I have a million dollars in my IBKR account and will get 10 million more next year, how do I successfully create a hedge fund?

I'm 19 years old and in a unique situation where me and my friend (his dad is an ultra wealthy Chinese entrepreneur) were given a million dollars to invest and use to create a rudimentary fund management firm. We were told that if we could outperform the market and create a strong foundation for a legitimate organization, that we would get another ten million in the next year. We've had the million for 8 months now and have been getting used to trading with this volume, making mistakes, developing our strategy, etc. We are up 15% and are hoping to reach our goals. However, I'm confused as to where the hell this is supposed to go. I've read on WSO that starting a hedge fund never works and it's better to break into IBD as an analyst and go from there but I think that we have a shot since we are securing capital and creating a track record. Where do I go from here? Me and my cofounder are good at trading and making plays but we have no idea how we're supposed to "create" a fund. We're just two dudes trading and having a good time. How do I actually try to make this into something that could develop into a career? What should I look out for and avoid? I just need some advice from someone in traditional finance.

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Comments (25)

Funniest
Aug 11, 2018

If you get that 10 milly then fuck working IBD. Your boy just got chewed out for accidentally putting 2 spaces between a paragraph in an internal email.

What concert costs 45 cents? 50 Cent feat. Nickelback.

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Aug 11, 2018

Oh my god... where do I find friends whose dad will give me a million to start my fund??? I wish my parents gave me some money to invest but they only earn a 50th of what you got every year so that's out of the question....

To answer your question, I know a couple of people who started their own funds (and have heard of some other people) and had raised a lot of money. Those guys had a previous history working at another fund and had good track records. I don't think that you'll get to raise capital from an actual investor unless he/she just gives away money. You probably need some years of experience to raise a lot of money. If I were you I'd start with gaining some experience before starting your own fund

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Aug 11, 2018

Does that mean going into IBD? That just seems like a long process considering I have capital I can use right now, like the other commenter said IBD just doesn't seem too great. Can I create a track record by claiming I'm trading under a garage band hedge fund?

Aug 11, 2018

You can do whatever you want to do. But if you want to raise more capital from a legit investor you probably need at least 3-4 years of serious experience. So if somehow you can generate good returns on whatever money the guy's giving you, do it if you want to. But working in a legit ib/hf would give you some credibility and some great experience.

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  • HFT
  •  Aug 14, 2018

Hey I'm 19 too. I have my own fund and looking for like-minded partners.

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Aug 14, 2018

Same here. DM me.

  • HFT
  •  Aug 14, 2018

We have spoken right?

Aug 11, 2018

How much do you manage?

  • HFT
  •  Aug 14, 2018

Hahahah

Aug 11, 2018

I dm'd you, we can speak further on a messaging platform if you want.

Aug 15, 2018

Is that 15% after costs? Are you and your buddy charging fees? if so what?

What are you trading? FX, Commodities, Equities etc? Can you divulge more about your strategy? Are you hedging? or is it pure L/S? Is it arb based? greek based etc?

Is the 10m from the same single investor or multiple investors? Likewise is there currently any formality? Or is it just a case of he put 1m in an account you have access to? What country are you based as this will obviously have a significant factor.

I believe but other people will have far more understanding than I that if you are US based you need significant amount of capital before the economics make sense. It would therefore potentially be better for you (if you are doing this in a informal way) to maintain that informality until you have a track record with a viable trading history so that your first fund can be of a sufficient size.

When did you start investing this 1m? if you are up 15% in less than 12 - 15 or so months then if you can achieve this YOY for say 3-5 years you will have no trouble getting investment going forward.

Aug 11, 2018

Thanks for replying, I'd love to talk to you further.

As for your questions, I'll try my best to address them here to the best of my knowledge. We are up 15% before costs and have a fee structure set but since our primary investor doesn't care to make money off of us we aren't too worried about that at the moment. We are using the traditional two and twenty fee structure but that is subject to change once we start trying to attract more investors. Although our primary investor set a very informal set of guidelines for us to manage the capital, we are a formed LLC in Delaware and are a legally recognized entity so we are a legitimate organization. We are based primarily in Baltimore (Johns Hopkins) and D.C.

We are trading equities in the biotech sector at the moment, we previously were using an AI focused trading strategy based on a machine learning algorithm we created through Google's TensorFlow but switched to more traditional value investing strategies because our resources and technology were really not there yet to be effective in that field. I can talk more in depth about our trading strategy with you privately if you'd like.

Also we are maintaining an air of informality at the moment since we both are in school so we are mostly focused on our returns and learning more about the market and then setting up for becoming a more formal and professional fund in the later years of our college careers.

This was a very rudimentary attempt at answering your questions but I'd be happy to talk more in depth and have you critique and give advice over the phone or text since I don't check WSO as often.

Aug 15, 2018

deleted

Aug 11, 2018

So having a different strategy and being a unique fund would be best if looking to get bought out by larger BB's? Our strategy has changed a few times since we are in our infancy and trying new things out, however, I think our current strategy is pretty unique. I am just wondering if I should focus on being consistent with a unique strategy or trying different methods out for the most effective rate of return for the fund.

Aug 15, 2018

I'm by no means an expert on this topic and a lot has changed since in the HF world since 2001; I'm pretty sure BB's are extremely restricted in terms of ownership/investment in HFs now due to Dodd-Frank. Starting a successful shop from the ground up is very difficult now as well, even with an experienced pedigree. A possible pathway is trying to be incorporated into a large asset management business that owns many different funds...which is long shot as well. That being said, developing a strong track record and unique philosophy in your unique situation could eventually lead you to running more capital perhaps from your friend's wealthy network.

Aug 24, 2018

So what if you've done 29% ROI yoy from 09 to 16? Aka beaten the S&P500 by 16% yoy just through your own trading skillset. Unfortunately, capital was in the few hundred thousand department. Where can I get my next 5 million in funding? Anyone interested? (I've got all documentation btw.)

Rahim Lakhani

Aug 24, 2018

Step 1: create a track record (2-3 years seems to be the min)
Step2: be able to clearly describe your strategy to people who have no idea what you are doing...make it into a document. What instruments do you trade? What type of strategy? Is it repeatable? What is repeatable about it? What kind of leverage do you use? What are your catastrophic risks (eg...if 2008 were to repeat)? How do you hedge those risks (or, do you)? What is your avg trade duration (how long do you tend to hold positions)? Are you trading for mean reversion, or momentum/breakout, or both? How so?
Step3: get organized (legally) such that you can accept outside investor money (non-US citizens want a way to invest where they are not subject to US taxes...this is why lots of US hedge funds have LLCs in the Caymens).
Step4: collect $$$

just google it...you're welcome

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Most Helpful
Aug 25, 2018

If I was you I would do the following. I would contact an established HF manager, or even a start up manager with a good CV, and explain your situation. I would ask that manager to take you on and allow you to train under him in exchange for you committing your 10m of capital to his fund for an agreed lock-up period (say 3 years). After 3 years you should have some idea if you are any good at managing money in an institutional setting and you will have a much more credible CV. After 3 years you can decide to stay or launch out on your own.