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

[lazar206]

Quote from nukethewhales31:

hey,

I deal with a multitude of funds in my business and see these pitches everyday.. I dont want to shoot down your ideas of opening a fund.. so dont think that I am. but here are some of the main problems I see with the idea of you being funded by more than friends and family..

generally you do not want friends and family to be vested in your fund.. especially as an newly formed fund with limited track record..

from the pitch on here you said.. nothing more than 10% in one vehicle .. generally max interest in one vehicle would be less than .3% of the entire portfolio.. and would be globally diversified not using an global etfs or emerging market etfs or passive indexing but actual diversification into global markets.. if you dont have a clearing firm lined up where you can buy off TSX/ASX/DAX/ etc... then you are at a disadvantage.. from calculating a lower cost basis than what aapl is at now @ 20 share the portfolio is heavily weighted into aapl at near 1%.

its also best to leave the more risk enhancing and hedging strategies alone while establishing the portfolio and investors as you dont want to show signs of nonproper hedging and excessive risk taking.

also the fund needs to grow in relation to the cash/equity fluctuation as a pair.. for example it look likes some funds are increasing wealth when they are not or if they are its extremely small..

to handle a load like this you need a team of trained traders..

I have to fully agree with “Trader KGB” .3% is really over diversification/conservative, I would much rather agree with a rule of like 1% and when there is a special opportunity go as high as 5%. Having said that I my comfort level is really with ETF’s not individual stocks. ETF’s of giving me the privilege of continually purchasing shares and not being afraid that it will eventually go to 0. (yes, I do have access to foreign exchanges but rarly using them)

I would love to hear from other member on the form if they are using the .3% rule or 1 to 5%.
Thanks

 

[nukethewhales31]

Quote from lazar206:

I have to fully agree with “Trader KGB” .3% is really over diversification/conservative, I would much rather agree with a rule of like 1% and when there is a special opportunity go as high as 5%. Having said that I my comfort level is really with ETF’s not individual stocks. ETF’s of giving me the privilege of continually purchasing shares and not being afraid that it will eventually go to 0. (yes, I do have access to foreign exchanges but rarly using them)

I would love to hear from other member on the form if they are using the .3% rule or 1 to 5%.
Thanks

well good luck at trading 1-5% and not skewing your costs.. i hope you have really good injection algos then

ill just offer one more piece .. its best to start with a prop business before becoming a hedge.. especially starting with nothing. Investors seem to like the idea of investing in an operation when the traders assume the risk and there money works to leverage.. and its easy to slip right into a hedge setup once everyone is trained and the money is backing the business.. and the account statements are there.

least thats how I did it.. lemme know if you wanna see some marketing information that we use.. may help in your pitches to see our system

 

[Hydroblunt]

Quote from lazar206:

Thanks for your comment; can you please explain why you think I am taking excessive risk and low diversification? My account value is pretty stable (now standing at 550k) and has had appositive return for 8 of the 9 last quarters. My portfolio includes the following; S&P 500, Emerging market index, preferred shares, technology, MBS, Municipal bonds, some closed end funds, and some options and pharmaceutical companies. My strategy is usually buy and hold for a year or more. I would love to hear where do you see that I am taking excessive risk? (By the way I have some people that seem to like my performance and are really considering investing thru my fund).

Thanks

You're a stock picker with no quantifiable edge that obviously uses max leverage on his long term position trades. Any investor that has been around the block would not take you seriously. There is no way you can prove that it wasn't you just being lucky with your picks. I'm sure you're not throwing darts at the board, but I am also sure that there is nothing you're doing that dozens of experienced long time pro money managers are not.

Your type of story comes up all the time in the industry. It's nothing new. While your results are great, they won't pass scrutiny. There is no free lunch, if your returns are that high, you need to have an explanation for them. Do you have some amazing exclusive edge or is it just luck & high leverage? What exactly makes you believe you can repeat that performance year over year? Is the liquidity & opportunity even there for you to accept additional capital?

My real reaction is that I do not see why you would even want to try to be a hedge fund & manage other people's money. It's a lot of hassle. If you believe in your results and you ability, you should keep it simple and keep growing your own capital. Maybe form a LLC/LLP, take on a partner for a simple prop firm like structure.

 

[nokomisjeff]

If you have to ask for advice on ET, do you think you're ready? Do you think hedge funders read ET? Would you ask someone that didn't have a fund for advice on how to start one? The markets since 2009 have been wonderful with the S&P almost doubling since Mar 9, 2009. Could you get such a return without such a wind to your back? How would you react if the market broke suddenly and we had a 40% correction in a week?

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

 

[Hydroblunt]

Quote from nokomisjeff:

Do you think hedge funders read ET?

You would be surprised to find out who reads this site.

 

[nokomisjeff]

Quote from Hydroblunt:

You would be surprised to find out who reads this site.

You're 100% correct. A good friend of mine, who's a household name reads this site for entertainment reasons only. I read this site to find journals of guys that I want to fade. Some other friends read ET for much the same reasons.

 

[lazar206]

Quote from Hydroblunt:

You're a stock picker with no quantifiable edge that obviously uses max leverage on his long term position trades. Any investor that has been around the block would not take you seriously. There is no way you can prove that it wasn't you just being lucky with your picks. I'm sure you're not throwing darts at the board, but I am also sure that there is nothing you're doing that dozens of experienced long time pro money managers are not.

Your type of story comes up all the time in the industry. It's nothing new. While your results are great, they won't pass scrutiny. There is no free lunch, if your returns are that high, you need to have an explanation for them. Do you have some amazing exclusive edge or is it just luck & high leverage? What exactly makes you believe you can repeat that performance year over year? Is the liquidity & opportunity even there for you to accept additional capital?

My real reaction is that I do not see why you would even want to try to be a hedge fund & manage other people's money. It's a lot of hassle. If you believe in your results and you ability, you should keep it simple and keep growing your own capital. Maybe form a LLC/LLP, take on a partner for a simple prop firm like structure.

Thanks for your comment. To answer your question I am not actually using a lot of loan/margin etc. In 2009 I had 40k in margin during March-April when the market was tanking. Right now the amount I owe on margin is $4,300.

You say “but I am also sure that there is nothing you're doing that dozens of experienced long time pro money managers are not”, actually I think there is a lot experienced long time pro money managers that are making a heck of a return. As it turns out at the same time I was buying preferred bank shares, David Tapper who runs Hedge fund with 10 employees has been doing the same.

Where do I think my strength is? I would say most importantly is the following famous quote from Warren Buffet in his Oct 16 2008 NYT article “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors”… while that seems pretty easy, its not. Also I am always trying to take advantage of dollar cost averaging in order to buy most shares when the market is low. A very recent example of fear was just last month, there was a lot of anxiety on the street regarding the letter from PIMCO and the NY fed to BAC to buy back 48 billion of mortgages. That has caused BAC stock to plunge, and their preferred stock dropped the most in a year. It seemed to me at that time, that the risk of BAC not paying their preferred dividend is minimal because of several reasons, so I bought BAC preferred. Now the stock is up 6% with a current dividend yield of 6.8%.. should the anxiety return again I would start buying on a monthly basis…

Thanks

 

[Hydroblunt]

Quote from nokomisjeff:

You're 100% correct. A good friend of mine, who's a household name reads this site for entertainment reasons only. I read this site to find journals of guys that I want to fade. Some other friends read ET for much the same reasons.

You would also be surprised what kind of relationships & dealings are initiated from this site. It may be full of clowns & jokers, but to a few here & there it has been an invaluable resource.

lazar, I will reply to your PM.

 

[ECFUTURES]

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

Hi Lazar,

just checked out this forum but it seem halted since last year end. Would like to know whether your plan has been success? If yes, can you share abit on how actually it go, thanks.