    • 5
May 31, 2015

I was prepare to write a lengthy post dumping all over your hedge fund dream, since the hedge fund dream is dead. But then you said you were a CEO in the biotech field, and that is somewhat more interesting. So in addition to the above (which is good advice, other than the big 4 auditor; you can get just as reputable, much cheaper), I would add that you should focus your strategy on biotech and adjacent stocks, as you might eventually be able to convince folks that you have an angle into that space (which is hard for generalists/finance backgrounds to truly get good at).

The other thing is to manage your portfolio for the aum you want, not the aum you have. If you knock the cover off the ball investing $500k in $10m market cap companies, that's really great, but nobody who can write a $10m check is ever going to give you credit for that performance. This is a frustrating reality because it might mean that you are forgoing or underinvesting in opportunities that would best serve your current LPs... but if you really want to take a run at the tail scenario of a 9 figure firm, you will need to show that your strategy can support that size without compromising liquidity

    • 3
Jun 23, 2015

RLC1 - Not to resurrect an old thread but why do you say the hedge fund dream is dead?

May 31, 2015

In to follow thread

Great comments here from @APAE and @RLC1

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May 31, 2015

It feels like it's been years ...

Jun 1, 2015

Thanks very much all. Mainly I was focusing on going after so called "FFF money" to start. I unofficially run around $5 Million now (family members) and I figured if I'm doing it anyway I might as well establish a track record. The advice above was really helpful, APAE and RLC1 thanks. A few questions: I've read elsewhere that setting up and maintaining regulatory standards are very expensive and funds need to scale quickly to stick around. Can anyone expound on that? Also, does the fact that I don't hail from an investing background automatically disqualify me? Thanks again!

Jun 1, 2015

Okay, that's helpful info. I don't have a concrete answer for you on what your AUM needs to be in order to bear the costs of operation. I do know a friend who successfully made a living starting from just under $10m and growing from there.

Your primary expenses will be legal (fund formation), audit/assurance, technological (Bloomberg, etc.), and insurance.

You aren't disqualified for not coming from an investing background, especially if you aren't going after sophisticated investors. You can show your performance with the $5m to date, and I'd rely as heavily as possible on existing investors to help you scale. An uncle with $500k in your hands right now probably knows several other people liquid enough to put a few hundred thousand in.

Again, I don't have a hard threshold for you where you know you can cover costs given that you can find service providers at any price level. I will say that you have it easier than my aforementioned friend because you have a job (biotech CEO role) that keeps food on the table for you.

As you scale and if you do form a fund entity, as I said, get 3 years of performance numbers and go after all the emerging manager mandates. They're everywhere: fund-of-funds, public pensions, corporate pensions, you name it.

Jun 6, 2015

I don't know about the equity space but there are plenty of guys in the commodity space (CTA's) who's are non finance backgrounds who post good track records for a few years and attract a fair amount of capital (institutional included).

Best of luck.

Jun 6, 2015
Jul 23, 2016