Joining Start Up Hedge Fund - What to Expect

abacaxi's picture
Rank: Senior Baboon | 202

Hey guys, I have the option to join a start up hedge fund after I leave b-school. It hasn't launched yet, and has raised almost $200MM in assets right now. The team is very strong, and the PM has had a great track record at the blue chip fund he left to start this one. We have not discussed comp figures yet.

My concerns are that they have been trying to fund raise for over a year now, and have only taken on $200MM. I don't know what their pipeline looks like. It's a pretty low AUM base given the team size (I would be 4th investment guy, and with back office, it adds up to 8 people), which makes comp very tight. I expect no bonus until assets increase, but do need a solid base to pay off student loans/to survive. For those of you that are more knowledgeable in startup funds, do you have any insight into other things I should consider, questions I should ask the team, etc, as I make my decision? Is this an overly risky proposition?

Comments (35)

Mar 21, 2017

What's the alternative? Do you have any other job offers yet?

Best Response
Mar 21, 2017

To be honest, USD 200m AUM on a 4-person investment team isn't bad at all. It's a decent starting point, especially if the PM is from a very good background with a great track record. Sometimes PMs intentionally wait out the initial period and decide against incremental fund raising - therefore, I'd make sure that they're actually trying to fund raise. Might be a moot point given that you already said that, but I thought it's worth pointing out. The reason why some funds might take their sweet time to raise AUM is because of the kind of investor base they want to accumulate - everyone would rather have very sticky capital and non-early investor fees and those guys that will stick with them for the long-run.

I would probably discuss your progression within the fund - i.e. whether the PM ever plans on making other guys / you more senior and give you a sleeve of the fund. Also would ask where does the PM see the optimal size of the fund both in AUM, coverage and headcount. Would also discuss compensation in the form of trying to mathematically tie it up with your own performance (as long as it's measured in transparent fashion) or the overall fund's performance rather than having it completely discretionary. This will provide ample incentive to stick around and wait for the fund to ramp up on the performance / AUM side. However, as with any start-up HF, the most important thing(s) is by far a) whether you believe in the PM succeeding and delivering in the short-run, since a year or so of sub-par performance can put clamps on the fund quickly and b) if the existing money is sticky enough or is it a single investor seed that's a bit light on commitment.

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Mar 21, 2017

Thanks for the responses, guys. From an options perspective, no FT offers on the table, though I am in advanced interviews with funds from $600MM - $30B in AUM.

I'm not familiar with intimate details on how comp is structured with regard to fund performance. What are typical structures? Some base number with an X% increase per fund % outperformance? Any chance at negotiating equity/carry?

Mar 22, 2017

Typical structure for junior people is actually base + discretionary bonus. Later on you can then get performance tied directly to your book performance or the performance of the entire fund in terms of % of PnL (i.e. the entire dollar value return the fund has generated) or % of performance fees (i.e. as it reads) or some other derivative, but the point is still the same - there's no running away by the PM / CEO when it comes to paying you - if the formula says you're supposed to get USD 1.23m pre-tax, that's the number you should get. However, does this mean you shouldn't have a discussion about this if they're fairly easy going? Of course you should. When it comes to "equity", partner status as an early stage employee at a start-up hedge fund is also possible - actually, you have better luck at landing a partner gig early on than getting a chunky % of performance to yourself.

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Mar 24, 2017

200m = 2% performance = $4m that covers salaries and office costs
20% return = $40m of which 20% = $8m, thats a decent amount to split between 4 investment professionals

Also as described above, there are reasons why a PM would want to limit the first seed capital, because the first money in is ususally more expensive, usually much better to raise some money, show a return and then raise more.

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Mar 24, 2017

As HF fees see continued downward pressure, fees are closer to 1%-1.5% management and ~15% performance. Also, founders share classes tend to drop fees a little more, so my math turns into:

1% on 200MM = $2m that will cover office and salaries, with little left over
assuming 15% return, 198MM * 15%=29.7MM * 15% performance fee = $4.5MM.

so all in, looking more like ~$6.5MM on my math to cover office expenses, salaries and bonuses for 4 investment guys + 3-4 operations staff. The pie shrinks pretty quick.

On limiting capital coming in: they've pushed back their launch date several times already (over several months). I'd understand if it were the case that they launched, ran the money and collected a track record before taking on more money, but they've continued to push back their official launch and so aren't running the money yet. Could be that the dollars haven't hit the bank. Makes me think twice...

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Mar 24, 2017

join on the condition that the pm gives you a slice of the pie. shooters shoot

Mar 24, 2017

Definitely crossed my mind. If I could get some piece of the fund, I'd forgo near term dollars for long term gain

Mar 24, 2017

jackpot. and if the fund ends up a complete disaster, at least ppl interviewing you know you have cojones for going for it

Mar 24, 2017

Look at the last two years performance of the funds you're considering. This matters more than anything since it will affect how much capital flows in and how fast you'll move up in the organization.

If you work for a $30bn fund with lousy performance, capital won't flow in for a while, you won't move up, and pay will be lousy. You also may run into layoffs if things continue to do poorly.

If you join as the 4th guy on a $200mm fund with strong performance, you can bet that money will flow in, the organization will grow, and thus you'll move up quickly and likely see better compensation YoY accordingly. Also a more exciting environment.

Mar 24, 2017

Great point on the track record. Anecdotally, I know the PM has a great track record over quite a long time investing this strategy on a significant capital base, though I've never seen the hard numbers. I have faith in his ability to make lightning strike twice

Mar 24, 2017

I also might mention in case you weren't already thinking this: Ask for carry! On a 4 investment personnel fund, this is a completely reasonable request. 1-3% would be typical at the associate level for this size group. I'd bet you'd get it, and it could be worth way more than bonus if the AUM grows. Worst case scenario he says no anyway.

Mar 27, 2017

If you don't mind me asking, what strategy is this PM/fund pursuing?

Mar 24, 2017

Seems like the size supports the staff and it's a good start. I wouldn't stress.

Mar 24, 2017

You should be very careful. Slow fundraise could spell further issues down the road (e.g. fund shutdown). The fact that they haven't launched is also worrisome. The headcount seems too high as well. Generally speaking a $300mm fund shouldn't run by more than two people. The PM would normally do all the trading at that level.

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Mar 24, 2017

I think this is fine. I would be really worried if they hadn't managed to raise money at all. I would ask them why they haven't launched yet though.

If at all possible, I would also try to get carry. They will probably push back based on your lack of experience, but I think its crap to join a startup and not get carry unless they agree ahead of time to pay you equivalent to a midsized fund. I would assume that given those two options they'll choose to give you upside. If not I'd seriously consider walking.

Mar 27, 2017

Sharing a new data point given to me from a coffee chat I had with the PM of a $1.2B credit fund, pertaining to new hedge fund fees (discussed above). This particular fund has most of its AUM tied up in an SMA (separately managed account). This PM told me that SMAs typically have management fees around 50bps, so the idea that it's running on 1-1.5% may be far from reality. Thought I'd share for others to learn

Apr 15, 2017

Curious to what OP decided to do. Based on what I've seen, $200mm is very much on the small side to focus on L/S credit / distressed, given portfolio concentration risk, lower liquidity in credit and the fact that you need to buy some size in a tranche to matter in a distressed sitch. Fees on a real distressed fund (established manager) is akin to PE.

Apr 30, 2017

I decided not to take the opp and am currently on the hunt for a role elsewhere. There was too much uncertainty in the equation and no interest in long-term comp through equity/revenue share.

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Apr 30, 2017

Cool, I think you made the right decision. I think you'd end up resenting them if the fund ended up crushing it but they weren't willing to give you much of the upside despite sharing similar downside risk (yes, they had to raise the capital, but they also sound like they've made a lot of money already in their careers).

May 4, 2017

Good job. I think too many people are afraid to walk away from offers like this (or any type of offer) b/c of the mystique + difficulty of getting HF jobs in general. If ppl expect you to take the risk/ do the work but don't want to treat you like a partner then f*** them

Apr 15, 2017

Something doesn't pass the sniff test here. A small startup, especially small as previously mentioned for distressed credit strategy, that likely has a lower fee SMA/seed, already staffed with several investment folks and full back-office, yet they want to hire for additional investment team out of b-school someone with whom they don't already have a relationship? Maybe it's a marketing thing to scale, but that's the last thing I'd be doing. At $200m, I would consider having two jr analytical resources with two more senior folks, and unless there was a previous relationship and reason to believe this person would be there for the longhaul and a certainty to add value, I don't think I'd give away carry/equity. Maybe OP is a superstar or something, in which case I'd advise them to take the more established opportunity.

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Apr 30, 2017

I had interned with the fund, and while I'd love to think I'm a superstar, I'm far from it. From my understanding, the more senior analysts/PM weren't drawing a salary and were living on their savings. All came from blue chip names after many years of work. In fact, this group was probably the most pedigreed I've ever seen. I imagine they had plenty of money in their rainy day funds.

That being said, as mentioned above, I decided not to take this opportunity. We stayed on good terms, and if they grow to a reasonable size and look to hire later, I may join on at that time. For now, though, I'll continue searching for another role at another fund.

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May 4, 2017

long hours, 60-80. Low base, high bonus.

Apr 30, 2017

Expect losing your job.

Don't say this in a banking interview:

Which superhero would you be and why? I want to be like Robin Hood, stealing from the rich and giving to the poor - me.

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May 4, 2017

As a freshman it should be fine, I am a junior at a hedge fund and I started in PWM, so you have leg up on me.

May 4, 2017

lol of course congrats. That's great if you're only a freshman. I'd imagine you'll probably be useful with the more "bullshit meaningless crap" since your so young. But take notes and try asking them questions about their investment strategy/ why they put on trades / and be eager to help. Things to do I'd say is it read up about what companies / industries they invest in and work on your Excel skills if you want to be useful. Things such as index match functions, match sumproduct functions, understanding how to make data sheets look clean, maybe basic understandings of dcfs, understanding wacc, how companies create shareholder value,etc

May 4, 2017
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May 4, 2017
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