Starting a hedge fund with very credible people in the industry

I recently left a large hedge fund that is not doing well, but I have an offer coming at another large fund that will be in the $500K neighborhood (which is very frustrating after 12 years in the business, but I have had a hard time getting someone to give me a shot at trading mostly due to my cost at this stage of my career).

On the flip side, someone I know very well is starting a fund with two other people. The person I know well is very credible and highly respected in the industry. They are thinking of bringing me on board with an equity stake as someone who will be very useful for understanding quant finance/statsitics/technology/finance in general/etc for a this new quant fund. My wife is shockingingly open minded to this even though we have a son - we are prepared to move to a one bedroom apartment in Jersey City (The other partners are already rich) so that we can afford to live on maybe 100K plus whatever my wife can scrounge up (could be 100k if we are lucky).

There is a good chance that we can have $250 AuM by next year when trading should start. What is a reasonable equity stake to expect - where is the boundary between a tough decision between the more stable $500K job and the equity stake that could make me rich. These guys are the kinds that could raise real money absolutely - could be multibillion in 3-5 years, but performance must be good in the first year of course. The quant ideas are novel too. Not the BS lazy vanilla trend following stuff that will be part of the next quant quake.

The downside in the event of the fund not taking off is that I can expect to add a LOT of other quantitative topics to my resume and a lot of doors can be opened working with these very well respected people - so not unlike going back to grad school, but with real upside - I have been craving positive convexity since I entered the industry instead of figuratively selling loads of teeny puts my whole career.

oops - forgot to ask about what could a feasible equity stake be. An equity stake is on the table, but the size is not clear right now. If it is only 1-2%, then I am out. Three co-founders already involved - one has been doing key CIO work for the last couple years, another will be able to raise capital and do a lot of risk/portfolio construction, while another will be CTO - then there would be me.

I bring a very well rounded skill set, but these guys are definitely the types that were MDs a long long time ago. Just using that for context on sizing me up. The guy bringing me in has a strong appreciation for work he has seen me do in the past - creative ways of representing new and extremely interesting data sets that nobody else has for our quant models.

Comments (16)

 
8/15/17

Sounds like you've already made your decision. Was there a question?

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8/16/17

just edited to add that I was seeking clarity on the way to size an expected equity stake.

 
8/15/17

It sounds like you are already leaning towards the startup offer and just need some confirmation that you are making the right decision. The startup sounds like an attractive opportunity from a risk/reward perspective especially if you can scale aum. In fact, aum wouldn't even need to scale all that much for you to eclipse what you would be making at the "more stable" fund, which btw is a faulty assumption (there is no guarantee that the fund will be around or that you will not be let go if things go poorly). If the fund does not scale or fails even, you will not be blamed, and I do not believe that you will have a difficult time returning to a larger fund. For my own negotiations, the pen and paper exercise I did was to imagine how the fund would realistically scale and assume that if the fund a decent year, then how much would I need to have in equity to make what I would be happy with that is competitive for the industry. For me, that number coincidentally coincided with the couple of data points that I was able to get from my close friends who were partners at their own respective funds. I found that if the fund did scale as planned or if it did do better than my expectations, then my upside would be significantly greater than what I could be making elsewhere. Hope that helps.

 
8/16/17

Your point is not lost on me - my job would be secure for a few years, but then what?! It is so easy to get canned in this industry even when your job performance is good because some traders suck. That is part of the reason that the risk is attractive. I still need clarity on a way to guess the size of an equity stake - I have edited my question above.

 
8/16/17

The other questions that you need to be thoughtful of is: 1) how do you get more points in the fund in the future; 2) how will be diluted as new people get hired as the fund gets bigger, if at all (usually, there is an pool that is set aside for new employees but every fund does things differently); 3) how do you benefit as the management company gets bigger, if at all (do the economics only accrue to the three other guys?).

 
8/16/17

12 years in the business and money still an issue? I know cost of living is high but it ain't crazy high.

Absolute truths don't exist... celebrated opinions do.

 
8/16/17

He never said money was an issue. 500k>100k, seems reasonable enough to me to think about it.

 
8/16/17

Not in the HF industry, but friends with guys who have started funds. Is there a large LP that is seeding the fund? These groups typically require a large stake in the mgmt company for being the cornerstone LP, thereby reducing the equity for everyone else.

I agree with you though, 1-2% is nothing and not worth the risk. I wouldn't think that 30/30/30/10 would be unreasonable. Just depends how "valuable" the other partners view you.

 
8/22/17

I disagree that 1-2% is nothing. You have 3 co-founders already, who are presumably much more important than you, and who all have to split up the pie. Your role is "being useful". If you're not bringing investors to the table, and you're not the reason why anyone would give the fund money (the CIO or the money-maker), then I would be surprised if you could get more than a few points. 5% is probably maximum. If you're principally on the investing side, maybe you could skew it higher towards performance fee points.

 
8/22/17

Maybe in a vacuum but not when comparing it to another offer w/ $500k guaranteed annual comp.

The senior partners need to ante up to overcome the extremely low cash comp if they want to retain anyone decent. 1-2% doesn't do that, in my opinion (their ownership stake would be worth 15x yours, think about that).

 
8/29/17

My opinion having been on both sides of the table --I still think 2% is meaningful, esp if they're launching w 250 (would be one of the more successful launches lately that I've heard of...which means they should be on track to 1bn) and the guy is hardly adding any start-up value (strongly weighted towards bringing in assets, then performance) and not a key founder. Maybe these guys aren't upset at giving away 10% of their business, but I really doubt it as they're only getting 33% each max. I would set expectations lower.

 
8/24/17

First off this sounds great. The startup HF seems like the obvious choice here.

Another way to go about finding the % stake you want/deserve/need would be to work backwards from a number in dollars. Use some reasonable (perhaps conservative) growth assumptions in AUM and ask yourself "if I have 5% of this $XXX AUM fund, will that payout be enough for the risk I'm taking?"

Good luck!

 
8/24/17

The HF route is the way to go if you have enough money saved up. Plus, you said your wife can scrounge up 100K per year. The HF route is a no brainer in this case.

CFA Charterholder, Certified FRM

 
8/29/17

Go with the startup! Its such a good opportunity especially if the PM is credible as you say. If salary is an issue for you (as you mentioned the 500k as frustrating) then an equity stake in a start up is a really good incentive for you to perform and earn more in the future. I'm interning at a FoHF right now and meet alot of new start-ups, and have met alot of people who left their succesful funds for a start-up. Some people are doing icnredibly well for themselves thanks to the gamble!

 
1/5/18

@Econometric can you tell me what is it that you exactly do for which you have an amazing compensation of 500k, I also aspire to work in the finance and HF world and would love to know how you managed to do do well for yourself.

 
1/5/18

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