Starting up a fund in a WeWork office
My friend plans to start his own fund next February when he's built up enough infrastructure, but he plans to run it from a WeWork office. Would this be an issue of not seeming "legit" for him when trying to raise capital?
What is the best way to go about starting a fund in terms of office space?
I started a fund 6 years ago and moved into a wework 4 years ago. It has not been an impediment to raising capital in my case, from neither high net worth individuals nor large (100M-1B) family offices/investment firms.
An investor who is unimpressed with a wework will likely be unimpressed by any kind of office you could afford just starting out. Also, an investor who makes decisions based on the appearance of the office and not the acumen of the manager is likely one you don't want; they will be the ones hounding you for performance reports and needing coddling through drawdowns and dumping you to chase the next shiny thing IMO.
That said, I really doubt an institutional investor would give you the time of day in a wework, but I don't have firsthand experience. Starting out these guys wouldn't be your friend's target anyway.
What kind of strategy is your friend going to run?
Wow, really insightful I'll pass this along to him. His strategy is selling puts/ doing spreads on options on futures. I don't entirely understand it, but he already has power of attorney over $1mm.
How did you go about raising seed capital for your fund? Also, do you think it is wise for him to not charge a mgmt fee but have 20% carried interest with a high watermark?
Thanks!
The strategy that you described is literally destined to fail. Tell your friend not to start this fund lol.
Is he delta hedging or just naked selling the options? Because if he's just selling unhedged options, it's very likely he will find a way to blow himself up. If he's just trading volatility, but doing it in a "fundamental" way as opposed to a market-making style strategy, this type of strategy has very low sharpe ratio, so it's very likely he hits a period of drawdown and the clients will redeem. Finally if he's trading a technical market-making style he doesn't have enough money and will get crushed by retail spread + commissions.
I trade in options for a living. Commodities options markets are very sophisticated, low liquidity, and full of traps for the uninitiated. This isn't the kind of market where you can just show up with a BB terminal and query EDGAR to find alpha. Tell your friend he should probably rethink his life for his own sake.
I wouldn't provide advice on what is wise or not, but typically management fee covers your fix cost (overhead) to run the fund. If your buddy starts his fund and experiences a minor drawdown the first year (i.e. no perf fee) he can quickly run out of money to maintain his business.
I am not familiar with carried interest; I though that was more for private equity or funds that invest in illiquid assets.
I think starting out you are likely not going to get a management fee at all. I would tell your friend to ask for 30% of profits and see if he can get 20. or take whatever he can get honestly. It is brutal raising money at the start without a deep pocketed personal network.
If an investor is not asking for a high watermark and every possible out of the fund (no lock up, etc), they probably are not sophisticated enough to take the risks your friend is likely taking.
All the above is between wrong and semi correct
If I were to make very high level assumptions, because really I have no actionable info with the above.. Fees will be between 1–1.5 management and 10-15 performance due to complete lack of pedigree and a weird strategy. Probably lower if he gets larger tickets and definitely lower if there’s a big corner stone/founders.
That said 1m to start the fund is difficult esp for a lower sharpe strategy. He might consider trying to get initial external backing or go to a platform. As for the main question whilst it’s appreciated to see cost savings it’s also ducking weird to be in a WeWork. Don’t you need some privacy and quiet to work? Sounds like a nightmare for any op due dil
Lets be clear here, 1mm isn't a fund. That's called quitting your job and investing your personal money - which frankly isn't a lot.
Based on the limited info at hand and as they way its described - works at a family office launching with $1mm, etc - this is absolutely destined to fail if you define success as raising real money in a short/mid time frame. Now, if you're buddy is crazy connected and/or can weather like a 5+ year horizon of likely no traction while simultaneously putting up number then maybe but probably unlikely.
No real investor is putting a penny in an operation like this. Not trying to be a hater just calling a spade a spade.
Some tough love advice: my buddy has 3x that amount and doesn't require a "power of attorney".
Tell your friend to get a job and forget this "fund".
Pick a co-working space not named 'WeWork' if you are concerned. There are plenty of off-brand ones.
Depending on who your LPs are, you could also pitch it as "we're able to charge lower fees due to our unique office arrangement."
Don’t do this.
why don't you just work out of your home like all the other startup managers?
This is my PERSONAL opinion. I think running an office out of a WeWork is fine if it’s not long-term. I work for a large institution investor...we’ve looked at funds based at WeWork and didn’t ding them for it, although we did discuss it. It’s not ideal and some more conservative institutionals might balk, but your friend is probably fine if he’s dealing with sophisticated LPs. The strategy, track, market conditions, confidence in the PM, team composition, type of LP, etc. are (at least to us) much more important.
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