Starting a Hedge Fund Requires $100 Million?

kinghongkong has made the primary point.

Technically your opening sentence is correct, itsSpaghettiTime, although it would be better if it said "raising a hedge fund requires at least $100m in commitments".

As you probably know, alternative investment funds charge both a management fee and a performance fee. The performance fee, or "carry", is the share of the profits that the partners running the fund get to keep. That number is usually 20%. The management fee is a fixed percentage charged to the assets of the fund. That number is usually 2%, although top-tier managers can get away with a higher number (2.5-4%, depending on who they are) simply because so many people want to invest.

The management fee is used to 'keep the lights on'. This means it is your budget to pay salaries for yourself and other investment professionals you hire, rent, all your technology expenses, professional services fees (legal, audit, accounting, etc.).

Mathematically you can see that securing $100m in commitments for your fund launch would mean you are guaranteed a $2m budget for your first year. For a small shop with one or two partners and one to three analysts, that's barely enough to cover costs.

If you are not raising external capital (you're simply creating a Limited Partnership fund vehicle to manage your own personal capital within a structure that makes offers great transparency on your track record), you can ignore all of the above because your expenses are effectively non-existent. (They would only be tax and audit [if you so chose to spend mid five figures on having an entity with zero external investors rubberstamped as to the fraud-free nature of your transactions].)

Jason Mudrick, for instance, started Mudrick Capital in 2009 with $5m of personal capital after leaving Contrarian and crushing it there for years on their equity vehicle. Today he's past $1.75b.

Secondly, as others have said, getting past $100m opens you up to checks from institutional investors. The reason this is the threshold is that institutional investors have (a) a minimum check size and (b) a concentration limit.

The former exists because of scale; a $4b university endowment or a pension fund with $8b allocated to public market managers does not have time to put all the work into diligencing a manager for a $10m check.

The latter exists because no investor wants to be too much of a fund's asset base. If you were 40% of the AUM in a $75m fund and you decided you wanted to trim your commitment by half, you are singlehandedly reducing the fund's management fee income by 20% (because that's how much you reduced their asset base), and as we've seen from the illustration I made above, you put the fund in a precarious position in terms of operational viability: they may not be able to cover expenses. The $100m threshold lets people start writing eight-figure checks to you with comfort.

In short, you wouldn't want to raise external capital in an amount below $50m unless you planned to take no salary and hire no team members. If you're managing personal capital, there isn't any minimum.