Thoughts on Joining a L/S Equity HF with $200MM AUM

Have an opportunity to join a $200MM LS Equity HF that's been around since 2010. They have beat the market all years but 2 with an average return of roughly 20%. Have opportunity to coinvest with fund.

What would the downsides be to join a fund like this? Is the AUM in comparison to years around an issue?

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Comments (21)

  • Investment Analyst in HF - EquityHedge
Oct 14, 2021 - 12:38pm

It should serve as a huge red flag. I would avoid joining personally. Risk-to-reward ratio doesn't seem there.

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  • Associate 2 in PE - Other
Oct 15, 2021 - 12:53am

Red flag that they have been around so long and manage little capital with a strong track record. Something else is going on, no one waits that long to raise capital. This is not a ground floor opportunity 

Oct 15, 2021 - 12:57am

Could it not be that they didn't want to sacrifice returns for higher AUM? Surely there are some funds that run some sort of simulations to see what their optimal AUM would be for their current portfolio.

Oct 15, 2021 - 9:15am

Micro/small cap investors, especially funds in special sits space. Maybe 200mm is not the absolute ideal for that space but for a small team, scaling upwards too much means losing investable universe / too many hours to fill up the portfolio for a lean team.

Most Helpful
Oct 15, 2021 - 10:36am

Most allocators can't be larger than 10% of a fund which means that, at 200m, the biggest ticket an allocator can write these guys is 20m. For a lot of allocators, it's not worth the due diligence effort for a 20m ticket. This is the problem for smaller funds, even though performance is good they just can't scale. Question you should ask is how diversified is their 200m and what are their plans to raise that? 200m at 1 and 20 provides 2m of management fees to cover opex which seems light. Question is do you want to leave the LO space for a HF? The longer you wait at a LO, the harder it is and you get pigeon holed as a LO guy. If these guys have a good track record this could be a good place to get some L/S experience for a few years and then bounce to a better/larger platform.  

  • 3
  • Analyst 1 in IB - Gen
Oct 15, 2021 - 10:43am

Ovechkin, thanks for your input here. I am currently not at an LO and actually at a macro fund. I want to move back into operating companies and this fund has a focus that meshes will with my macro experience albeit focusing on individual names. They said they are actively hiring a marketing guy to help scale AUM and hope to be 300-500MM within the next 1-2 years. They also echoed something similar that they didn't want to be handling investor relations with such a small team.

  • Investment Analyst in HF - Other
Oct 15, 2021 - 10:51am

I've known a fund like this. Founder started the fund with friends and family money out of school, no pedigree or real training. Smart guy but clearly self-taught which has a high failure rate as you can imagine. Never got institutional support because of skepticism on background and small AUM. Most of strong returns generated at AUM sub $20-50mm probably. Maybe now they are larger at $200mm as you say with a decade of performance they can finally attract some institutional capital, but I will always be skeptical of a fund like this' ability to scale. How much of this was luck? Were they mostly dabbling in micro caps and now they have to move up market? They've never had to deal with market impact from trading - how much of their performance will suffer from this? It's much harder to trade blocks of $10-20mm shares which could take days to get in and out of a stock vs $1-2mm where you can essentially buy the price you see on your screen in a short period of time. And with a likely small-cap focused strategy like this it's hard to see how they can support AUM much north of their current size which inherently makes non-founder economics much less attractive than one could get it a larger fund. My 2c

  • Analyst 1 in IB - Gen
Oct 15, 2021 - 11:05am

The founder at the fund is H/W/S and spent 4 years at Citadel prior to founding this firm. They began with 6MM of inside cash and grew to 40MM or so with family friends and are now ~organically at 200MM ish. They generally participate in companies with light or no coverage but >1B market caps. Had a down year in 2008 (which makes sense) and 2011-2012, otherwise everything has been positive.

  • Analyst 1 in IB - Gen
Oct 15, 2021 - 11:05am

The background seems to be impressive and I don't see why he WOULDNT be able to scale with his previous work experience and performance. However obviously I too, am skeptical.

  • Investment Analyst in HF - Other
Oct 15, 2021 - 11:16am

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