How to Start a Hedge Fund

http://www.vanityfair.com/business/features/2010/09/hedge-funders-201009

by cwan • 16 years ago

80 40 16 years ago

rchi• 16 years ago

it's funny that the reward of starting a hedge fund is 'marry that yoga instructor'. 1. seems like a pretty indirect strategy for getting what you want. 2. quite an insult to the yoga teachers.

byrneseyeview• 16 years ago

It's an insult that respected, powerful men want to risk half their net worth to marry someone? Take a look at the NYT wedding announcements some time, and note the facial expressions of everyone who is insulted in such a manner.

binomial• 16 years ago

The insult may be in that it implies the person to be married is being swayed purely by money basically.

zackattack• 16 years ago

as far as your "indirect strategy" comment goes, this is something that i have been thinking about. on the one hand it's extremely inefficient to try to build great wealth in order to get a date; on the other hand, sublimated sex drive can be a powerful impetus... known colluder dave mcclure, for example, says that a good reason to start a startup is that "you can't get laid".

dsplittgerber4• 16 years ago

It's a mostly useless list. The main problems are just like with startups - finding the right people, getting your product right and fundraising.

Amongst the questions not answered at all:

- How do you find good co-founders if you're not amongst the analyst legions at GS, MS or some other bank?

- How do you set your fund up, legally, technically, strategically, and foremost financially? Who funds you if every institutional investors wants either a prior track record or a list of credentials (partner/MD at mega-bank etc.)?

- How much money gets spent immediately on Bloomberg terminals, other database subscriptions etc?

- And: How do you make money? How do you go about executing an idea?

arethuza2• 16 years ago

I don't think it is being entirely serious....

dsplittgerber4• 16 years ago

That's what you get for actually being interested in the topic - you miss the obvious.

danhak• 16 years ago

This is what happens when people make sarcasm the default voice when trying to make a point.

retube• 16 years ago

What you actually need to start a hedge fund:

- A long & phenomenal track record of making a LOT of money trading for big name firms, ideally in a new or "hot" market - Have clout and a great reputation in the city or on wallstreet, pref both - Have lots of "ins" with big fund and asset managers who can connect you to people who have a $100m to invest.

Sukotto2• 16 years ago

If this author was to write a similar article on, say, "How to play the flute" it would probably read:

- Buy a flute

- Blow into one end

- Press the various buttons and levers

- Make sure you perform at least once at Carnegie Hall

hugh3• 16 years ago

Did you miss the point that this is more a satirical commentary about hedge funds (with some genuine information for the curious thrown in) rather than a serious how-to guide?

InfinityX0• 16 years ago

I didn't miss that point - but given that I had actual interest in how Hedge Funds start (as I believe most do), I was pretty let down when the article decided to go the humorous route. That, and it wasn't that humorous given my first expectation.

Sukotto2• 16 years ago

Of course not. It was clearly not intended to be informational.

Neither was my comment.

jacoblyles• 16 years ago

I would have preferred a serious how-to guide.

gaius• 16 years ago

The clues are nothing for the American people and rogue finance shop...

jakarta7• 16 years ago

I think the internet is helping change how hedge funds are started and people are hired, possibly for the better.

I'll give a couple observations:

1. It's becoming easier to find people with good track records.

No, I am not talking about KaChing or Covestor. There are actually two sites that exist where you can apply for entry. They are heavily populated by people who already work at hedge funds, so the process is pretty rigorous. One is SumZero operated by Divya Narendra (the guy who sued Zuckerberg), the other is VIC run by Joel Greenblatt (runs Gotham Capital, professor at Columbia).

In these sites, you post investment ideas which are then rated by the community. Because the community consists mostly of hedge fund analysts, it is pretty tough to get a good rating. But for those that do, it becomes easier to get jobs or raise capital. Greenblatt in particular uses his site to identify talent and in the past has seeded members (Michael Burry is one of them). In general, the sites help in networking which is the key (IMO) to landing a HF job or raising capital.

2. Blogs and an online presence are helping connect inexperienced students of investing with hedge fund managers/wealthy people.

I know a few people who started blogs where they posted investment ideas and news, and then went on to use their online presence to network in real life.

One of these people attracted $1M in seed funding from a well known investor, who then would routinely introduce him to other businessmen/wealthy individuals and helped raise capital. This was a kid that managed to start a $15M fund straight out of undergrad. A couple of others followed a similar path. Started a blog > used it to network > wrote and published books > networked some more and eventually raised capital to start small funds.

I also think some of the barriers to entry in the HF biz are coming down, a little bit. I had 3 interviews last week that all came as a result of having an investment blog. It's interesting because most of the people at these firms have had years of experience working at investment banks and graduated from ivy league schools (both of which I lack).

3. It's becoming easier to market yourself/your fund.

I see a lot of young/new fund managers offer to do interviews for blogs where they go into their investment process and how they think about markets, plus a few past and current ideas. These interviews work as wonderful marketing tools.

Some funds will also leak their investment letters to bloggers which will contain all sorts of returns data and more about their process. This is kind of a sketchy area because you really are not supposed to be advertising returns to the public. Usually what happens is, the letters stay up for a while and then are taken down after a period of time.

---

Now, the people I've seen that take this path generally start small funds in the single to double digit millions. They all have offices they rent and they take a very small personal salary. But after a year or two of good returns, it's been pretty easy for them to scale up. One has went from $5M in AUM to $50M in just a few years.

wheaties2• 16 years ago

What interesting little tid-bits you've dropped in this comment. I wonder, could you follow up with a more full-fledged article? I don't see your blog linked to your account on here but I'd love to read something like this.

jakarta7• 16 years ago

If you have any questions feel free to ask them here and I'll try to answer to the best of my abilities.

DevX101• 16 years ago

What's your blog?

conorh2• 16 years ago

I'm the technical guy behind SumZero and I'd have to say that your comments are spot on. It can be very difficult to get a good rating on the site, those ideas that do tend to be exceptional and get a significant amount of attention.

dsplittgerber4• 16 years ago

Do you know about any other of those types of clubs?

conorh2• 16 years ago

Also, and sorry for the plug, but I think it is relevant here. If you are interested in seeing the quality of ideas that come through SumZero you should sign up for our individual investor mailing list - http://sumzero.com/retail/users. Each week we send out a top idea to the members on the list. edit: There are some sample ideas on that page.

sbaqai• 16 years ago

This makes a lot of sense. Investing seems to be a specialized skill, and finding talent isn't the same as hiring "generally bright people" (the top ivy league kids).

I think I'm paraphrasing Burry, who said if any one school had figured out how to pump out great investors, it would be the most expensive school in the world.

I really hope other industries consider this type of approach, cherry picking standout/non-traditional talent, that independently build some type of track record. Actually, I believe YouTube eventually hired the student who created instant, so it might already be happening.

Do you know how things look on the operational side? For a fund with $1M AUM, how much of the costs are legal or for getting the business up and running? It would be interesting to see a breakdown of the process involved in starting a hedge fund and how similar it might be to starting a startup YC-style.

jakarta7• 16 years ago

It depends on how much back office work you want to do yourself. A lot of young fund managers get enamored by the prospect of being able to spend all their time looking for investments that they forget about the administrative work required to run a fund.

A friend runs a $3M fund where audit, legal, book-keeping/accounting costs about 0.8% of assets. This guy does A LOT of the back office work himself. You can actually hire other firms to do stuff like cut checks, client contact, etc. It just raises your costs.

Also, what some young guys will do is sell a percentage of the hedge fund business up front, in order to secure capital that will pay for initial start up costs, compliance, a living salary for the first year. So maybe you will sell 20-30% of equity in the fund up front to get that.

davidw2• 16 years ago

> you post investment ideas which are then rated by the community. Because the community consists mostly of hedge fund analysts

With the premise that I know pretty much zero about that industry, posting good ideas to people with the talent and connections to execute them seems like a good way to get ripped off. What's the "yeah, however ..." or "well, in reality ..." ?

jakarta7• 16 years ago

Most of the time people post ideas after they've invested in them. So if the idea is for stock X and you believe it is worth $20 but it only trades at $10, having your argument get sent out to market participants who might have more capital than you is beneficial. You might make them aware of something they missed and bring attention to the company -- which could push the stock price up as more people catch on. That's beneficial to you.

Since sites like SumZero and VIC have a ton of buyside members, which is a rather small community of people who spend a ton of time talking to each other, it's pretty unlikely someone is going to get away with stealing your idea and claiming it as their own. They will probably get called out on it.

The other benefit to posting ideas is you can get criticism and see if your logic is flawed or maybe that you missed something in your analysis.

I will always remember an idea posted on VIC by a guy who ran about $400M in assets at the time. This was in 2007 and it was for a financial company. A few commenters asked questions relating to the company's ability to accurately estimate customer default rates. Rather than defend his thesis, he simply said they should move on because apparently they aren't interested in the company. What happened? Management at the company did incorrectly estimate loss rates and as a result the company crashed. It dropped ~80% and this was close to 10% of that fund manager's portfolio.

frisco• 16 years ago

I like how he described raising money for equity as "one step up from human trafficking... they try to own part of you." A different view on a process that's totally normal in the startup world...

klochner• 16 years ago

This thread needs an auto-responder for everyone that missed the satire.

higher• 16 years ago

The author seems to think that financial reform has done anything to harm the ability of big banks to extract dollars from productive humans. It has not. Among other things, it has granted FOIA-immunity to the SEC, so that in addition to failing to regulate the industry, it can now ensure that nobody knows for certain that it fails to regulate the industry.

known• 16 years ago

Hedge Funds are built on trust and personal relationships.

How to Start a Hedge Fund

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