Leaving an established fund to start/join a family office fund?
Hey all -
I've been on the buy-side for 5-7 years now, where I've spent time in private and public markets. Right now, I work for an equity focused hedge fund where I help the PM with a niche / uncorrelated strategy. I'm happy in my role, and can see myself here over the longer term.
I may have an opportunity on the table to start / run a fund with a friend of mine that has very good relationships with some UHNW individuals. The idea would be to link with his relationships and initially raise at least $10M-$30M to manage on a discretionary basis, which should be doable given initial takes by prospective LPs on the concept.
As some context, I know that $10M-$30M is peanuts, so my requirements to help start this venture would entail a six-figure base/benefits, fully paid for infrastructure (BBRG, Office Space, Staff, Back Office, Counsel, etc.), appropriate compensation (20% of profits), and a capital lock-up (ideally over a multi-year basis in something akin to an Evergreen fund and/or Venture fund structure).
If, hypothetically, the stars aligned and you got all of your "asks", would you leave your current fund to do something like this? The concept sounds intriguing, but it certainly comes with substantial risk (at the cost of stability) and the current unemployment rates/uncertain economic environment doesn't help...
$20M at 100bp is $200k. How will you cover Bloomberg, office space, outsourced b/o AND pay yourself a $100k base? I think depending on your strategy, you may be able to get away with no Bloomberg. And why do you need an office space if it's friends and family type money? I think it is doable if you cut out some of the fat.
If you can implement a Buffett partnership fee structure (say 25% above a 6% hurdle) that would be decent. Assuming you return 15% that's 450k to you. Not bad for being your own boss.
Are you counting on raising institutional money or staying with f&f? Institutional will want to put your strategy in a box, and you also need some differentiation/hook (not just buy high quality compounders).
If you don't manage to raise more money, are you going to be content with $100k to $550k a year compared to what you're walking away from? I can tell you I'd take that deal because my personal EV is $150k to $450k a year dealing with b/s and paying nyc taxes. To make somewhere in that neighborhood, be my own boss, move to a lower COL area - makes sense for me. Your mileage would obviously vary if you are consistently making $1M+ at your current gig.
Please also ask yourself - are you willing to invest most of your liquid net worth alongside the $20M in outside money? That should tell you how confident you are in this working out. You should not be managing other people's money if you aren't willing to have skin in the game.
15% annual return? LOL
Unless he is an extraordinary investor, 15pct is very agressive, and likely to lead to the wrong decision. I would cut that in half, just to be conservative, and see what that yields.
If you only return 7-8% your clients should buy the index and you shouldn't be managing their money. But sure, you should also consider that bear case. It would put you on the lower end of that comp range and you'd likely be out of even that job in 3-5 years. Then again, not a terribly different profile versus some analyst jobs at larger funds.
I probably wouldn't do this unless:
1) Initial Capital >100m + Reasonable Risk Parameters (10-15pct Target Vol): As others have said, you need to have enough capital to cover costs: 150-200k salary/benefits for you and whomever you want to hire, Bloombegr feeds, office space, legal, research access, data access, software, et al.... It probably adds up to 500k-1m if you want to do it properly. Additionally, I would want to know that it is enough AUM that if I perform well, I can pay myself/team well.
2) Hire CFO / COO Team Member: I'd want to have someone that can take as much of the business side off my plate so I can focus on generating P+L. Its impossible to do this entirely, but a dedicated seat to tackling these tasks would be helpful.
3) >1m Liquid Net Worth: I'd want to have a reasonable buffer to be able cushion whatever direction this takes. Worse case scenario is that you don't make any money for a few years, face redemptions, have to handle gradual unwind, and you only earn salary / no bonus and have to eat up savings, but do not have to materially make life adjustments.
4) Optionality to Bring in New Assets: I'd want to be sure I could go market the fund and grow it if I put up great returns. The real value is not in clipping coupons on returns from a 100m book, it is being the GP in a fund that you have been able to grow from 100m -1bn on the back of a few years of good returns.
5) High Degree of Confidence in Friendship co-Founder: Relationships can fray easily under intense stress of poor performance. Especially if returns are mediocre and if you are the investment side of the business and he is the relationship/client-side.
So to answer your question, if I could check all of these boxes, would I pursue it: probably. I would want a 100m AUM day 1: ideally with 1-2 main anchor investors, founders class fee structure, offer some cut of the business (5-10% stake/rev share), and joint desire with investors to grow the business.
edit: One thing to add, while it would be nice to be your own boss, you can basically achieve this by simply becoming a PM at a fund. In this set up, you would have to deal with so much non-investment related content: prime broker negotiations, random ops headaches, regulatory reporting, et al....
This is great advice. What background and years of experience would you say it might take to be in a position to raise $100m?
Also, would your thoughts be different if the fund was just long only equities?
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