A good friend and former sports teammate that I've known since junior high school started up his own alternative investment fund (by starting up, I mean legally establishing a fund) in late-2014 and has asked me if I am interested in joining as a "managing partner" (obviously, titles are relatively meaningless for a startup). We've met up on and off over college and post-college years, but I still remember him as being a sharp kid in junior high and high school.
His previous background is in trading and I think he had been reasonably successful but decided he wanted more of the profits he was generating for his firm (typical story). He has done all the necessary legal paperwork and has the necessary infrastructure in place (most of it outsourced) and has already started deploying the fund's capital (I don't have all the specific details of his firm's mandate, but it seems like a pretty vanilla L/S equity). He has gotten office space although its more of a "hedge fund hotel" type place, but it seems he was able to get himself good deal.
Obviously, the most important thing is how much money he's been able to raise... and it's not bad (if we are talking early 1990s)... $1.2mm on his own through friends and family. It might sound like an OK story so far, but I'm under no illusions. My friend in all likelihood is not being 100% altruistic in reaching out to me. He does know about my family background, and although he has not said so explicitly, he's probably hoping that my father can throw in another $1mm or $2mm if I join.
It could be an interesting opportunity, but everyone I hear from in the industry says the days of starting a hedge fund with $3 million a la Daniel Loeb are over. Worse yet, I don't have any previous investing experience in a formal capacity (aside from my personal accounts). I am curious to know how people who currently work in the industry regard experience at a start-up fund. Obviously, the experience is not going to be viewed the same as working at a Tiger Cub, but just how bad would it be? Is there any precedence for someone to go from working to a start-up fund to a more established fund?
My current situation:
IB at one of the major firms
Unmarried (e.g. don't have a wife and kids to worry about)
Enough savings to survive 2 years with no salary (I'm assuming that we won't be drawing a salary until we get to a certain level of AUM)
You lack an edge and your friend's proficiency is an unknown. If you were to develop an edge it would likely be in value investing (IBD background) and your friend is certainly not a value investor (given his trading background).
Therefore you two would have entirely different approaches. How would you make investment decisions? 50% of AUM each? Split profits?
I'm all about joining start-ups and swinging for the fences, but this seems to have some serious headwinds.
What do you want to do? Is going to a HF a goal of yours in general?
I actually raised this concern with him by asking him whether or not our investing philosophies would be completely different based on the fact that his background is in trading and mine is in IB? His reply was that he previously did trading because that's what he was able to get a job in, but that his personal investing style is closer to a fundamental, bottom's up approach (though not necessarily "value") and he also believes in longer holding periods and adjusting holding periods based on an idea's quality.
No. Stay in IB and save your (and your dad's) money. Even if you charged your clients a 2% management fee (aggressive) and were able to raise $4M AUM you would still only be drawing $40K each pre-tax. You're not going to generate enough returns investing to be meaningful unless you're taking some exaggerated investment risks.
too much risk in investing in a friend's fund
not enough reward in vanilla LS equity
I wouldn't do it.
think about it like this: would you invest your own money in it? would you recommend your dad invest money in it (it sounds like no)? If not, then I'd shy away. raising assets for an established firm is tough, for a new firm? fucking impossible (not literally, just effectively).
also, how good is he, really? he's probably been a serious trader since, what, 2009? a monkey with a eTrade account could've compounded 20% in that timeframe. not saying your friend isn't smart, I'm just saying this has been a great environment to be a long stock picker. I'm estimating that because of your prior posts putting your age between 24-28. If I'm way off and he's 35 and had positive returns annualized 2000-2014, then bravo to him, that's a tough decade to be an equity manager. take his returns into the context of the current market environment.
that was more meant for tough love than a douchey monologue, so I hope you got the gist of what I was trying to say: do not do it. feel free to PM if you have more specific questions, I know you're a sharp kid and you could rebound if this falls flat, but this is a huge risk with limited upside it seems.
I would not invest my own money but that is mainly because I don't have substantial investable assets. As for my father, the answer is it depends. I would need to have more discussions in further detail before reaching a decision.
Spot on. Both the age range and the year that my friend began trading. My friend has only traded under favorable market conditions and hasn't proved that he can make money in both good times and bad.
Quite likely. Again, I would need to have more in-depth discussions with him about his specific strategies, risk management, etc.
Douchey monologue did not ever cross my mind. I sincerely appreciate the honest advice.
He was a trader and thinks he has an edge in L/S?
$2mm of AUM?
Stick with IBD. I'd even choose back office over this.
This.
What's described here is not a hedge fund, it's a glorified personal account.
"It could be an interesting opportunity, but everyone I hear from in the industry says the days of starting a hedge fund with $3 million a la Daniel Loeb are over. "
Sahm Adrangi started Kerrisdale Capital with 300K.
but i believe Kerrisdale hit a skid as of late (probably haven't had much luck scaling the fund beyond $100mm) and have gone down the research advisory route to supplement revenue stream...that's usually not a great sign.
Neither one of those things are true - they run $300M and don't sell their research. Just because they publish doesn't mean they sell it.
OP, I personally wouldn't do it.
If I were you, I would ask him if he would still offer you the chance to join him even if you didn't bring in any of your father's money.
I bet a dollar that his demeanor would insta change.
This
My take from your writing -your friend probably knows what he's doing - that's good -he only wants you in because of money (according to the post you have no clue what you're doing so why else?)
Conclusion dropping IB for a HF job that has 90% of going nowhere - not necessarily the smartest move. Read "Money Mavericks" to learn about how hard it can be to do own HF. Takes 4-6h, definitely worth it given this is a life changing decision. The book should also make you question why he wants you in when you have no experience.
Otherwise I would suggest IB --> Big / MM HF --> then do what you want
No fucking way. How is this guy going to raise assets? No background in this space other than a personal account?
@sanitycheck is right......a back office job is better than this.
Before he started this fund, he worked at a major bank, first as a flow trader and then later a prop trader.
//www.wallstreetoasis.com/forums/hedge-fund-seed-deals
Hard pass. If your buddy raises ~$25 to start and has a pipeline to grow to $50 - $100 over 12-36 months, maybe it's worth taking a risk. But $1.2m...? My dentist daytrades more than that in his PA and doesn't call himself a hedge fund manager.
$25m is the new "started with $2m pre-crisis." $100m is the new "might be around in five years."
Hahah... exactly my thoughts. Maybe recommend OP go to dental school?
"His reply was that he previously did trading because that's what he was able to get a job in, but that his personal investing style is closer to a fundamental, bottom's up approach (though not necessarily "value") and he also believes in longer holding periods and adjusting holding periods based on an idea's quality."
Your'e smarter than this, OP. Continue IBD, practice modeling & pitching ideas, and hit up the HHs for a standard legit HF recruiting channel. Think about how dumb your friend's answer would sound to a LP.
"Yeah we're raising capital. Experience? No I was a flow trader and then I day traded and obviously didn't do well and now I'm doing this hedge fund thing. No, no I have no relevant experience but trust me my style is definitely fundamental bottoms up despite everything I've done with my life. Huh? Yeah I have like $1mm...Yeah my buddy who is sell-side who also has 0 experience might have another $1mm. So yeah... can I meet with you sometime to see if you'd like to join as a LP? Hello? Hello are you there?"
The way he structured his story is he started off as a flow trader at a major investment bank, then within that bank he was promoted internally to the prop trading desk (although I am not familiar with the in's and out's of S&T, I believe that pre-Volcker this is a competitive role). I don't think prop trading at a bank is the same as day trading... but I could be wrong. He told me he was successful and I tend to believe him. Obviously, the post-crisis landscape is much different with banks winding down or spinning off their prop trading operations. Is my friend one of those casualties? Perhaps, but I wouldn't hold that against him.
If I came onboard, I would ask my father to invest a small amount (small from his perspective), at least $1 million and probably $2 million or potentially even more. Perhaps I'm being optimistic, but if we took that initial $2.2 million or $3.2 million and ran it for 2 years with good results, wouldn't that track record be enough to raise a small amount of non-family & friends LP money?
Assuming we run it for 2 years with good results, the worst that can happen is we raise $0 outside LP money. In that case, I could probably ask my father to put in an additional investment, maybe in the $5 to $10 million range (as long as the track record was good, why not?). I don't expect to go into this and immediately ramp up AUM to $100 million. It's unclear to me what the problem is with slowly increasing AUM over a longer time horizon? If paying the Manhattan office rent is an issue, we could ditch the "hedge fund hotel" my friend arranged (which is cheap anyways) and move into some spare office space at my father's place.
If I'm serious about this, there are also other family members that I could tap into to raise money. I could reach out to my grandfather's family office and probably get an investment. I could reach out to my uncle who runs his own small hedge fund ($1bn - $2 bn AUM) and probably get an investment out of him. My father could also make some introductions to some seeders though I don't know if my friend wants to do that or if the fund is even at that point yet.
Of course, this then begs the question, if I am willing to leverage this much social capital to raise money for a fund, why would I do it for someone else's fund instead of my own fund...?
You clearly seem to have a good relationship with you dad, and if $1 million is "small" for him, then it is not like going into this start up will financially destroy you (even if it completely fails), and you could probably pick yourself back up and go back into the industry if things don't work out. I don't think most people would go for this, because they can't tolerate the risk and don't have the money to land back on if it tanks. For someone like you, there seems to be way more upside than there is downside.
Just my opinions, though.
Good luck with whichever choice you make!
Sorry but now I feel like you are trolling.
If you are working in some bs jobs and desperately want to do finance, I can understand your reasoning. If you already work in a reputable bank, you should have no problem secure a decent HF offer (not necessarily those big names but there are tons of mid-size HF) given you have passion in investing. After 2-3 years good performance (hopefully), you can then use your dad's money as seed money to start a HF. Even if you really want to invest some serious money right now, you can do it on the side of banking job using ur dad's "small" amount (unless your firm forbid personal trading on any names) and use that record to leverage HF jobs.
I'm glad someone finally commented on OP's friend's ridiculous explanation of his strategy. Oh, he is a fundamental investor, he likes to adjust holding periods based on an idea's quality. Does he also like to use numbers to back up his ideas? How about PE ratios, does he like to incorporate them into his investment strategy?
And OP, it sounds like you have no investing experience whatsoever, and are not even sure if you are interested in investing. It's hard work, you don't jus wake up one day and tell yourself you are now an investor. Tell me, after you quit your job, take your dad's money, and get office space, have you thought about what you will actually do on your first day?
Doublepost
Doublepost
if you could help bro on the side without quitting your job or putting $ up then sure but otherwise
Yes, definitely do this. Work at a long/short "on the side" and keep your investment banking job. I'm sure you'll have lots of great ideas and make great returns since you'll know lots of really cool information from your IBD job that you can utilize on the public side. Good thing there's no laws or anything against this!
personally, i think you're much better off going to a real HF and learning how to actually invest from people who know how.
most of the big-name HF managers (even from the days when you could start with very little money) spent at least a couple years learning from somebody real (see einhorn, klarman, etc)
Really interesting topic. Sounds like your dad is worth $100mm+, so you're pretty secure financially. You've got a few years of IB experience, seem articulate and intelligent. If your buddy is actually legit, this could be a great opportunity to work your ass off for a few years and actually reap the benefits - compared to working for the man where you're paid a fraction of the value your provide if you're good. If it doesn't work out, your family is out a few mil, you aren't an associate, and maybe you go back into the industry (possibly as an associate) with a good story or hit up B-school.
The whole thing depends on whether you believe in your buddy because it sounds like the majority of investment thesis' are going to come from him while you learn to trade and handle most of the operations. I would fly out and spend some time with him asap. You'll know if it makes sense and feels right after spending time with him.
Another perspective: idk how big your family is or how much $ you actually have, but having that sort of capital backing means you get to go a little non-traditional. Sounds like you've gotten some good structured experience, now you get to take risks that other people typically won't because they don't have any sort of safety net. Worst case you're left with a good story of entrepreneurial finance, which a lot of folks have an appreciation for within the HF / IB / AM industry. IB to FINANCE startup is a good story.
Hey CorpFinanceGuy
Really appreciate the constructive advice.
I'll hold off on commenting how much my father is worth, but let's just say I have been very fortunate to have many advantages and opportunities in life: Private school from pre-K all the way to 12th grade, 4 years of Ivy League tuition paid (no student loans) and a huge network of people (through my father) who have helped me along the way.
Spot on. I've known this guy since junior high school. He's definitely a smart guy, but I need to make sure not to let emotions or sentimentality cloud my judgment. I haven't spoken to him since his initial proposal but I will be arranging a time for us to sit down and have a discussion soon.
Yes, for better or for worse, I do have a "safety net." You mentioned business school and that is definitely something that would make sense given my age and background. This presents another interesting wrinkle because the time he is starting up this venture coincides with the time a lot of my peers are starting to leave (or consider leaving) for business school.
Totally. I think this forum can give you a little bit of warped view on the appropriate age for b-school. Obviously, getting your MBA when you're 27-28 is great because you graduate at 28 or 29 and go into your 30's full throttle, but joining an MBA in your later 20's or early 30's is very common as well. I think this forum makes it seem like if you're not an MBA at 27 or 28 you're a screw up, when in reality you just have a very unique perspective from starting your own fund and more experience than your counterparts upon matriculation. And there are a lot of 30 year olds, too.
Honestly, spend a weekend with him more or less doing due diligence but in a casual format. You could come away with a "no fucking way" or you might put in your 2 weeks that Monday. Good luck man.
This and @"CorpFinanceGuy" 's post after.
Take a step back.
What do you want? No one here knows you and so therefore we're in a position of not knowing you or what makes you tick but telling you what to do. I see it like this...
If you don't want to be a lifetime banker, but want to be more entrepreneurial and learn a lot, then this might be a good idea for the reasons stated above in addition to the whole bootstrap, all hands on deck kind of experience that the vast majority of people don't have and are terrified to even try... If you joined, what cut of the equity would you get? Or be potentially able to get? It seems like your family is rich (that's awesome) and you have a good relationship with your dad. This means that not only can he bankroll you (if he wants and if you are hardworking/earnest etc) and/or probably has a good network. In other words, if it does not work out, you won't be out on the street even if the market tanks and you can't get a job. You'll learn a lot about investing/business (depends on your role), people (ie trying to raise capital), marketing, and a host of other things. In other words regardless of how it turns out, you probably won't be some mindless drone like so many are.
Maybe you like the big corporate thing and (like everyone else here) want to go into some MF/HF/PE in the typical structured way, get an MBA to switch fields or whatever. And that's totally fine too. In this case your downside potential is limited, but you could still lose your job if markets tank or the BB cuts a lot of people (happens more than people on this board give credit for). Your upside is definitely capped at a BB (even CEOs don't make the big bucks as before and it still pales in comparison to lots of HF/PE guys. Comp is not what it used to be in banks and as you go higher in the game it becomes more political. Very political and you need to play all of those cards right AND be lucky (all while doing well/ok in the job and not getting laid off/fired). At other buyside shops you will not only have to knock the lights out, but also try to move up and there are lots of founders/ senior types who don't want to move out and make space...
You just don't know (like most people here or in general in life). That's totally ok.
Regardless, if you are serious about even considering joining your friend, do some DD on him. Look up some background stuff, spend time with him (watching the game, going golfing, chasing girls, whatever). That will help you make your decision as well.
Plus on the lack of "edge." People use this word all the time. Honestly, lots of funds (including a lot of big ones) don't have an "edge" and one can see that from the performance data over the longer term (I have access to tons of HF data - just the nature of my job...). All people care about really is performance and that you won't cheat them out of their money ala Madoff etc. I can think of a few funds that were started small. One guy started with 500k or something and is now at over $400m (which is legit in HK), another (and this is a personal friend), started with $2m family and friends and has crushed it since he started 2 years ago and is now at $10m (just him and a partner). Of course this environment has helped him and he's pretty much just a long-biased equity guy, but it can be done.
My two cents. Once again. It goes back to YOU. and what YOU want.
Good luck
@"Jamoldo": I would agree that the "edge" concept is BS. But there is a legitimate issue here in terms of human capital. The OP may have the raw skills to be a tremendous investor, but based on what he's said, while he has an interest in investing, he's done little to act on that interest thus far. Warren Buffett was running his partnership in his 20s with no formal experience, but he had spent years intensely studying and honing his craft by that point. All of the successful examples of hedge fund managers starting funds in their 20s that I am aware of also involve people who had highly uncommon levels of knowledge and experience, whether acquired on their own or through working for someone else.
So to me, if the OP had been investing intensely since he was 14 and reading everything he could get his hands on, then this would be a hard decision to make. In this case, it seems easy to recommend avoiding this opportunity and trying to gain experience at a successful fund.
So essentially you want to bankroll your friends fund? Realistically your friend has little chance of success on his own. But with you, scaling it to $10-25mm is doable - big enough to get attention from seeders and even institutions.
I think you've already asked yourself this but I'll ask again. Seriously, why don't you start your own fund? Quit your job open a personal account at interactive brokers with a million from your dad and test drive whether of this is what You want to do. Heck, go work for your uncle for couple years. use your dads connections to network more and learn as much as you can in the meantime.
Your friend needs you waaayyy more than you need him. To be frank, 50/50 ownership split isn't even fair at this point. There are plenty of ex-prop traders littered on Wall Street now who still can't find placement on the buyside. Your friend is likely just one of them who decided to go on his own BC that was likely his only option.
Partnering with your friend is soooo -EV that it's hard to believe you are actually giving it a serious thought.
Realistically, I'm leaning towards passing for now and see how he's doing a year from now. If he's still "in business," maybe I can start seriosuly considering his proposal (although it might not be on the table anymore in a year's time)
First of all, think or swim FTW Second, I don't think this is a viable option. I've always thought (or maybe had a romanticized notion) that the investing business is an apprenticeship business so at the end of the day I think I probably need to get some experience under someone (or in this particular case, join someone) who's been in the game for a while before doing something on my own (although it's questionable whether my friend counts)
Harsh... but you may be right. I'm curious to know what your background is? Are you a former trader? I have a close friend who used to be a trader at one of the really quantitative shops and your style of communication is eerily similar to him...
I'm probably not getting the right odds to pull the trigger, but if you consider the implied odds, it might be +EV
Have you ever actually worked with him? Do you know exactly how good of a trader he was? What's his financial situation?
These are among the many questions you need to know the answer to before you go into business with anyone. Furthermore, you remember him as a bright student in Jr. High and good friend but you'd be surprised how much people change over the years - especially in light of different experiences. Although the payoff and perceived freedom a startup offers is very enticing you need to be incredibly objective about this because should things go south (which happens way more often then not) you will be left holding the pieces. And this is where things get ugly, friends or not. I witnessed this with a couple of my friends and it wasn't pretty.
Never worked with him unless you count projects that we worked together on in high school AP Physics class... I don't know how good of a trader he is, but from what he tells me he was successful (being promoted from flow trader to prop trader at his bank, sick bonuses "back in the day") His financial situation is basically no income at the moment but no student loans or any major debt. He used to live in the city but is now living in New Jersey to save on rent which he is splitting with a roommate. Basically, he is living off savings. Upper middle class background. Mother is a homemaker and his father is already retired (father used to work in financial services industry, in what capacity, I am a little bit fuzzy). Father put up some or most of the $1.2 million.
Appreciate the solid advice. Thank you.
A Bloomberg terminal costs $3000/mo. The office is not your biggest expense- the data is what will kill you starting up.
Add a zero if you need 2-3 of capiq, compustat, Reuters, MarkIt, Barra, OptionMetrics.
You'll need an accountant and an accounting system. You'll want backups so you don't lose track of who has what claim on the fund. I want to say there are firms like Northern Trust that can do it for you but it won't be cheap.
Starting a fund with $1M in capital sounds like a bad idea if you ask me. I think it's going to cost a good $100K/year + your costs of living. $200K/yr divided by 2% gives me $10M in AUM.
When your friend raises $5M, and if you can raise another $5M, this might work. Or if you can raise $10 on your own, hire your friend and give him an option on 20% of the equity.
I'm managing partner of an alternative investment fund with over $3.5m AUM. It's called "my personal account" and managing it is nowhere near a full time job.
Stay in IB.
I have been told by business owners to never do business with personal friends. Things can get messy and relationships can be damaged.
Maybe you guys should talk to your uncle who runs a HF, see what he thinks.
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