Is it my time to strike out?

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Hi WSO,

I wanna get a gauge on whether is it my time to strike out with my own HF. I'm currently in an established fund with shared track record. Envious of being the fund manager and CEO at 40 at my own place adds impetus to me starting on my own.

My stats are:
- Top undergrad target school. No masters, no MBA.
- 5 years as analyst over two HFs. No banking experience.
- Track record of strategy I co-developed. 4% returns 0.7 Sharpe over 1 year live record trading an AUM of 5m.
- Investments over G10 currencies hedged using major index futures.

I'm being realistic. If I can get 50m at 1% management, that'll be half a million to start me of with rental, hiring and systems for the first year. I'm looking at Hong Kong or Singapore as my base.

I got a chance?

  • Nijikon

Comments (23)

 
Jul 27, 2016 - 1:15am

I think that you need to consider

  • How are you going to get to 50M? i feel like rule of thumb here is that its hard to make a living under 100m in the HF game
  • Do you have a sustainable source of alpha?
  • Will you be able to replicate strategies on your own?
    -What will happen if the market moves against you , and the fund fails, enough savings to coast?
    -where are you going to hire from ?
 
Jul 27, 2016 - 3:54am

mcmckay21:

I think that you need to consider

- How are you going to get to 50M? i feel like rule of thumb here is that its hard to make a living under 100m in the HF game
- Do you have a sustainable source of alpha?
- Will you be able to replicate strategies on your own?
-What will happen if the market moves against you , and the fund fails, enough savings to coast?
-where are you going to hire from ?

Hi Mcmckay21,

Thank you for the follow up. Indeed, I thought about those question:

  1. I don't have rich connections. So I was thinking make a good presentation and pitch to investors during hedge fund shows.
  2. I guess I have to answer "Yes" to sustainable alpha? While I know I only work at two HFs, I recognize where I stand in terms of quality and originality of investment ideas. Comparing to what I hear of the strategies my peers are doing, I believe I'm ahead of the curve enough to have sustainable alpha.
  3. Some problem here because where I am, there's like a 3 man team for execution and a 2 man team, me included, for research. And both research and execution are vital for the strategy to work.
  4. No savings to invest in the fund.

  5. Hiring is planned with respect to Asia as I'm familiar with the labour market there.

- One compliance guy. US$40k a year.
- One back office guy. US$30k a year.
- Two on execution. Execution is automated and I have development experience. I'll get fresh graduates, US$35k each. I'll sketch out the design and they bang away at the code.
- US$150k a year on rent and electricity should get me some place decent.
- I'll be doing the marketing and strategy formulation.
- One secretary at US$25k a year.

That's US$315k a year. With US$500k from management fee, assuming 1% from US$50m, I believe I have a good US$185k for myself and as a buffer. Do I need a 3 year lock up period?

That's the plan.

 
Jul 27, 2016 - 3:54am

Loving the ambition Nijikon. You have to remember a lot of the start ups now have no management fees, only performance fees for up to some times 2 years so maybe you have to use your own savings for the initial part of the fund.

Also how did you get into the Analyst roles in the Hedge Funds, what was your pathway?

 
Best Response
Jul 27, 2016 - 4:16am

Wolfofgeorgestreet:

Loving the ambition Nijikon. You have to remember a lot of the start ups now have no management fees, only performance fees for up to some times 2 years so maybe you have to use your own savings for the initial part of the fund.

Also how did you get into the Analyst roles in the Hedge Funds, what was your pathway?

Highly unlikely I have savings to keep the fund afloat in the first two years. And I won't take a bank loan. So it's only through convincing investors at the conferences to invest in me.

I've seen enough, read enough, to make arguments of when performance is just a good number and when performance is real. And both can apply to start up funds and mature (3 to 10 year) funds. Thus, my idea is be genuine - here why my strat works, why it may not work, do you like it, if so let's do it.

Top US school, straight to <500m hedge fund as a developer, then to research, then to ~1b hedge fund, 75% research 25% development. I guess the key was that I was okay with a no-name fund to begin with and progress from there.

Now I'm just starting to think whether I should start this because only when doing so, can I be the owner of a ~1b HF when I'm 40. Nothing wrong with being the top XXX at Millennium but sometimes I have an inclination to have a place to call 100% my own.

 
Jul 27, 2016 - 8:14am

I was about to slay but it looks like you have some level of experience. that being said, I don't know if you're ready to start your own fund even if you get 50mm seed money from somewhere.

Martinghoul think this type of thing would work well at a multi manager shop? if he can get some success there as a PM, he could branch off and probably get some capital more easily...

 
Jul 27, 2016 - 9:13pm

Martinghoul:

Yeah, I think this is a more common route these days... Obviously, it's very competitive there as well, but there have been a few success stories.

Thank you for the encouragement. I understand that a 1 year track record is just that ... 1 year. There's always more experienced to be gain. I was looking at the goal.

Working in HFs, I realized one thing - the company philosophy, direction and character will always flow from the founder. And no matter how far a PM advances, he will never be the face of the fund. These founders perhaps thought the same decades ago and decided to do what I'm deciding to do now.

Suppose my life takes one of two outcome in 10 years - a PM at Bridgewater with 3 analysts running 2b AUM with defined risk limits, or the founder of a 400m hedge fund calling ALL the shots. The latter seems more interesting and fun.

 
Jul 27, 2016 - 9:45pm

sorry, but your performance stats are not good enough to start your own fund without better Pedigree, and much more time.

4% return with 0.7 sharpe?? You need at least 10% return with that Sharpe Ratio to justify the risk of a new hedge fund with a no-name manager to find investors.

I'd suggest either of the following 2 routes:
a) get a job at a BB in research/strategy, where you publish your trade ideas to the client base. This gives you a wider audience to see your work (exposure).
b) go get a spot at millenium or schoenfeld...where you have sole P&L attribution over a book. Do well, get paid well...15-20% of your P&L.

After a few years, if you still want to run your own fund, THEN you will have the necessary track record to attract investors...and enough of your own money to seed the fund to start.

 
Jul 27, 2016 - 10:35pm

ironnchef:

a) get a job at a BB in research/strategy, where you publish your trade ideas to the client base.

Thank you. Just a few things I want to clarify.

I initially thought 4% returns at 0.7 was already good enough relative to what other funds are doing. The HFRX Family Indices (www.hedgefundresearch.com) published today has Macro/CTA annualized YTD -0.33% and YTD -0.35% and Global annualized YTD -0.83% and YTD +0.51%.

I'm not claiming 4% as amazing performance. But it's definitely better than what today's funds are giving.

Further, I heard different opinions of having pedigree over performance. Does BB tag really count that much more over track record. I admit, my current fund is not recognized like how Citadel and Millennium are. But suppose I stay here, I'm projecting a 3 year track record trading $20m AUM. Is that worse than in a BB publishing research without an actual dime given to the strategies?

 
Jul 28, 2016 - 4:27am

i've spoken to a number of hedge fund recruiters that have mandates from some of the large multi-manager platforms, and here is what the recruiters/headhunters have been told to find/poach.

a) fund traders/PMs who are managing 100mm+, making 10% returns with a sharpe above 1.5 (aka...rockstars)
b) current BB traders / research / strategy who are performing well (have pedigree)

your $20mm AUM isn't large enough for consideration...i'm sorry to say. You will have to raise money from FFF (friends, family and fools)..and if that is not likely, then you will need the pedigree of an institution. That's just the way it works.

Nobody cares about your desire to be managing xx dollars by a certain age, so just forget that silly notion. It makes everything else you say come under doubt, and that you are not to be taken seriously.

4% on 20mm = only 800k. As a junior trader on a BB trading desk, you would have a 1mm stop loss, and an expectation of making 5mm your first years of actual risk taking. Underperformance is grounds for dismissal.

Now, your 800k on 20mm doesn't look so hot anymore does it?
Think about it...assuming a 15% payout on that 800k, you'll only get paid 120k...thats the BASE SALARY of a junior trader on a BB desk.

 
Jul 28, 2016 - 1:27pm

No. Too young / inexperienced. Managing a very small amount of $. Your 5 years HF experience was 25% of the time as a developer... this puts you at a relatively entry level / junior position on the buyside for research. You have no chance of raising outside capital right now (sorry to be a dk). 4% in today's market... SPY is +7%. You may be outperforming HFs who are flat YTD but you're taking a small sample size, comparing it to a very narrow window in time on a small amount of capital and think it's a good time to strike out? Liquidity's impact to performance should not be underestimated. You can whip $4mm around very quickly / instantaneously. Much harder to whip a $1bn book around w/o moving the market, especially in equities.

 
Jul 28, 2016 - 9:06pm

Okay, I'm starting to get the point.

Given my circumstances and goals, it seems then it's better for me to just advance to the PM position, not that'll be easy, in my current set up and have my goals lean towards a nice yearly salary and max out US$100m AUM at the end of my career? None of this 'face of the franchise' seems plausible.

I'm actually a realistic person. It seems that my lack of pedigree and / or a better track record tells me I'm not destined to strike out on my own.

 
Aug 1, 2017 - 7:08am

Hi Everyone,

I wanted to give an update on where my heart is in this starting HF thing.

I've been running live money, sub-100mio, in my portfolio for a good 6 months now. It's been a great learning experience and the PM / CIO are really keen to push my ideas to live if they work. Performance is flat but I've been learning quite a bit given that it's live money in a 24 / 5 market.

Here's the thing. It has reached a stage where I do about 90% of the idea generation / testing / research and the PM says Yes or No. I understand that he can't devote more time with my strat as he needs to handle two other strategies. And honestly, he isn't adding profound ideas, most probably because the ones that worked years ago don't anymore.

Do other analysts face this PM's contribution dearth once they're given more responsibilities?

Basically, I don't see any way my strat generates more PnL in my current fund versus another, that is, my own. So if this fund raising thing is at all possible, starting small with say 200mio, I might take the plunge.

Cheers,
Nijikon

 
Aug 1, 2017 - 5:43am
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