Considering starting a small hedge fund good idea? bad idea? advice?

Quote from Ghost of Cutten:

The way I would do it is this - start an incubator and get yourself audited each year. Turn down 9 out of 10 clients. And perform well.

Audited performance record is the thing people care about in *sticking with* a hedge fund. Connections can raise $1 billion but if you flop then your fund closes in 18 months. As Julian Robertson said, what matters in this business is performance above all. If you can perform, you will succeed. Connections and marketing make it happen quicker, but better to be a great trader with no marketing or connections, than the other way round.
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I suspect not all of these are posting poor numbers......

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aCasZh6xvwJk

so in some ways I disagree - although I recognise you are talking about REAL hedge fund managers not the currently being weeded out I Bank post 2003 startups. I think your description of how HF managers just flail around collecting fees until they go broke and then start a new fund is more representative of the industry. The thing about a hedge fund pre 2007 at least and maybe again going forward was 3 of you put in $300,000 or so each , used your Ivy/I Bank pedigree to impress people who don't know I Bank "trading" is institutionalised edges and then if you raise $1bn with a 1 year lockup that's $20m/3 just on fees, with a 3 year lockup that's $20,000,000 each just on fees. The next stage to be was stillborn - Wall St was priming the market - first hedge fund IPO's seems were attempts at raising stable capital by established names rather than cashing out but then again Wall St didn't prime the Dot Com IPO market with pets.com - it was [seemingly] real businesses like AOL. Hedgefunds were to be the same IMO - if the party had continued you might even have seen startups with a short bull market track record or even NO track record IPO'ing - sorry the fund managers track record is proprietary to their previous IB employer - confidential. In which case you have something completely virtual that is created out of paper and sold at a high price just like the dot coms. that's my theory of what the driver was for many startups. A quick flip on something that cost you virtually nothing and retire a wealthy man.

As for hedge fund results, I am very, very suspicious, because making money trading without an institutionalised edge is a very etheral business. A surprising number came off the sales desks not the" trading" desks - although I do recognise that experienced salespeople have a feel for what stories are bough andtherefore bid up.
 
Quote from lazar206:

Hi everyone,
Just looking for some feedback about an idea I’m considering. I have been in the stock market for the last 2 years and had some pretty good success. I started 2009 with around 175k invested, had around 100% return bringing my NAV to 366k, in 2010 I started with 366k and invested an additional 50k, YTD had a 30% return bringing my total account value to 538k.
I was considering starting a small hedge fund/money management business and want to get some feedback.

Thanks
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A dose of reality for you.

Any serious investor would look at this summary of your results and say that it's dumb luck. This sounds like highly leveraged discretionary trading with no real edge.
 
Quote from mokwit:


As for hedge fund results, I am very, very suspicious, because making money trading without an institutionalised edge is a very etheral business. A surprising number came off the sales desks not the" trading" desks - although I do recognise that experienced salespeople have a feel for what stories are bough andtherefore bid up.
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There are 3 time-honoured ways to make money without a structural edge:

i) superior fundamental analysis and understanding of the investment process.
ii) superior market feel and understanding of crowd psychology, market trends & momentum.
iii) superior data-testing and systems building

Most other approaches are either smoke and mirrors, or rely on structural edges that in most cases can and will be competed away.

There are a certain set of characteristics that each valid approach requires. To find out the durability of a hedgie's edge and talent, grill him to see if he has those characteristics. For example, if he's a fundamentals guy, then you want him to be giving great angles on companies, to have excellent knowledge of the economics of corporations, that it's obvious he understands the business 10 times better than you, has read all the footnotes, knows the numbers and the business model of every stock out there, knows the stuff that is undervalued on the books etc. You also want to check that he can hold onto his nuts and buy more as a stock plummets in a market panic, and that he sells rather than holding on when stocks enter bubble territory. You want to make sure he has rarely if ever invested in a stock that went bankrupt.

For a market feel trader, you want to see multiple trades where he bought very close to the low of a major market bottom, or shorted near the highs of a blowoff top. You want to see what % of major thematic trends he caught each of the last 3 years. You want to see some nice spread trades where he made 80% of the return the outright delivered, with half the risk. You want to see him having bought breakouts when market leading stocks hit new highs yearly on record volume, then liquidated when Cramer pumped them and they spiked 15% in 2 days with lots of CNBC coverage. You want to check he uses stops and sticks to them.

For a systems guy, there are other questions, I'm sure you can come up with some.

For all of them, they need to demonstrate a coherent strategy, that covers all steps from idea generation to trade exit and performance review. I.e. why they buy and sell, how they tell if they are wrong and need to exit, how they get ideas, how they implement views, how they review and improve performance, etc etc.

That's how you evaluate a manager. Not on their track record. A track record can only disqualify a manager if it is poor or terrible, it cannot reliably demonstrate his skill if it is good. One needs a good track record AND a good response to profile questions. IMO it takes a good trader to know another good trader. You can just tell. An experienced trader can tell a BS artist in about 1 minute, whether he manages a $20k IB account, or a $2 billion fund.
 
Quote from Ghost of Cutten:

There are 3 time-honoured ways to make money without a structural edge:

i) superior fundamental analysis and understanding of the investment process.
ii) superior market feel and understanding of crowd psychology, market trends & momentum.
iii) superior data-testing and systems building

Most other approaches are either smoke and mirrors, or rely on structural edges that in most cases can and will be competed away.

There are a certain set of characteristics that each valid approach requires. To find out the durability of a hedgie's edge and talent, grill him to see if he has those characteristics. For example, if he's a fundamentals guy, then you want him to be giving great angles on companies, to have excellent knowledge of the economics of corporations, that it's obvious he understands the business 10 times better than you, has read all the footnotes, knows the numbers and the business model of every stock out there, knows the stuff that is undervalued on the books etc. You also want to check that he can hold onto his nuts and buy more as a stock plummets in a market panic, and that he sells rather than holding on when stocks enter bubble territory. You want to make sure he has rarely if ever invested in a stock that went bankrupt.

For a market feel trader, you want to see multiple trades where he bought very close to the low of a major market bottom, or shorted near the highs of a blowoff top. You want to see what % of major thematic trends he caught each of the last 3 years. You want to see some nice spread trades where he made 80% of the return the outright delivered, with half the risk. You want to see him having bought breakouts when market leading stocks hit new highs yearly on record volume, then liquidated when Cramer pumped them and they spiked 15% in 2 days with lots of CNBC coverage. You want to check he uses stops and sticks to them.

For a systems guy, there are other questions, I'm sure you can come up with some.

For all of them, they need to demonstrate a coherent strategy, that covers all steps from idea generation to trade exit and performance review. I.e. why they buy and sell, how they tell if they are wrong and need to exit, how they get ideas, how they implement views, how they review and improve performance, etc etc.

That's how you evaluate a manager. Not on their track record. A track record can only disqualify a manager if it is poor or terrible, it cannot reliably demonstrate his skill if it is good. One needs a good track record AND a good response to profile questions. IMO it takes a good trader to know another good trader. You can just tell. An experienced trader can tell a BS artist in about 1 minute, whether he manages a $20k IB account, or a $2 billion fund.
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Great points.
 
Quote from Ghost of Cutten:

There are 3 time-honoured ways to make money without a structural edge:

i) superior fundamental analysis and understanding of the investment process.
ii) superior market feel and understanding of crowd psychology, market trends & momentum.
iii) superior data-testing and systems building

Most other approaches are either smoke and mirrors, or rely on structural edges that in most cases can and will be competed away.

There are a certain set of characteristics that each valid approach requires. To find out the durability of a hedgie's edge and talent, grill him to see if he has those characteristics. For example, if he's a fundamentals guy, then you want him to be giving great angles on companies, to have excellent knowledge of the economics of corporations, that it's obvious he understands the business 10 times better than you, has read all the footnotes, knows the numbers and the business model of every stock out there, knows the stuff that is undervalued on the books etc. You also want to check that he can hold onto his nuts and buy more as a stock plummets in a market panic, and that he sells rather than holding on when stocks enter bubble territory. You want to make sure he has rarely if ever invested in a stock that went bankrupt.

For a market feel trader, you want to see multiple trades where he bought very close to the low of a major market bottom, or shorted near the highs of a blowoff top. You want to see what % of major thematic trends he caught each of the last 3 years. You want to see some nice spread trades where he made 80% of the return the outright delivered, with half the risk. You want to see him having bought breakouts when market leading stocks hit new highs yearly on record volume, then liquidated when Cramer pumped them and they spiked 15% in 2 days with lots of CNBC coverage. You want to check he uses stops and sticks to them.

For a systems guy, there are other questions, I'm sure you can come up with some.

For all of them, they need to demonstrate a coherent strategy, that covers all steps from idea generation to trade exit and performance review. I.e. why they buy and sell, how they tell if they are wrong and need to exit, how they get ideas, how they implement views, how they review and improve performance, etc etc.

That's how you evaluate a manager. Not on their track record. A track record can only disqualify a manager if it is poor or terrible, it cannot reliably demonstrate his skill if it is good. One needs a good track record AND a good response to profile questions. IMO it takes a good trader to know another good trader. You can just tell. An experienced trader can tell a BS artist in about 1 minute, whether he manages a $20k IB account, or a $2 billion fund.
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While the way to make money can be identified the actual implementation is etheral. There are very few warren Buffets. J. Paul getty gives one of the most concise explanations how to make money in stocks but judgement is required.

I was alluding to all the literally thousands of newly formed hedge funds. It sems they are not all making money in legitimate ways or through the application of skill in a way that would be regarded as fair. Just seems that way e.g shorting ahead of a PIPE and covering with the PIPE shares, naked shorting, using mark to make believe on unlisted investments (a;lso a smoothing technique) etc etc. IMO the reason the government had to allow GS and MS into the Fed club was not just to save them , but also a back door bailout of hedge funds. Remember just before the Fed met at 9.30pm to allow GS and MS in MAN stated that it could no longer finance OTC derivatives positions. My guess is seperate from any distressed sale pricing effect if at any time all hedge fund investors tried to get out what they believe they had from their statements at the same time the money would not be there, same as if all bank depositors asked for their money back. It has just emerged that Buffet 's portfolio is inflated by non markdown to the tune of $1b++ because Berkshire feels the stocks will come back so no need to mark them down. Mark to Make Believe in other words.

Goldman employs 30,000 people and has 300+ position dealing rooms in NY London HK and Tokyo, yet it transpires that actual prop trader numbered around 30. All the others where structural edge people. If a trader constructs a product or a solution for a client that is booked as "trading" revenue. As for flow trading, if that is "trading" It is possible to be a profitable "trader" in your first week on a desk.

I mean no slur to the many many hedge fund managers who make money honestly with skill, I just remain sceptical that there were that many people coming out of the Banks with that skill. Look at Boaz Weinstein - great "trader" until it turned out he was holding dross - same with the genious who named his yacht 'Positive Carry' until he went bust and had to sell it again coz he was buying dross. Same with UBS traders wit an artificially low cost of capital calculation. Same with "traders" who borrow from the Fed and then invest in Govt bonds - how hard was that? They paid the,mselves a s geniouses at our expense.

It seems auditing of HF results has tightened up a lot - probalbly find that they don't repeat their past "performance" even if market conditions replicate.
 
i run a small 7 figure firm myself
except its all my money,

i have a lot of 6 figure people wanting to invest in my firm
i'm sure if my fund was 8 figure, i have a lot of 7 figure people trying to invest in my firm

whats the point? increase your capital in play. The people below your level will invest. Rarely will u get an above your level to throw you a bone.
 
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