Advice on Staring a Hedge Fund

Quote from heech:

I don't necessarily disagree with you... and I've heard your message numerous times from other people.

In my case, I actually found it MUCH more difficult managing *family* money than investor money.
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Family is a bitch. 30 years ago I recommended a single stock to my father. He spent 3 weeks researching the damn thing, then got in too late and bailed for a loss on a natural pullback.

So for the next 20 years, no matter what success I had in life, I was a bum when it came to any area of finances or investing.

And yes, while 'official' investors can sometimes be more patient and understanding than family, they are not by any means less forgiving. Nor is your life any better when you are going through a natural drawdown and getting daily calls from people who are payng you for results. ANd as a small fund, you will get those calls directly, and often.

It isn't something I enjoyed at all, and the additional income was not worth the regulatory hassles, hand-holding, and added stress.

If you really believe in your system, IMHO, the best route is to find just one or two folks with whom you can have a great relationship, and grow the hell out of their accounts.

Good luck. But be careful what you ask for. You may get it.
 
lindq,

Are we related!? Feel like we might have the same father. Best decision I've made in this business so far: turning down money from the in-laws.

I haven't been at this long enough to deal with the harassing outside investor yet. Part of me wants to say... that'd be a good problem to have. But the truth is, you're probably right... that's yet another challenge I'll have to find a way to conquer (or go down in flames).

One positive: my strategy is quant/black-box. If someone calls me to discuss their view of the market... talk to the box.
 
Quote from lasner:

If anyone out there could give some advice on starting a hedge fund that would be great. I know there are some really helpful links on this site in regards to formations of hedge funds. If anyone could recommend some good ones that would be great as well.

I'm 34 and have 100k in my trading account. I've been trading for 10 years. I currently have a 1 year track record on 15k (which I generated a 70% return on). I traded micro and mini forex, mini futures as well as full futures and forex.

Within my track record I guarantee to not lose more than 7% of the initial capital. If at any point the fund dips below a 7% loss I return everyone's capital and walk away.

How I did it was in the beginning I would risk .5% of total capital on each trade ($75). In order to be down 7% I would have to have 13 consecutive losing trades.

I started out very conservatively as my profits came in I opened my positions with slightly more risk. Going from micro forex to mini forex to mini futures and eventually into full futures and forex.

I feel I could have actually made a guarantee of 3.5% rather than 7%. That would be 6.5 consecutive losing trades.

I'm fairly entrepreneurial. I own an energy consulting firm that is generating 400k in net revenues. We are still new 1 year old and this upcoming year are expected to quadruple our net revenues with the addition of 3 more sales reps. I keep my profits from my company in reserves and would actually like to reinvest the reserves into my fund. Since my fund will be ultra conservative and having very little risk of initial capital.

I'm also pretty well educated having a decent degree from a major university and currently working on an MBA from Temple which is ranked top 50 in the nation.

I want to start a hedge fund but obviously don't want to spend 150k on the formation of it. I was wondering if anyone could give advice on how to spend the least amount of money to get it started.

I don't know if I want to do a full hedge fund because I could only deal with accredited investors having to have a net worth of $1 million. I think my best bet may be to form a CTA or CPO and have the option to deal with any size investor.

If anyone has any good advice is would appreciated....Thanks
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I have $500K from the sale of one of my apartment buildings. With a track record that short I wouldn't give you a try. I would at least expect a minimum of above average returns. That being said, a hedge fund manager wouldn't even piss on me with the money I have.
I day traded with speedtrader some years ago. I have been watching the market daily because I plan to return in January. I think I will play with about $300K I was very successful and damn lucky back then because my knowledge was limited and I done pretty well.
 
lindq and heech, I had a similar experience with my father.

Never again to accept money from family members. I do not even think I want to accept money from "friends". It is just too complicated and like heech said..."they never quite get it".

I think in the same way a trader (or his/her quant box) needs to be selective in his trade selection, traders need to be very selective in selecting their investors. Yes this might lead to slower than desired AUM growth..but it ultimately gives you peace of mind. Investors who understand your strategy and its risk-reward profile and who understand the markets can be excellent partners, those who don't can make your life a nightmare.

This is partially why I very strongly believe you need to structure the terms of a fund or pool in such a way to weed out certain investors.

Thanks to all for sharing
 
heech,

How was the experience of returning money to family and turning down your inlaws? I am curious, because I do not know how I would tactfully handle such a situation.

Were they offended, any resentment? Family relationships are so so tricky....
 
Quote from CPTrader:

heech,

How was the experience of returning money to family and turning down your inlaws? I am curious, because I do not know how I would tactfully handle such a situation.

Were they offended, any resentment? Family relationships are so so tricky....
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I really, really emphasized the risk aspect. To be perfectly honest, I exaggerated it.

I forwarded them all articles on the Ebullio blow-up earlier this year, when they fell 96% in two months. They'd say things like "but you're really smart"... which is what parents (even in-laws) are supposed to say about you. I wouldn't accept that compliment graciously or passively! I'd shoot back immediately... "not that smart, I could easily lose 20% tomorrow if X, Y, Z goes wrong."

In terms of returning money... my max DD this year is 7%. At the bottom of the draw-down, family was making noises of concern. I told them this would be a good time to "try" the withdrawal process (since I use a third party admin). They were happy to do that. Since that point, although I'm now well above my high water mark... I've just reminded them of the risks whenever they hint about moving money back in.

At this point... I think everyone's clear I appreciate their emotional/mental support, but are also operating under the assumption that investing with me is only for gamblers and idiots. (Incorrect assumption! I hope.)
 
Quote from heech:

I really, really emphasized the risk aspect. To be perfectly honest, I exaggerated it.

I forwarded them all articles on the Ebullio blow-up earlier this year, when they fell 96% in two months. They'd say things like "but you're really smart"... which is what parents (even in-laws) are supposed to say about you. I wouldn't accept that compliment graciously or passively! I'd shoot back immediately... "not that smart, I could easily lose 20% tomorrow if X, Y, Z goes wrong."

In terms of returning money... my max DD this year is 7%. At the bottom of the draw-down, family was making noises of concern. I told them this would be a good time to "try" the withdrawal process (since I use a third party admin). They were happy to do that. Since that point, although I'm now well above my high water mark... I've just reminded them of the risks whenever they hint about moving money back in.

At this point... I think everyone's clear I appreciate their emotional/mental support, but are also operating under the assumption that investing with me is only for gamblers and idiots. (Incorrect assumption! I hope.)
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Very smart approach. Thanks for sharing.

I have to say if they get concerned about a 7% drawdown for a CTA strategy, then they shouldn't be invested with you or any CTA!

But this raises another question...why do many investors - individuals and institutions alike, tolerate 50% drawdowns in the S&P mutial index funds but get apoplectic over 7-10% drawdowns in hedge funds. The typical individual has bought the marketing spiel form Mutual funds to invest in the 401K for retirement. They like sheep invest money monthly and literally forget about it. They don't seem to bother about the steep drawdowns or abandon ship aggressively druing large drawdowns - they call it "buy and hold" but with hedge funds, CTAs & CPOs...the behavior is the complete opposite.

Can someone explain this paradox to me??
 
Quote from CPTrader:


Can someone explain this paradox to me??
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Because the financial press and investment advisors have always fed the public the line that the 'market' will always come back, and they need to stay in for the long haul.

But smaller funds are more personalized, as individuals are making trading decisions.

So from an investors point of view, they enter each arena with different expectations.

I've never invested in a fund, and never trusted anyone else with my money. But even as an experienced and hardened trader, if a fund manager was down 7% on my money, I too would probably be all over him. Most especially if I was paying maintenance fees.
 
I think if you consider friends and family for investors you have to assess them just as if they were a random individual investor, ie they must meet the same criteria. Accepting them as clients when the fit is not right, leaning on them for funds when it is not appropriate for their situation, or letting them in as a "favor" is all asking for trouble.
 
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