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Starting a Hedge/Private Equity/Investment Fund. Launching your own - How to start one successfully?

sartoris's picture
Rank: Senior Monkey | 77

How does one usually do it successfully? Are most fairly experienced in the industry before they launch their own fund? How about contacts? Thanks.

Comments (385)

Jun 15, 2011

Experience enough to know the answer to those questions.

"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns or dollars."

Jun 15, 2011

I think investors look for two things:

1.) Experience.
2.) Capital commitment to the fund.

The real question is whether you honestly believe you can beat the market- and whether it's a reasonable assumption to believe you're qualified to have that figured out. Four or five years in S&T and sticking in all of your savings (which should be substantial) should be a strong signal.

Jun 16, 2011
IlliniProgrammer:

Four or five years in S&T and sticking in all of your savings (which should be substantial) should be a strong signal.

Does the same hold for IB experience? How you get people to invest in your fund, via fundraisers?

Jun 16, 2011
Walkerr:

Does the same hold for IB experience? How you get people to invest in your fund, via fundraisers?

I dunno, you could always find the Boy Scout troop in some rich neighborhood and offer a 1% commission on investments to help pay for tents and camping gear. :D

In S&T and research, you develop a reputation and people eventually seek YOU out. I am not sure how it works in IBD. IBD might be good for a niche fund like risk arbitrage, but just based on experience and skillsets, it's going to be a bit harder for a banker to make a compelling case to investors than for a salesperson, trader, or research guy.

Not saying it isn't doable, just saying the PE/VC route would be a bit easier for a banker starting his own fund. Bankers claim that HFs hire them as traders and I believe them, so that might be another way to get some experience in as a trader.

The more intelligent money will be looking for a signal that you know what you're doing and you can make them money. A track record in research is one way to do it. A track record managing a trading book- ideally as a prop trader betting on market directions- is another way to do.

Partially disagree with Kenny in that the HF route, while helpful, may not be absolutely necessary. It comes down to your reputation as a stock picker/risk taker and how many rich people know you. There's a lot of ways to build that reputation, including the hedge fund route, but it generally takes a few years.

Jun 16, 2011

The majority of new funds are started by people who are coming from a leadership/risk-taking role in an existing fund (prop desks as well but that's not likely to be relevant to anyone who has to ask this question). Those people by and large have a) a track record and b) connections to various "gate-keepers" and capital allocators like fund-of-funds, family offices, private banks/wealth management groups, and rich individuals, etc from their previous jobs.

Besides these relationships, many new funds are seeded by the principals' former employers or by hedge fund seeding funds, who often take equity in the management company and/or reduced fees in addition providing investment capital.

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Jun 18, 2011

IP you are consistently negative about banker's hedge fund roles and I have to say I don't see it in my circle of friends, acquaintances and colleagues (note that I was not a banker or a trader). You say that bankers are only suited for "niche roles" like risk arb but that is completely contrary to the real-world breakdown between fundamental, quant, and macro strategies. Big parts of the hedge fund world are related to bottoms-up, financials-driven strategies that attract bankers and research analysts. I actually know fairly few traders in non-execution roles, though I know that macro and commodities funds as as well as certain highly-structured strategies require more of a trader skill-set.

I agree with you that someone moving directly from a corporate finance role will have a hard time starting a fund, but that's not what most people do. People leave for the buyside and learn the portfolio/position management elements there.

I also disagree that people really view running a non-prop book or making buy/sell recs at a bank are really analogous to running a fund-that's why people go to the buyside as an analyst, trader, junior PM, etc and build a truly relevant performance history.

You're welcome to provide a list of the recent fund launches by sell-side and I will provide a list of the recent buy-side launches-I can guarantee there are more funds whose founders have buyside experience.

Jun 18, 2011

Here's an interesting article on how Howard Marks of Oaktree got HIS start running money:
To summarize, he was in research but was floundering, and got a chance to run a prop fund focused on convertible bonds.

http://www.bloomberg.com/news/2011-06-17/biggest-d...

Jun 19, 2011

Interesting thoughts Kenny.

Isn't it more common for a banker to switch to buy-side and possibly start his own fund after a couple of years buy-side experience?

Jun 19, 2011

Not just a banker, ANYONE. The vast majority of fund launches come from existing buyside PMs, with the notable exception being prop trading desks which are essentially extinct now, or will be.

Jun 19, 2011
sartoris:

How does one usually do it successfully? Are most fairly experienced in the industry before they launch their own fund? How about contacts? Thanks.

Not too rip you apart or anything, but these are things you need to know before even considering starting a fund. Most of all you need to know the legal structure behind it. Your definitely going to need a Series 7 certification if you plan on managing equities. Its not an easy task, its why only a few individuals are able to accomplish such a feat.

Jul 3, 2011

Here's how one guy did it:

Grandmaster capital is a brand new hedge fund out of San Francisco. The founder and portfolio manager was a portfolio manager at Clarium before venturing out on his own. Clarium provided him the startup capital (I believe it was $50m) to get started.

Jul 3, 2011

Valueinvesting,

Not to rip you apart or anything but learn what the fuck you are talking about before giving advice. A Series 7 license is not a prerequisite for stating a HF (unless you choose to register).

May 22, 2015

I'm new but hungry. :) well maybe would like to create a fund trading futures. Where is this hf seed funding?

May 22, 2015

cool story brah

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May 22, 2015

pretty cool. good for you man. congrats on getting it together.

May 22, 2015

good luck. reduce overhead costs! I've read books on small, successful funds that started up in a garage or empty office space. The more you put into the business, the more time you're devoted to non fund activities.

May 22, 2015

out of curiosity: is there a minimum $ requirement to create a HF? and what are the legal differences between a HF and a traditional investment fund?

i know i could google this, but since we are already on the topic...

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May 22, 2015
esbanker:

out of curiosity: is there a minimum $ requirement to create a HF? and what are the legal differences between a HF and a traditional investment fund?

i know i could google this, but since we are already on the topic...

There's no minimum with regards to how much money you want to manage -- you could theoretically launch a fund with $50,000 in AUM if you wanted to. However, the minimum that we hope to launch with is $2,000,000 because at that amount, the 2% management fee will cover overhead (administrators, accounting and tax) for the year, although we have some extra money for overhead if need be.

As to the organizational expenses to launch a fund -- the most bare-bones you could do it with would run you about $15,000 for a boutique law firm. We raised about $60,000, and went with a boutique law firm that will run us about $20,000. The rest is for unexpected costs, first year overhead, and fundraising. They're fairly well-known and respected though for a small firm, and we researched them and found generally positive reviews.

May 22, 2015

Hedge funds with a reputable law firm (and ongoing representation) is between $60,000 and $100,000 and 6-month lead time. Now, you can get it done cheaper, but then you'll have other problems. Post-Bernie Madoff, people are doing additional due diligence and if anything smells funny (or cheap), they won't go. I'm an analyst at my firm and potential investors asked for my biography; and I have to have a notarized certificate of graduation on file in the office. That's how thorough things are getting.

May 22, 2015
rls:

Hedge funds with a reputable law firm (and ongoing representation) is between $60,000 and $100,000 and 6-month lead time. Now, you can get it done cheaper, but then you'll have other problems. Post-Bernie Madoff, people are doing additional due diligence and if anything smells funny (or cheap), they won't go. I'm an analyst at my firm and potential investors asked for my biography; and I have to have a notarized certificate of graduation on file in the office. That's how thorough things are getting.

After that ex CEO at Yahoo who could blame

May 22, 2015
nameback:

So, some of you are aware from my posts that I'm trying to start my own hedge fund. Yes, it's a bit ambitious for someone with a stats background and no finance experience to try to launch a fund, but we have a great system so we're going for it.

Anyway, I just wanted to post that we raised money for the management company's startup costs, and have started getting all our docs done. We'll be launching on August 1st. Whether we have our seed capital by then is an open question, but we're on our way.

Many people have outlined steps of the process. Could you give a breakdown and perhaps what you found as your biggest challenges? Thanks

May 22, 2015
JoshFi7:

Many people have outlined steps of the process. Could you give a breakdown and perhaps what you found as your biggest challenges? Thanks

I mean, there are really two challenging parts, and the rest is just bureaucratic legwork.

(1) Developing a strategy that's unique, offers high returns, and is robust.

We're quants -- my partner and I are both statisticians -- so our main focus was and is developing our proprietary trading system and making it as versatile and robust as possible. It's been about a year of non-stop development and we're hardly done; there's still so much more to squeeze out of this system. This is obviously more specific to quant funds -- but in a way, I think you'll have an easier time starting a quant fund as the proverbial "two guys in a garage" than a qualitative fund, because your strategy is independent of things like pedigree, and its track record doesn't depend on experience, discipline, etc. Just set it running and wait for results.

(2) Raising AUM.

This is by far the harder part. It was easy enough to raise $70,000 from friends and family for a test fund to start building a track record ($5,000 here, $2,500 there, etc). And raising $60,000 to start the business wasn't terribly hard either. However, raising $2mil is another beast entirely. First of all, almost all fund of funds, institutional clients, and even most family offices are off-limits to you right out of the gate. They have too many screens. "We don't invest in quants." "We don't invest in anyone with less than $50mil AUM" "We don't invest in anyone with less than a three year track record." Even many seeders don't want to be the first investor in a fund.

So really, you have three targets from hardest to easiest: Seeder funds, family offices, and high net worth individuals. Then it's simply a matter of networking and getting your materials in front of as many people as possible. Cold calling funds, attending conferences, using your personal network, etc.

Our personal story went something like this:

I started creating trading models for fun last summer, and as some of them started looking particularly promising, I ended up putting more and more time into the hobby. Before long, the workload was becoming increasingly difficult to manage and the math was becoming quite complex, so I enlisted my friend who is getting his PhD in statistics.

We worked diligently for about three months before deciding we had something strong enough to test in the real world -- so we raised some money from friends and family. That took maybe a month to raise $70,000. People were generally eager to give it a shot, and we had prepared some nice materials that were pretty convincing.

Then there was sort of a doldrums from December 2011 through March 2012 -- just letting the system run and accumulate a track record. Then, we decided to revamp the model based on the results we'd been seeing and the lessons we'd learned so far. So we went about creating a new system based on the old one -- and in the process were able to dramatically boost returns and versatility. That took about a month to get to a place where we were confident in our revisions, though as I said we're continually evolving the system.

We then decided to try to raise money to launch a proper fund. We started by tapping everyone in our personal network who might be able to introduce us to HNW individuals, and then by attending SALT and other hedge fund events. It took us about another month to raise the $60,000 for business expenses, and concurrently about a month and a half to select a law firm and begin the process of setting up the fund.

May 22, 2015

JoshFi7, I reckon that he hasn't reached his biggest challenge yet- raising money. For an unknown manager with no background or experience in finance, to say it will be a herculean undertaking would be an enormous understatement. There isn't enough back-tested data in the world to easily overcome those odds.

I don't mean to be a downer, but 90% of hedge funds fail (they are small businesses after all). And they fail for operational reasons which are oft associated with not having enough money for continuing operations. Even if an investor is interested and willing to put money in a fund, they will hesitate if they don't think you have enough management fees to be self-sustaining. I'm assuming you'll be doing 2/20.

Question for the OP: How much money do the principals/partners have in the fund (assuming you are not alone)? That will be a very important question from potential investors.

May 22, 2015
rls:

to say it will be a herculean undertaking would be an enormous understatement. There isn't enough back-tested data in the world to easily overcome those odds.

Amen. We know it's going to be incredibly difficult, but we think we just might be able to pull it off. It may take us a year or more to raise the money, but we think our system is worth the effort. We've done 11% so far this year, and if we can finish out what is shaping up to be a shitty year with somewhere between 15% and 25%, we think that may just be impressive enough of a live track record to get some people interested.

We also have some decent personal connections. My partner's uncle manages the Soros Open Society Fund, for example. And then there's the random stuff you would never expect -- like my roommate (who is an exotic dancer) having Andrew Lahde as a regular client of hers and telling him about my fund, or my friend who is close friends with Matt Damon and Ben Affleck.

Personally, living in LA I'd really like to reach out to the entertainment community, as they're not exactly known for being particularly conservative with their finances. It's tough to break into, but if I can pull a few good connections, it could be a good source of AUM for us.

Question for the OP: How much money do the principals/partners have in the fund (assuming you are not alone)? That will be a very important question from potential investors.

100% of gross assets to our names. Not much in absolute terms, but it's all we have.

May 22, 2015

Thanks for response. One question investors may ask is how fund handles different time frames.

2007-8 bear market.

chop of 04-06. tech bubble and burst and also how fund performs when small caps out perform, foreign equities, large caps etc.

Almost a way to diversify themselves and understand drawbacks of what appears to be a great system.

May 22, 2015

Good luck to you man. I admire your courage.

May 22, 2015

Please keep us updated. I hope that you succeed but even if you don't, good things can spring from failure. Good luck!

May 22, 2015

Some updates on overhead costs for those curious: a lot of admins/auditors are willing to work with you on scaling down costs if you're a lean startup, and to that end I've got a proposal coming to me from an auditor for just $8,000 for our first 18-month audit. Then figure another 7k for taxes, and as long as we can keep admin costs below 25k for the first year we might even have a little bit left over to cover some fundraising expenses (conferences, travel, etc).

May 22, 2015

Good luck man, thats awesome. Keep us in the loop as you go forward.

If I had asked people what they wanted, they would have said faster horses - Henry Ford

May 22, 2015

All the best Nameback, fortune favours the brave!

Something for you to maybe consider is how social media can help you getting your message out there, especially in regards to chasing AuM. There are many channels that can be utilised (within regulatory requirements) to develop your networks online.
Be happy to help you out if you need some pointers.

Again, very good luck to you.

May 22, 2015

Congrats on getting this far....this is definitely a serious undertaking and its something i have looked into in pretty good detail.

On the expenses, I would be careful about going cut-rate on the attorney's/auditors etc. While it may be easier in year one, the business you are building is not going to make you rish in year one (or two or three) and down the road when you are trying to ramp the business it will really help to have relationships with top-level service providers. Many institutional investors will not even look at a fund that doesnt have big names providing these services.

May 22, 2015
Bondarb:

Congrats on getting this far....this is definitely a serious undertaking and its something i have looked into in pretty good detail.

On the expenses, I would be careful about going cut-rate on the attorney's/auditors etc. While it may be easier in year one, the business you are building is not going to make you rish in year one (or two or three) and down the road when you are trying to ramp the business it will really help to have relationships with top-level service providers. Many institutional investors will not even look at a fund that doesnt have big names providing these services.

I would say our motto has been "small but reputable." We're using names that are reasonably well-known, especially on the West Coast (we're located in Los Angeles), but who are able to work with us on prices. No, we're not using Rothstein and Kass, but we're not using some guy in a strip mall, either.

May 22, 2015

Would you mind sharing what your background is and how you started investing? Whats your general investment thesis?

May 22, 2015
Cries:

Would you mind sharing what your background is and how you started investing? Whats your general investment thesis?

My background is in politics, where I worked as a quant -- modeling voter behavior and preference, turnout projections, doing some database management, etc. Before that I was a political organizer. My partner is a PhD candidate in statistics and formerly worked as a quant in the consulting world and in government. We met on the Obama campaign in '08.

I started building financial models as a hobby to learn more about investing -- however I started having some pretty good success in backtesting, so I decided to take it a little more seriously. From there, it just kind of ballooned and now I do this full-time and it's been about a year of hardcore development.

We don't have an investment thesis so much as we have a proprietary algorithm, or set of algorithms.

May 22, 2015

What type of quantitative trading models have you built? Given your background in collective intelligence and statistics, I hope you resist the temptation to deploy machine learning/ AI algos as that stuff is far more often than not fool's gold when applied to markets.

May 22, 2015
Macro Arbitrage:

What type of quantitative trading models have you built? Given your background in collective intelligence and statistics, I hope you resist the temptation to deploy machine learning/ AI algos as that stuff is far more often than not fool's gold when applied to markets.

We heavily use machine-learning techniques. So far it's worked well! We're up 12.6% this year.

Can I ask why you are averse to these methods?

May 22, 2015

So we just got out of an investor meeting and we've officially raised our first $200,000! We're all pretty excited, I have to say.

May 22, 2015

What kind of investors are you going to for commitments? I'm working with a group who is trying to get a fund launched sometime in the next two years and we can't justify it making economic sense without commitments of at least $100 million, though we're planning for about 3-4x that amount, if not more coming from funds these guys are going to be leaving if this gets off the ground.

I know you guys are probably young and it's just two guys with a quant strategy, but what about office space? What have your legal fees looked like and are you planning on adding back office staff for admin type work?

Have you gotten together with a prime broker yet and negotiated commissions, or how do you plan on placing your trades? Or what were you using before when you established your track record?

I'm sure the details of launching are a lot different for you guys than they are for the team I'm consulting right now but I'm interested to hear how it's working out so far. And congrats on the initial funding.

May 22, 2015
BlackHat:

What kind of investors are you going to for commitments? I'm working with a group who is trying to get a fund launched sometime in the next two years and we can't justify it making economic sense without commitments of at least $100 million, though we're planning for about 3-4x that amount, if not more coming from funds these guys are going to be leaving if this gets off the ground.

I know you guys are probably young and it's just two guys with a quant strategy, but what about office space? What have your legal fees looked like and are you planning on adding back office staff for admin type work?

Have you gotten together with a prime broker yet and negotiated commissions, or how do you plan on placing your trades? Or what were you using before when you established your track record?

I'm sure the details of launching are a lot different for you guys than they are for the team I'm consulting right now but I'm interested to hear how it's working out so far. And congrats on the initial funding.

We're mostly going after medium-high net worth individuals that we have in our personal network. The reality is, not coming from established funds or investment banks or prop shops, we don't have access to institutional money or 7-9 figure commitments of any sort, really.

We will have no office space to start with -- purely out of home. Legal fees are already taken care of for launch, and we have a bit socked away for anything further. Admin will be external at the start -- everything for service providers should cost us about $29,000/year. We're still negotiating with primes. Probably going to go with a relatively cheap introducing broker.

And yeah, I'm sure it's [i]very[/i] different from what you're consulting on, but as you said, we are young and basically two guys in a garage, so to speak, so for us this puts us 10% of the way to our goal of launching with $2mil.

And thanks!

edit: The one place we might be able to pull off some institutional money could potentially be with some unions -- if they have emerging manager programs. I say that because I used to work in the labor movement when I did politics, so I have some connections in high places at the AFL-CIO, Steelworkers, AFT, and AFSCME. It's something I haven't really been pursuing aggressively yet, but now that we have a launch date and everything is set, I think it's time to start after that money.

May 22, 2015

Any opportunities for internships? :D

good luck and thanks for posting this, this is awesome!!

alpha currency trader wanna-be

May 22, 2015

Got our foot in the door today with Larch Lane. First big seeder we've talked to that hasn't screened us out just based on materials. We're gonna have a follow-up with them in a week or two, and based on how that goes and what they think of our strategy, they'll decide whether to put us through the full due-diligence process or not.

Does anyone know what the success rate is like for a fund doing due-diligence with a seeder or FoF? If you make it that far, what level of interest in your fund does that indicate?

I'm very curious, because I know LL makes pretty big seed commitments -- the guy I spoke with told me they generally invest 75-100mil -- so I'm obviously excited at the prospect but I have no idea just how steep the odds are.

May 22, 2015

This is an awesome story mate, I hope it works out for you. Am interested to hear how your algorithem performed when you back-tested from 2007-2009/10?

All the best.

May 22, 2015

Few questions about your fund:

  1. What are administration fees / costs? (How much are they, what are they for, etc.)
  2. How are you doing on raising money from high net worth people? What's your strategy / approach for this group?
May 22, 2015
AK Senator:

Few questions about your fund:

  1. What are administration fees / costs? (How much are they, what are they for, etc.)
  2. How are you doing on raising money from high net worth people? What's your strategy / approach for this group?
  • Standard 2% management and 20% incentive. If we launch at 2mil, then management fee will go strictly to overhead only, and incentive fee will pay salaries at the end of the year.
  • So far I think we're doing alright, but we need to expand our network of HNW. Our biggest problem is simply not knowing enough wealthy people. We've raised $300,000 so far, which of course is not much in the scheme of things, but represents 15% of our goal.
    May 22, 2015

    Honestly, it's starting to frustrate me how difficult a process it is talking to family offices and institutions.

    We've earned 20% on our proof-of-concept fund since December 2011. According to public indexes like BarclayHedge, the average hedge fund is up ~1.1% over the same time period.

    And yet people don't seem particularly impressed by our results. I get that we haven't been running our test fund for that long, but it's frustrating nonetheless. Ah, well, fundraising is a fundamentally unpleasant task. Just gotta keep your head down and plow through.

    May 22, 2015
    nameback:

    Honestly, it's starting to frustrate me how difficult a process it is talking to family offices and institutions.

    We've earned 20% on our proof-of-concept fund since December 2011. According to public indexes like BarclayHedge, the average hedge fund is up ~1.1% over the same time period.

    And yet people don't seem particularly impressed by our results. I get that we haven't been running our test fund for that long, but it's frustrating nonetheless. Ah, well, fundraising is a fundamentally unpleasant task. Just gotta keep your head down and plow through.

    There's a lot more to it than just having the "product" part down. Think of it like you're selling any other product, because basically that's what you're doing. So you're basically trying to market a new, "better" product right now, but people aren't sure if they can believe it's better. The best way to get big institutions to buy into your product is to have some sort of credibility. If Martha Stewart is featuring your product, then Wal-Mart will probably put it on its shelves. Now I'm assuming you don't have a Martha Stewart on your investment team, but who gave you the $300,000... or is it just from friends and family? Anyone can return 20%, but if you have any relationships those are a lot more important when bringing your product to market. What has the Sharpe looked like? Drawdown? If you can, I'd look for institutions that apply quant strategies similar to yours and speak with them about it. At worst they'd be able to give you advice as to how/if your product is superior to most, and best case they seed you if they're really impressed. HNW aren't interested typically in your returns, they want a brand name or some sort of "reliability factor" where they can feel good that their money is with the XYZ guy who came from Goldman Sachs and wears a nice suit and pays for my steak when he's explaining to me why they're down 60%. You'd be surprised how shitty most HNW are at investing if they made their money elsewhere, or more often, inherited it.

    That said, best advice I can give you is to actually spend less time marketing to family funds and HNW, because they tend to hate on quant funds since they don't understand the risk/reward side of investing and just like the relationship side more often than not. I'd try and get in touch with some quant institutions that have more of an understanding of the way you're investing... if you really think you have a superior product.

    Best of luck with the capital raise going forward. Keep us updated.

    May 22, 2015
    nameback:

    Honestly, it's starting to frustrate me how difficult a process it is talking to family offices and institutions.

    We've earned 20% on our proof-of-concept fund since December 2011. According to public indexes like BarclayHedge, the average hedge fund is up ~1.1% over the same time period.

    And yet people don't seem particularly impressed by our results. I get that we haven't been running our test fund for that long, but it's frustrating nonetheless. Ah, well, fundraising is a fundamentally unpleasant task. Just gotta keep your head down and plow through.

    How would your algos performed if they started running in 1998?

    May 22, 2015

    I'm confused about why people are always asking what kind of leverage was used for those returns. If he made 20%, isn't it just 20% no matter how much leverage there was? Or is it possibly a way to see how risky the portfolio is?

    May 22, 2015
    numnum:

    I'm confused about why people are always asking what kind of leverage was used for those returns. If he made 20%, isn't it just 20% no matter how much leverage there was? Or is it possibly a way to see how risky the portfolio is?

    correct

    May 22, 2015

    Reading this is fantastic, I wish you the absolute very best of luck. I would recommend reading 'Money Mavericks: Confessions of a Hedge Fund Manager' if you havn't already. A Danish guy sets up his own fund and goes into great detail about the setting up and difficulties raising money with no track record.

    Again, best of luck!

    May 22, 2015

    So Larch Lane got back to us, with some good news and some bad news.

    Bad news is that they don't want to put us through due diligence for seeding because we're too new to the industry.

    Good news is that they are interested in allocating to us from their FoF division, once we hit 25mil in assets on our own. They recommended that we hit up family offices to cover the initial seed, as apparently a lot of them are filling in the gap where traditional seeders have pulled back since 08. Still structure it like a seed deal, with profit sharing, just not from a FoF.

    May 22, 2015

    i am sure that you're aware that you will have similar times from most larger funds. You could consider borrowing from friends / family and running a smaller sum for a while. Also not sure if this is a good idea .. but would a prop trading firm back you?

    May 22, 2015

    What is your structure like? Normally we see:

    1. Delaware LP to accept subscriptions from taxable US investors
    2. Cayman offshore feeder fund to accept subscriptions from non-US persons and US tax exempt entities
    3. Cayman offshore master fund through which the US feeder and Cayman feeder invest.

    If you are faced with low capital, one suggestion is to sit on a platform designed by one of the larger fund administrators. The platform is a lower cost deal and is targetd at start-up managers who wish to establish a track record. Once AUM reaches a certain level, you come off the platform and form your own fund vehicles.

    Any questions on any of the above, just let me know.

    May 22, 2015
    CaymanIncorporations:

    What is your structure like? Normally we see:

    1. Delaware LP to accept subscriptions from taxable US investors
    2. Cayman offshore feeder fund to accept subscriptions from non-US persons and US tax exempt entities
    3. Cayman offshore master fund through which the US feeder and Cayman feeder invest.

    So a fund that raises capital from U.S and foreign HNWs via private banks and PWMs would fall under 3?

    May 22, 2015

    update on your progress in the last 6 months?

    May 22, 2015

    Hi! How you back-test your strategy? How/where you write your algos (software, etc,...)? How important is your education when you speak with HNW, private banks? Thank you and Good luck.

    May 22, 2015

    any update on your progress?

    May 22, 2015

    Also interested to see where this went. Sounded fairly promising.

    "When you stop striving for perfection, you might as well be dead."

    May 22, 2015

    PS, If this is illegal per say per the SEC laws because I don't have a Commodity trading advisor license, is there a way around it so that I can trade capital that has been raised through my personal network? IE family and friends??

    May 22, 2015

    Sounds good. Just be able to have a track record and post your returns. Realistically, your best bet is jumping into a prop shop or BB sales/trading. Just be aware that most banks are cutting back. PE/HF really only comes if you have a top technology skill or a good mathematician w/o an MBA.

    May 22, 2015

    Good learning experience, making some money would only be a bonus... and seems like this would be very useful in an interview to use as a platform for discussing what stocks you like. Just don't get carried away and pull a Lumina Investments. Surprised more frats and similar groups don't do something like this.

      • 1
    May 22, 2015

    Yes exactly we want to preserve our capital and offer an experience to the members. Indeed making money would just be extra.

    Great post on idea generation btw.

    I sold some shares, but on a net basis, significantly increased my ownership.
    Jeffrey Skilling

    May 22, 2015

    College isn't for learning. It's for getting as fucked up as possible.

    May 22, 2015

    That's actually pretty cool. It would be a great experience to bring up in an interview. Unless you guys are all idiots, why would a fraternity investment fund be different from one handled by another school organization? You might get someone who is biased against fraternities in interviews, however, speaking in general terms, I have yet to meet anyone who continued to hold on to negative stereotypes after I spoke intelligently about my fraternity experience. Dispelling rumors and false stereotypes is not hard. If you have good grades and relevant experiences, you could be in a better position than other applicants (assuming you interview well). Being in a fraternity and handling your priorities shows that you can manage your time.

    I'm not sure how large of a sum you're talking about, but I'm curious how you got approval from your alumni board to manage money if no one in your chapter had any relevant experience. I'm talking about having a track record of money management, PWM and IB internships don't count. Was it donated directly to your chapter instead of the housing or general corporation? We tried to do something similar, but our alumni corp denied the request.

    May 22, 2015

    Hi redrocksky,

    So a bunch of the guys on our BOD have careers in HFs and AM firms.
    We sold them on the idea that we would keep the risk level very low and have strict covenants on how much equity vs bonds or ETFs we would hold and a market cap + minimum diversification restrictions on stocks.
    Additionally the BOD has total veto power over any transaction and we have to submit detailed written reports to them of our holdings,trades, changes in the portfolio on a monthly basis + meeting.

    My school has a strong finance program and part of the course is to manage a portfolio in the low-mid 6 figures. We are assisted by several profs in the whole process which has allowed me and a bunch of the guys to get great hands on experience of the difference dynamics of money management.

    Again even with this we are on a relative basis fairly unqualified but again the idea behind this is an educational experience and actually making any money is really just bonus.

    The sum was earned by our chapter through the house that we own and our national entity has not say over this. Were talking mid 5 figures so yea pretty small.

    I sold some shares, but on a net basis, significantly increased my ownership.
    Jeffrey Skilling

    May 22, 2015

    Sounds like you guys are risking burning through your frat's money in order to build up your own experience and resumes.

    Sounds very self-serving.

    If I was a running a PE shop, I'd worry that you have little sense of fiduciary duties and would happily burn LPs money for your own short term gain.

    That said, I don't run a PE shop.

      • 3
    May 22, 2015

    That's not what's going on at all.

    They received a donation and were given permission by their alumni board to manage it. No one is trying to misappropriate funds.

    May 22, 2015
    SSits:

    Sounds like you guys are risking burning through your frat's money in order to build up your own experience and resumes.

    This is pretty much what a frat is for...

      • 2
    May 22, 2015

    Sounds like a great opportunity. Speaking partially from experience, a few thoughts/tips:

    1. If you can find a faculty mentor then you can probably work it out to get class credit for the experience (via independent study). Everybody loves an easy A (and Emma Stone).

    2. Depending on the location of your school, try to get an alum or professional in the industry to act as a mentor.

    3. Reach out to investment clubs at your school/other schools and talk to them about how they structure their club, etc.

      • 1
    May 22, 2015

    Hey,

    Yes we have several alumns working in finance on board to help us get up and running and mentor us/ conduct workshops along the way. We have a bunch of guys in the investment club and we've been talking to other schools in the area to seek advice.

    Reaching out to faculty for class credit is a great idea though!

    Thanks for the input and the DCF template.

    I sold some shares, but on a net basis, significantly increased my ownership.
    Jeffrey Skilling

    May 22, 2015

    Just curious cause I have no idea, are there any limitations or restrictions on investments based on is being a tax-free organization?

    May 22, 2015

    If you guys are going to do this, sit down and do this right from the ground up. Start with what the purpose of this fund is and look for the best "classification" for your account. Is this going to be a fund that speculates, that looks for GARP, Capital Appreciation or Income Generation? That's a huge thing to weigh in. I would also start reading as many Mutual Funds and ETF prospectuses as you can. They are set up in such a way that their holdings must follow explicit guidelines. Every fund has some form of this or another, but Mutual Fund and ETF prospectuses are the easiest to get ahold of so start there. IF you can't find it in the prospectus, look for the Additional Statements of Information" that may accompany it. This is a huge thing - especially if you have people that you are acting in the best interest of. These guidelines are there for both your protection and your investors piece of mind knowing that your holdings will follow some rough guidelines.

    May 22, 2015

    I have a relevant question, My friend and are opening a joint E-trade account, but it's in his name. It's not a substantial amount of money or anything. I am wondering if we might run into issues in terms of the taxation of our earnings ( if we have any haha)-- that is, since the account is in his name, technically, he is liable for any tax payments. What should we do?

    May 22, 2015

    How large is the account? Do you guys have other income streams? If your brokerage account is in the 4 figure range, and your gains aren't ridiculously good, you shouldn't expect a large tax liability if any.

    May 22, 2015

    This can be extremely beneficial or an utter joke. Having a defined investment and risk management plan etc is crucial but stuff like 'hedging' with ETFs to reduce "systematic" [i'm sure you mean systemic] risk is just over the top. Hedge fund jargon dropping is gonna make you guys an easy target in interviews and I'd be willing to bet that there's no way way you're going to generate a "decent level of income in any market environment". Worry about generating great risk-adjusted returns instead of impressing your interviewers. Best of luck, sounds like a great idea.

    May 22, 2015
    Macro Arbitrage:

    'hedging' with ETFs to reduce "systematic" [i'm sure you mean systemic] risk

    Pretty sure he means systematic risk.

    http://en.m.wikipedia.org/wiki/Systematic_risk

    May 22, 2015

    Yes agreed perhaps income in any market environment was the wrong way to put it.
    What I meant is build a very defensive portfolio to limit downside risk as much as possible if the index takes a beating which we would aim to do in holding mostly debt, blue chip companies and long inverse market ETFs to reduce the theoretical beta of our holdings to 0.

    Again I realize this is much easier to say than implement successfully.

    As BlackHat mentioned the last thing we want to do is pull a Lumina Investments.

    We'd focus on educating our members, deploying our capital in a responsible way and taking a lot of advice from our alumns/mentors.

    I sold some shares, but on a net basis, significantly increased my ownership.
    Jeffrey Skilling

    May 22, 2015

    If you're in a good frat, like SAE, DKE, ADPhi, PsiU, St. Anthony Hall, etc.

    May 22, 2015

    Funnily enough it's one of the above.

    I sold some shares, but on a net basis, significantly increased my ownership.
    Jeffrey Skilling

    May 22, 2015

    Agree with the above comments. My contribution is look into the potential for it to be an endowment, and follow Swensen's model. This would emphasise asset allocation over security selection though, nevertheless it would give you a good foundation into the funds management business altogether.

    In my opinion you'd;
    1) Come up with a set of Strategic Asset Allocations across;

    Listed:
    cash, corporate bonds, government bonds, domestic equities, international equities, emerging markets,

    and if you can gain access through your alumni network,
    Unlisted;
    Litigation Funding, Absolute return (hedge funds), Private Equity, Infrastructure (physical), property (physical), commodities (physical).

    Beyond that you may be able to beef Listed up with REITs for property + infrastructure funds etc.

    Your split should be essentially 'around' a 60/40 split between 'growth' assets such as equity, and 'debt' assets such as cash/short duration bonds. This is a time-proven split that's ideal as a foundation, which you can then deviate from if you provide an adequate justification (i.e. the sacrifice of liquidity for increasing Sharpe ratio -> this is essentially what Swensen's model advocates)

    Once you've established how much you want in each asset class then;

    2) Set out the governance of the funds management:

    I.e. How much are you allowed to deviate from each of Strategic asset allocation, how regularly will you rebalance the weights (as there is drift daily), what are the rules you are using for rebalancing (is it time-based, risk based, return based etc).

    The most basic setup would be a Tactical asset allocation of 3-5% (i.e. you can be overweight equities upto 5% of the SAA), with rebalancing set monthly (good balance between transaction costs and control of SAA).

    3) Then set out your risk-controls; You say you want to be low-risk; what does that mean?

    Essentially you would want your multi-asset portfolio measured against a modified CVAR - this would then allow you to effectivley manage the risk your portfolio is taking, and adjust it to a more suitable level through reduction in exposures. This measure is more for internal use than 'performance' reporting.

    4) Then set out your performance evaluation or 'attribution analysis'

    I.e. this would 'explain' your performance monthly as a split between your 'asset allocation' decision, and your 'security selection' decision. This is important information as it allows you to monitor how you're actually going, and what areas need work.

    5) Then designate security selectors (mini-pm's) to manage each asset class.

    Here you'd designate the 'conviction' that each PM can have - i.e. what % of the asset class can they use up on one stock selection, what controls are over this PM - what is the budget for transaction costs etc etc.

    You would then use Sharpe ratios etc to evaluate performance on a monthly basis.

    6) Finally - this is crucial; you set your 'target' return per year.

    This is the entire point of the exercise; generating alpha. This requires the following;

    1) Setting an 'internal' benchmark for the entire portfolio (it could be the SAA's theoretical return)
    2) Setting industry-recognised benchmarks for asset classes
    3) Setting internal PM benchmarks

    Then you're able to actually able to say that your decisions over asset allocation, security selection (and even market timing) have generated 'alpha'.

    But also - you're able to establish a base-line required return so that you are 'risk-aware' and realise that achieving a 5%+CPI return consistently is far more difficult task than 'matching' the SP500's return.

    The above is essentially how I would structure such a fund based upon my experience within a large University endowment fund - and I have been toying with implementing this set-up myself (no Frats in Aus though so i'd be doing it personally with a lot less capital).

    Two key benefits;

    1) If done correctly you won't look foolish if you blow-up; because it has inherent diversification and layered controls.
    2) If done very well - you may use it as a vehicle to fund-raise from Alumni and actually establish an endowment for the Frat that would consistently payout and benefit current frat and future frat members equally.

      • 1
    May 22, 2015

    I was apart of an endeavor similar to this last year, so here's some advice from a student. Our attempt failed, and it was because participation and interest dropped right off a cliff as soon as we got to the stage where we needed to start generating investment ideas, and you should expect the same to some degree.

    I think a better approach to making something like this successful would be to structure yourself not as a "hedge fund", but just as an investment club. Everyone will be all over the place in terms of equity research and investing capabilities, so trying to come out of the gates with a target alpha goal would probably be counter-productive. I know of similar clubs in other houses, and they usually start because the founders of it want to pad their resumes and have some alpha results to put down. As a result a lot of the ideas and execution are rushed and sloppy.

    This would be a great chance to have workshops on valuation, markets, modeling, etc to start getting everyone up to speed on ER. If you have an alumni base within finance, see if you can get some guest speakers to talk about their experience. When it comes to idea generation encourage club wide collaboration, and when agreement comes on a thesis use the funds your Alumni Board approved to execute these trades not with the goal of building a track record for your club, but to study and see where you were right and wrong.

    Remember, just because you have money to invest doesn't mean you HAVE to spend/allocate it. If you can get a solid foundation with the club you can potentially have something great in 2-4 years time and beyond, especially as new members come into your house. Possibly after that time your club will be large enough to where you can have a sect break off and be your Investment Committee with the primary duties of idea generation and portfolio management.

    Good luck!

    May 22, 2015

    This is the last thing that would've been on the minds of the guys in my big ten non-target frat. It would've been how can we have a pool built for the spring or we need a new sound system in the basement, etc.

    I think you guys should do some ER in your core competency sector: DEO, BF-B, BUD, SAM, BREW, PM, MO, LO...

      • 1
    May 22, 2015

    Not a bad idea.

    Two suggestions:

    1. Participation is key. Even if enthusiasm is high amongst the initial set of members, it needs to stay that way even when you've long since graduated. You may need to make it a constitutional requirement in your charter or have some requirement of commitment from pledges.

    2. Establish a process and have the discipline to stick to it. Create an investment committee that approves what is sent to the Board and consider having outsiders (a prof, alumni, etc.) on it. Have a formal reproting and recommendation process to that committee. Don't make decisions informally over beers.

    May 22, 2015

    You should really open up a non personal account for this endevour. If you do end up having gains, someone is going to get hit hard with taxes. Or if you lose a lot of money that person is going to do awesome on their taxes taking in that credit.

    Also, this is college, so if you piss off the person with the personal account, you can say bye bye fund.

      • 1
    May 22, 2015
    Skinnayyy:

    You should really open up a non personal account for this endevour. If you do end up having gains, someone is going to get hit hard with taxes. Or if you lose a lot of money that person is going to do awesome on their taxes taking in that credit.

    Also, this is college, so if you piss off the person with the personal account, you can say bye bye fund.

    this is 100% correct. +SB

    titling is the #1 mistake people make with their assets after they've done some planning (e.g. drafting a trust but not funding it, leaving IRA beneficiaries to an ex or to your estate, etc.). and I mean no disrespect to the HF and AM alums you have, but their realm of expertise is not in account titling or the legalese therein, that's the job of an attorney. The reasons why you absolutely HAVE to have the assets in a non-personal account are thus:

    1. when the person who owns the account graduates, I assume you'd give it to another brother. the brothers would have to file a gift tax return and the surrendering brother would lose part of his lifetime exemption. not fair to the surrendering brother, and this is an irrevocable action.
    2. if the brother who owns the account goes into bankruptcy, creditors can seize the account and you have no recourse.
    3. same goes for divorce, if this brother gets divorced while he has this account, say bye bye to half or more of it.

    seek legal counsel, but I was president of a large fraternity and I can say that while some of the guys are my best friends, will be my groomsmen and my pallbearers, I cannot say the same for all of them. you need to set this up as something where any individual brother puts the chapter at zero liability and zero risk (aside from investment risk). this will usually mean setting up a corporation or LLC, make your alumnus advisor CEO or something and have the brothers change as the guard changes. partnerships are tricky because the general partner still has liability and if you have LPs always leaving (graduating), it's more paperwork and trouble than it's worth. still, seek legal counsel, you are setting yourself up to possibly get royally fucked.

    I hope none of these things happen to you, but I'm of the opinion that one should plan for the worst, and hope for the best. I hope it all works out for you, but please heed my warning.

    PM me if you have more questions.

    May 22, 2015

    This is a cool idea though. I'd love to have this opportunity.

    May 22, 2015

    My MBA program had some of the school's endowment allocated to them so we could gain real time experience managing money. It had an air tight IPS and quarterly reviews with industry professionals. You should call alum of your frat and ask if they want to participate. Great networking tool and a way to get mentors

    May 22, 2015

    This seems like a great learning opportunity. Wish I had an opportunity like this while in college.

    May 22, 2015

    What do frats spend their money on besides Greek Alphabet t-shirts and beer? -- Semi-serious question

    May 22, 2015

    Such a GDI question

    May 22, 2015

    OP, I'd try to be more anonymous on the internet. Judging from your post I KNOW you're a tri lamb.

    Source.

    May 22, 2015

    Interested to hear how this goes. I had this same idea the other year but got shut down pretty quickly by my Alumni Board and Chapter Director. Keep us posted on what you do though!

    ...

    May 22, 2015

    Yea sure I'll post in a few months when were up and running or if anything new comes up!

    I sold some shares, but on a net basis, significantly increased my ownership.
    Jeffrey Skilling

    May 22, 2015

    Does anyone know of a reasonably comprehensive portfolio management software that can be used for virtual/paper trades? Looking to start a student managed fund as well but without real capital so as to establish a track record and receive an endowment... The software doesn't have to be free but it definitely can't be what I imagine most funds pay for their service, if it means anything I have access to bloomberg terminals.

    May 22, 2015

    I was looking for this as well, and all I came up with is this: https://www.interactivebrokers.com/en/software/tws...

    if you have access to bloomberg I would just ask a bloomberg rep, they should help you out.

      • 1
    May 22, 2015

    There's a guy on here who quit it all and started his own fund. He's up like a bajillion % YTD. He also gets hit on all day/night by dimes/smokeshows and has a 100% conversion rate for reals. Just a regular fucking renaissance man. He will post here no doubt. Watch.

    May 22, 2015

    why has this been posted 3 times?

    May 22, 2015
    turtles:

    why has this been posted 3 times?

    Dude cuz he's not in it for the $, he's in it for the game of allocating capital. Allright homes he's in it for the game. Don't hate the mf playa, hate the game. Of allocating capital

    May 22, 2015

    It was posted three times because I'm assuming that the crowd that looks at this forum may be different from the hedge fund crowd, which may be different from the PE crowd.

    As opposed to relying on one group of people that are interested/experienced in one aspect of finance, I'm trying to get as many ideas as possible. Hope the triple posting doesn't offend anyone!

    Also will apologize/justify my comment about the "game." I go to NYU and every kid I meet (especially in Stern) seems to be interested in "finance", but few seem to be able to describe why other than money. Now, I respect financial aspirations big time. That being said, because I'm not purely in this for the money, I feel the whole "traditional" route may or may not apply to me.

    Sorry to create such a headache for you all!

    May 22, 2015

    This is so jokes because I'm pretty sure the OP is being sincere, just naive. If you want to start a Hedge/Value/PE fund someday (What finance guy wouldn't?), you're going to have to spend 10-20 years working for someone to have the required capital and connections for such a venture, that is if you're ever fortunate enough to have that option. PE and Hedge funds, as well as private investment vehicles are all radically different in strategy, markets and skills required so it's very short-sighted to lump them all together.

    If you want to work in private equity, it's a general consensus that IBD situates you well from both a recruiting and knowledge base standpoint.

    If you want to work @ a hedge fund, you have your choice of S&T or AM generally, and the decision rule really being the strategy of the fund. Value funds might even be better suited to IBD veterans because to the fundamental nature of the strategy, but I'd ask people in the industry.

    TBH no offense OP but for someone with such lofty dreams and tacky jargon you don't know a whole lot about the finance world, especially for a Stern sophmore. You really should try and get some finance-related work experience under your belt this summer. Given you said "recruited" and didn't say "was hired" I'm guessing you're gonna have to find some boutique IBD or PWM experience this summer but do your HW man and figure out the route you want to take.

    "Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns or dollars."

    May 22, 2015

    Search baupost, greenlight, etc. on linkedin and see where those people came from.

    May 22, 2015

    Hope you plan to use more than just Axial to source your deals... Goodluck.

    May 22, 2015

    Youre a prospective IB monkey? May I ask what the interest is?

    Generally, it depends on the fund size. Some have their own fund raisers. Using placement agents is very common - they take ~.5% of the money raised for larger clients, and different amounts for other sized groups.

    The only people who can raise funds successfully are experienced in the industry.

    Contacts should be extensive prior to finishing your MBA.

    "...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

    • Schopenhauer
    May 22, 2015

    IB because I'm thinking the modeling experience might be worthwhile.

    May 22, 2015

    5% for placement agents is a little high, 1% or 2% is far more likely.

    May 22, 2015

    It's really hard (and I would know). You need a good product/thesis and the contacts and be prepared to spend a nice chunk of your personal money getting everything set up and funding yourself while you build track record. How much experience matters depends on what you want to do, but obviously more is better.

    It's the ultimate high risk/high reward career move.

    May 22, 2015

    Read Barton Bigg's Hedge Hogging, it'll show you how much a pain in the ass it is to start one.

    People like Coldplay and voted for the Nazis, you can't trust people Jeremy

    May 22, 2015

    You have to have a good rep. on the street. Be ready to shell out at least 2 million. Good luck!

    May 22, 2015

    Obviously its tough..but there is no one set way to do it. Look at Citadel. Ken Griffen found it at 22 with no industry experience.

    Einhorn started a few years in the industry but with only $1m dollars

    Cornwall capital had an initial capital base of $110k.

    It doesn't cost much to set up a hedge fund and can easily be done for less than ~$50k. The hard part is finding seeding capital and performing

    May 22, 2015

    Here is me being helpful- http://www.wallstreetoasis.com/forums/starting-a-s...
    Here is me being cynical- don't give so much weight to backtesting results. That means next to nothing.

    May 22, 2015

    Thanks, I saw that thread previously, and was wondering about additional information as the setup was a little vague. As far as backtests, that was only to check, I also have 2 years of actual results to back it up.

    May 22, 2015

    I imagine that thread gives you everything you need. If you want to do it right, you are going to spend thousands of dollars setting it up. Unfortunately there is no DIY solution for something like this- its why lawyers can bill hundreds of dollars an hour for this work. If you're trying to really start a fund and make some money, you can't risk fucking something up because you wanted to save a couple grand.

    On the other hand, if you are going to be dealing with <1,000,000 I probably wouldn't bother with setting up much of anything outside of a personal brokerage account. Or, become an RIA, which, I would imagine, comes with a cheaper cost.

    May 22, 2015

    Two cents on your trading strategy, have you considered that it might only work with smaller dollar amounts? The more dollars you trade in a name the more you may move the market on it against you with larger volume's, and could potentially offset any economic gains from the trading strategy. Especially if you are trading smaller cap names. This is part of why large (and small) portfolio manager's have a hard time beating the market.

    May 22, 2015

    To further clarify my fist post, I will not be doing this for own income.. only as a hobby and to help my friends/family. I will continue to work my other job.

    May 22, 2015

    No. It's not even close to enough. You could just have these people open accounts at Fidelity (or wherever) and take discretion over them. I believe if it's less than 5 people you don't need to register as an investment adviser in most states, but don't quote me on that.

    May 22, 2015

    I looked into this briefly and the start up costs would range between $50-$100K for what we were looking to do. We figured we would need at least $10MM and that would be cutting it. I guess it would just kind of depend on your set up, but I found think anything under $10MM would be really hard, unless it was something more of a hobby.

    May 22, 2015
    subrosa:

    I looked into this briefly and the start up costs would range between $50-$100K for what we were looking to do. We figured we would need at least $10MM and that would be cutting it. I guess it would just kind of depend on your set up, but I found think anything under $10MM would be really hard, unless it was something more of a hobby.

    Contemplating starting a fund while networking at the gym and applying for executive assistant positions? How do you find the time?

    May 22, 2015

    200k is a bar tab, not a fund.

      • 1
    May 22, 2015
    BTbanker:

    200k is a bar tab, not a fund.

    I seriously let out a LSO Hot Dog Vendor-style, auto-tuned "Ohh Shiit!"

    "That dude is so haole, he don't even have any breath left."

    May 22, 2015

    Any reason why they're trusting you with their funds? I hope you know what you're doing because your family and friends can quickly turn into something else. Don't mean to rain on your parade but unless you have a proven strategy and a track record, it seems a bit reckless. Again I don't mean to put you down, but just want to give you some real advice

    May 22, 2015

    Agreed! Perhaps a satellite style strategy dumping 80% in SPY or something and then just piggybacking on others ideas for the rest maybe?? BTW love your icon, I didn't know there were any fans of Tombstone on this forum!

    May 22, 2015

    You kidding? You'll shoot your eye out...

    Dirk Dirkenson:

    Shut up already. Your mindless, reflexive responses to any critical thought on this are tedious. You're also probably a woman, given the name and "xoxo" signoff, so maybe the lack of judgment is to be expected.

    May 22, 2015
    Louboutins and Leverage:

    You kidding? You'll shoot your eye out...

    Pardon?

    May 22, 2015

    Depending on the strategy, start as a Commodity Trading Advisor instead as startup costs are much lower.

    May 22, 2015

    Curly Bill says hi

    May 22, 2015

    Joking aside at that level of AUM you're better off having them give you discretion over their brokerage accounts. The cost of forming entities alone will be too much to make it worthwhile.

    May 22, 2015

    First off, your fund would not be a hedge fund. Hedge funds can only invest the money of accredited investors and/or qualified purchasers. Secondly, your revenue wouldn't even cover the cost of a Bloomberg machine if you are making 2 and 20 off of 200k.

    May 22, 2015
    FinanceWhiz1989:

    First off, your fund would not be a hedge fund. Hedge funds can only invest the money of accredited investors and/or qualified purchasers. Secondly, your revenue wouldn't even cover the cost of a Bloomberg machine if you are making 2 and 20 off of 200k.

    This. LOL @ OP.

    May 22, 2015

    For what you're looking to do it would cost under $10K to set up. That can be amortized for accounting purposes (but that's not GAAP). Ongoing legal, accounting, and tax will cost a few thousand a year. Your time spent dealing with the fund won't be worth it either.

    May 22, 2015

    I'm actually in the process of something similar so I'm interested in responses...but you really need to specify which type of 'group' as each are incredibly different skill sets, legal structures, goals, etc.

    If the glove don't fit, you must acquit!

    May 22, 2015

    The reality is that if you have to ask...you probably are not qualified or adequately prepared to start your own fund.

    Most of the individuals that you refer to generally created a track record of performance over time and even the guys who did not know the procedural/legal/logistical steps required to open a fund were all but forced to open funds due to the demand from others to manage their money. I'm thinking of Buffet's partnerships, guys who started successfully trading out of college dorm rooms, etc.

    A) You are asking a pretty broad/stupid question but I'll bite using broad generalizations because your post is so vague. You can do any one of or a combination of the following:

    1) develop a track record of successful performance that can be independently verified
    2) spend a number of years working at a successful shop and/or under a successful mentor before spinning off to do your own thing (Tiger cub hedge funds as an example)
    3) have access to a ridiculous network of capital whether it be family money, high net worth individuals, institutional money (less likely), etc.

    Unfortunately, the recession, guys like Bernie Madoff, and increased regulation have ruined it for guys like you. It is difficult to raise capital even for guys who have been building track records for most of their careers.

    May 22, 2015

    I am just a college student, but I would say if you are coming here for answers, then you are not in a position to start one of these firms. Even on the smallest of scales, you need an enormous amount of capital to start any of those three types of firms, especially in PE and VC where your money is going to be tied up for years at a time. If you don't have it yourself, you'll need to get it from investors like you said, but in order to do that you will need to a) know lots of high net worth individuals and b) have an amazing and relevant track record. On top of that, your name will have to command some type of respect in the industry in order to get any talent to your firm unless you have the type of capital to pay people exorbitant salaries.

    As I'm sure you have learned from your readings, most of these firms are started by high net worth individuals who have led long and successful careers in the field.

    May 22, 2015

    I understand the above comments, but I've also read books, seen things on CNBC American Greed, read articles, etc where some anonymous person comes out of nowhere(maybe starts with like 5-6 figures of inherited on family money and then gains more investors from there. Plus, now with the Internet, I believe it's called crowd funding, can't u solicit investors online on specific sites tailored for this?

    "Did you know that Whitney Houston's debut LP, titled simply Whitney Houston, had four number one singles on it?"

    May 22, 2015
    bbillgold:

    I understand the above comments, but I've also read books, seen things on CNBC American Greed, read articles, etc where some anonymous person comes out of nowhere(maybe starts with like 5-6 figures of inherited on family money and then gains more investors from there. Plus, now with the Internet, I believe it's called crowd funding, can't u solicit investors online on specific sites tailored for this?

    I don't think you've read enough books. Otherwise, you're reading the wrong books.

    Also you ask for advice. Then when people give it to you you claim to understand, but ignore it because of your books.

    Get some experience in the industry and then give it some more thought.

    twitter: @CorpFin_Guy

    May 22, 2015

    You could theoretically crowd source money, but most of those sites that I know of are funding projects and not really "investing" their money looking to get a return. And even if you could fanagle that, think of how many people with the resources to make a meaningful contribution spend their time on crowd sourcing websites. I'm guessing not many.

    If you have 6 figures worth of truly dispensable capital then you could actually potentially start a "hedge fund" but you would need to personally invest that six figures and turn it into at least 8 figures before you are even in the ballpark. And if you can do that, then people will be literally begging to give you their money. So if you are a Paulson-esque trader, then yes, you could start a hedge fund with that little capital.

    But think about how much money you actually need to start a Private Equity shop or VC fund. Those guys buy companies for tens of millions of dollars and have their money tied up for years at a time. Even if you had ten million dollars to spend, you could maybe invest in two companies. Then you would have no money until you exited those companies, and there's no guarantee you make a profit at all.

    My advice would be to take this money that you have and start investing it if you really want to do something like this. Like I said earlier, if you are phenomenal at trading, you could end up doing all three, but in my estimation you need at least $10 million that you don't mind losing to even be thinking about PE or VC.

    May 22, 2015

    I'd be very careful about crowdsourcing the funding for PE/IM. If you have a lawyer, check it out with him. As for your questions:

    1) You generally get years of experience elsewhere first. A couple years in banking followed by 10+ year in PE to learn the business will do it. Investing is a little different. If you start somewhere and are a rockstar you can do anything after ~3ish years (these numbers are complete guesses, but needless to say you need experience).

    2) It's very difficult if you have no experience unless you plan on conning people out of their money. I'd highly advise against that.

    Also, those guys you read about/saw on TV who started with 5-6 figures and got more investors afterwards, they didn't just get them off the bat. For one, I highly doubt they started with only 5 figures. Maybe low 6 figures. On top of that, it probably took them years to get outside investors.

    You don't just jump into a pool without making sure it's full first. The one's that do die or paralyze themselves on the concrete.

    In short...

    Step 1: get a couple years' experience, learn about the industry/business, and create a track record for yourself

    Step 2: see how your boss gets clients, try and sell the company's services to others (see how hard it is for an established firm, much less a new shop with no record)

    Step 3: ????

    Step 4: profit!

    May 22, 2015

    Not really possible..you need investors to have a reason to give their money to you instead of another fund. It's hard to give them a reason in your 20s

    May 22, 2015

    you could try to get arabs to give you money

    May 22, 2015
    tradewell12:

    you could try to get arabs to give you money

    or a Nigerian prince. You just need to give them your bank account information and will be in your account in no time.

    May 22, 2015

    The only way I could think of it happening is to start a company, sell it for a lot of $$$, and let others invest with you in new ventures.

      • 1
    May 22, 2015

    Doubtful. Only way I could see this (even maybe) happening- somehow either join a PE/VC firm out of school or out of 2 years IBD, work 5-7 years there and somehow get enough responsibility/credibility that people are willing to trust your investment decisions (and you have enough capital to get started). You'd also probably need to have some very wealthy connections. Very very unlikely.

    May 22, 2015

    The only way to do this is you are in your 20s is via starting a Search Fund. A lot of MBAs from H/S have started doing that as it is almost like a fast track to C-Level.

    May 22, 2015
    AstonMartin:

    Is it possible to start a VC/PE fund in your 20s if your parents are not extremely wealthy/well-connected?

    Watch Wall Street Warriors, season 2. There's a guy (maybe 26?) who runs his own PE shop. He talks about his story in a few episodes.

    May 22, 2015
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