ASAP Hedge fund Close to outside investors

[luxhydrus]

Why is it that the most sucessful hedge funds close to outside investors?

Wouldn't make more sense to use the sucessful managing with higher armount of assets under management, to make more money?

or is it easier to get high profits with a lower amount of AUM?

please shed insight into why the best hedge funds close to outside investors,

 

[cfu]

All things being equal, your % return decreases as you increase your AUM. A 10m sh trade that typically returns you 15 - 20% when you have $100mm AUM may only return 1% when you get to $1b AUM.

Some managers have cited this as a potential problem in that it removes you from the very strategies that made you successful in the beginning. To get that same 15 - 20% return you would have to take on more risk. The trade notionals would increase exponentially, i.e. - you'd have to really size up, which in itself affects the nature of the trade. And in case you don't know yet, it's always very easy to get into trades. Getting out... not so.

 

[bc1]

Quote from cfu:

All things being equal, your % return decreases as you increase your AUM. A 10m sh trade that typically returns you 15 - 20% when you have $100mm AUM may only return 1% when you get to $1b AUM.

Some managers have cited this as a potential problem in that it removes you from the very strategies that made you successful in the beginning. To get that same 15 - 20% return you would have to take on more risk. The trade notionals would increase exponentially, i.e. - you'd have to really size up, which in itself affects the nature of the trade. And in case you don't know yet, it's always very easy to get into trades. Getting out... not so.

Yep. That same 5 or 10 contract trade they make now doesn't get traded at the price they want when they have to increase the contract size to 100 because of trying to make the same ROI for a much higher aum. That is also the problem with bwol's scheme to become a billionaire through compounding. Same problem with the big institutions when they want to take a new position in a stock. They can't just decide to place a million share order one day. It takes them weeks to increase their position which is what may be happening right now with the institutions disguising their orders with the low volume.

 

[cgroupman]

Quote from luxhydrus:

Why is it that the most sucessful hedge funds close to outside investors?

Wouldn't make more sense to use the sucessful managing with higher armount of assets under management, to make more money?

or is it easier to get high profits with a lower amount of AUM?

please shed insight into why the best hedge funds close to outside investors,

I think a lot of this is marketing and appeal. Investors like to think they're special, thus the interest in such things as Maddoff offered. You don't want to be in a fund that allows just anyone to join, that sort of thing. A few people with $10mil each is seen as better than trying to get hundreds of people with only $1million.


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[d08]

Quote from cfu:

All things being equal, your % return decreases as you increase your AUM. A 10m sh trade that typically returns you 15 - 20% when you have $100mm AUM may only return 1% when you get to $1b AUM.

Some managers have cited this as a potential problem in that it removes you from the very strategies that made you successful in the beginning. To get that same 15 - 20% return you would have to take on more risk. The trade notionals would increase exponentially, i.e. - you'd have to really size up, which in itself affects the nature of the trade. And in case you don't know yet, it's always very easy to get into trades. Getting out... not so.

+1

The bigger you become, the more visible you are and different games will be played to take advantage of your size. Scalability is critical.

 

[cfu]

Exactly.

Remember, these funds are judged not on their nominal returns, but % returns. So now the more AUM they get, the less return they get on the same trades that made them initially successful AND the more difficult the trades become.

You'll also see the bigger name funds, like DE Shaw, be the umbrella name for smaller funds underneath. So their $23b is spread out between 5 different funds and 20+ subaccounts.