Minimum Size of a Good Hedge Fund
At the risk of this question sounding ignorant, what is the minimum size of a good hedge fund? I understand that yes, a $100M dollar hedge fund can post returns of 27% while a $10B fund can post returns of 5%, but what I'm trying to get at is what is the minimum scale of AUM that a decently established (4+ years) fund might have? Perhaps some metrics to judge this would be what at which point does a significant majority of the hedge fund industry/investors to consider it to be a good fund, or provides the best exits to other hedge funds?
Would it be fair to say it would be $1B+, or would this number be perhaps closer to $500M?
Your question only begets more questions. Is this a family shop? What asset class(es) does this fund focus on? Depending on the asset class, is there leverage involved? How many employees are there that have to get paid out? What's the fee structure? Who are the investors (IE is it a fund of funds?) Etc.
I think I get where you're coming from, seeing these behemoths like Bridgewater and SAC and then hearing stories like the guys who took their $30mm and made a killing in the CDO crash. Both would definitely be considered "good" in most everyone's eyes.
Fact of the matter is, if you're a fund with only $10mm and showing good, safe, consistent results, you're going to get more money without a doubt. If you're a fund with a full-fat $10bln and you're showing those same results, you're still going to have people banging at the door to give you money.
+1 SB, thanks for the response. And yes, you are correct that is to a large extent what I am coming from, and I understand it's a broad question. So what if we are looking at a value fund (L/S equities) or a distressed debt fund? (Traditional Hedge Fund not Fof with variety of investors of high net worth individuals and large institutions). Let's say a free structure of 1.5% Management Fee and 20% performance fee. Thoughts?
What kind of timeframe are you comfortable working on/in? A traditional L/S value fund is definitely more "snappy" than a distressed debt fund. It's not unheard of for that distressed debt fund to go a year and a half to two years before cashing out on their specific positions. Are you willing to wait that out? Even then, it goes back to AUM: the traditional L/S fund definitely functions better with more AUM to work with on a daily/weekly basis. The distressed debt shop can take their initial position and then just need the liquidity to sit on until their plays come through.
I think the biggest real concern to look at is longevity. In either of these scenarios, like TheFamousTrader said, does the fund have what is needed to grow AUM and performance? If Sperandeo emailed me tomorrow and told me to move over to Southlake to be an entry associate with his new $10mm firm tomorrow, I'd be (almost physically) fighting TheFamousTrader for the spot, it's that simple.
An incredibly tricky question. Let's make a ton of assumptions here, if it's a single manager (or strategy) equity L/S shop with no replica long-only pocket, runs said L/S equity strategy in the broadest sense of the way, doesn't focus exclusively on the low market-cap segment, is not an industry specialist, has posted decent returns in the past, the PM / CEO is not picky with who are the investors and takes anyone's money, fund hasn't reached what the PM would deem optimal size (so that it doesn't start hurting performance) yet and has been running for 3+ years, I'd say anything above USD 500m can start looking interesting. However, even with all of the assumptions this is a massive generalization.
I'd totally jump on board a sub- USD 100m fund if an industry legend decided to set up his / her own shop, knowing full well that the fund's size can be scaled. A simple consideration to gauge scale is probably more on how much a fund manages per investment professional as opposed to the absolute dollar value itself. If you're running USD 1bn with 10 PMs and 20 analysts, you know it's on the low side, but if it's USD 500m among you (the analyst) and a PM, you're in decent hands from a "having money to manage" perspective.
The best approach to think about this is seek out the best / most consistent performers in the field, try and join a place where you know the top guy is a living legend, try and make sure that you won't be an irrelevant cog at the fund, but will rather have plenty of opportunity to grow and take on responsibility, make sure it's not spread too thin in terms of AUM/headcount and the absolute level of AUM should work itself out. Most importantly, make sure you're on-board with the thinking behind the strategy and you won't find yourself disagreeing on every point with the PM, which can be a killer - both can be right at the same time, just looking at the investment through a different set of lenses.
Best to do some digging yourself on a few fronts:
Your communication with headhunters / hedge funds would be more fruitful if you had a much clearer idea of the above. Generally, if you're from a top bank / team / group, headhunters are always a good shout as an IBD background hits the spot for a huge number of hedge funds. However, when speaking with headhunters they want to see that you're committed to a strategy or, at the very least, if you're dead set on HF (as opposed to VC/PE).
Contacting hedge funds themselves is always way more tricky and best done via networking with people working in the field as opposed to sending out generic emails to said hedge funds. Not to say that that doesn't work, but it would probably yield a low hit rate and it should be the last thing you do, as opposed to the first.
Fingers crossed the hunt is fruitful - have fun.
Where do I sign up to join Axe Capital?
I think they go by a slightly different name nowadays.
Everything TheFamousTrader said is right, but for a bit more color:
I assume when you say "good" hedge fund you are talking about good for you, someone joining as a junior analyst. Lets take a more realistic 15% payout (and assume you won't see any of the management fees). At a $100M fund, in an okay 10% year that's $1.5M payout. Obviously, at a $10B fund thats $150M. The question then becomes how many people are ahead of you and how generous is the PM. Obviously, at a $10B fund you can be paid well in any decent (and even some bad) years, so this question is really for the $100M fund.
Obviously, given scale advantages the only reason you'd consider a $100M fund is it it has the potential to get bigger quickly, and if you are likely to participate in the upside of joining a 'startup'. It would likely be a BIG mistake to join a $100M fund if they just want an analyst for a few years (unless you have no other real options). In general, I think its a bad idea to join startups (tech and HF) unless you're basically being treated like a founder (e.g. given equity/points up front), though that will likely not be the case for you coming straight from banking.
Getting back to the question, is $100M good for a ~4 year old fund. I'd say no. The fund has showed an inability to scale. Its rare (basically never happens) for a fund to start out that slowly and get to $1B+ ever, as not being at a few hundred million by year 4 generally indicates a 'failure to launch' type of situation. Its possible that the PM wants to run a small lifestyle fund, but in that case you should wonder if there is any upside for you in that (answer is probably no).
For a 4 year old fund that is trying to scale I'd say $250 - 300 is the minimum they need to indicate fundraising momentum. $400 - 500 is good, and getting to around a billion is great. If you want both safety and upside, i think funds in the $500 - $1B range that a few years old are a great place to be - young enough for you to matter to the firm, big enough to get paid if performance is good, and dramatically reduced blowup risk (any fund less than ~$2B is only a few bad quarters away from going out of business though). Anything below $300 is "living on a prayer" lol.
Referring back to what Famous said, ideally with a startup you'd be with a consistent performer / industry legend. (S)he would have raised more than $100M in 4 years if she wanted to.
Thanks for all the info thus far, really appreciate it. If you did have a startup scenario with a small fund, say under
People get hung up on "first few employees" when it really should be "founder or partner with significant points". If the fund was founded by 2 people and you come in at #3 with no points, you are just an analyst. Until the fund is a few hundred million plus that means no big paydays for you.
If there are 2 founders and 1 senior analyst, making you baby analyst on a $100M fund, I don't consider that a particularly high quality / unique opportunity. There are >1000 $100 - 500M teams at the big platforms (Millennium, Citadel, Point72, etc), and thousands more small hedge funds with that kind of AUM. There has to be something special about this (you're really close to the founders?) for it to be any better than the other gazillion options out there
From the perspective of an LP who allocates to hedge funds, usually we like to see a minimum of $500M AUM. This basically insures that we aren't the only big fish invested in the fund. If a fund is $100M and an investor pulls $25M, that's 25% of the fund and is going to negatively impact performance for all the other LP's. It might even force them to close the fund.
As some others have said, I would say $500M-$1B is the sweet spot for finding an "emerging manager". Generally that's when the larger, more serious LP's (won't pull $ after 1 bad month) start to invest. Having a sophisticated investor base is huge when it comes to the stability of the fund.
I honestly don't understand why AUM is considered a more appropriate measure of hedge fund performance over returns. I have personally invested in more market-beating top performers and prefer those to the funds of bulky HFs with large AUMs. Simply put, I'd prefer less money in high-volatility high market return HFs, and more money in a mix of low-risk vehicles. Don't know why anyone would go for anything else - but hey, I'm not so risk averse.
AUM isn't a measure of performance. We're approaching this from the perspective of someone who wants to work at an HF and (presumably) get paid well for doing so. Its a scale business. For you to make money you need to be at a fund that scales
Shit. Saw the replies only now, a year later.
So why are HFs often ranked by AUM most of the time? Sure, news articles blather on an on about performance, but rankings are usually done by AUM.
Most funds are designed to eventually transfer all alpha from the investor to the principals. Growing in scale and changing from a return structure that interests the individual to something gets pension money is the plan for everyone.
I figured this would be an appropriate palce to ask.
Does an AUM/Headcount of 150 - 200m/4 people sound like too many cooks for a long value fund?
Typical Hedge Fund Size? (Originally Posted: 10/12/2010)
What are the typical fund size ranges across the various hedge funds out there?
definitely 400-500mm I wouldn't want to see more than 4. 200mm a head is great structure though
You do realize that question is extremely broad... there are hedge funds run by college kids that are tens of thousands of dollars, and there are funds that are billions of dollars...
Yeah, there really is no specific range. If a hedge fund is under 100million, it's small time. Over a few billion and then it has international name recognition. There are many in between.
eleventy billion under management.
Range from 0 to 30 billion
HF AUM (Originally Posted: 03/08/2010)
Is a HF with ~$290 million AUM big or small?
Not tiny, but definitely on the smaller side.
If this is for a potential job, one thing you should potentially worry about is the number of investors that make up that $290 million, if it is 290 individuals with $1 million each it is much less risky than a few huge investors. just food for thought
agree with lotsofquestions, and for your reference, the AUM threshhold to enter Alpha Hedge Fund 100 ranking is $ 4 billion 2009.
Et alias consequatur qui eius ut quasi. Adipisci ut voluptates ipsam quo repellendus voluptatem. Aliquid distinctio necessitatibus reprehenderit ut eos aliquid impedit. Quis aut optio quaerat minima dolore veniam assumenda et. Quis ea nihil odio ea et laboriosam. Quis dicta sit cum totam quaerat dolore. Aperiam et impedit impedit.
Veniam eligendi aut libero tempora ad vitae hic suscipit. Est et eveniet atque pariatur odit. Odit recusandae nam nesciunt commodi eum quisquam rerum expedita. Mollitia sed porro enim quis. In quasi nihil facere est placeat iure.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Voluptas aliquam voluptas eos beatae reiciendis. Culpa natus qui quibusdam distinctio. Cumque consequuntur culpa quasi consequatur dolor facilis voluptas id.