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Hedge Fund New Money Troubles
- Thread starter Ripley
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if you were managing a hedge fund would you ask questions on ET? Sometimes you just gotta play along. At anyrate, it's an interesting question that many money managers have to deal with. You can't have it both ways, always accepting new money, and maintaining a stable fund for your loyal early investors. If Warren Buffet was still accepting new money, he'd have to invest a billion dollars a day on top of what he already has in cash.Quote from darkhorse:
Not trying to be a spoil sport -- if he is just dreaming, or trying to work out issues while in the process of setting something up, doing the "one day" thing etcetera, there's nothing wrong with that.
But that's not what was said...
Quote from oldtime:
if you were managing a hedge fund would you ask questions on ET? Sometimes you just gotta play along. At anyrate, it's an interesting question that many money managers have to deal with. You can't have it both ways, always accepting new money, and maintaining a stable fund for your loyal early investors. If Warren Buffet was still accepting new money, he'd have to invest a billion dollars a day on top of what he already has in cash.
Right, forgot this was the kiddie pool. I'll make a final comment and take my leave.
That's why performance based money managers don't "always accept new money." They maintain awareness of strategy capacity and close the window when the current opportunity set is saturated or capacity is full, or even give capital back in low opportunity periods.
This seems so basic and logical (not to mention widely documented) as to hardly qualify as "interesting"... but then, I guess I forgot the locale...
yeah, until you look at Blackrock, that now has over a trillion under management. Somebody had the idea, "There's money in them thar money management hills."Quote from darkhorse:
Right, forgot this was the kiddie pool. I'll make a final comment and take my leave.
That's why performance based money managers don't "always accept new money." They maintain awareness of strategy capacity and close the window when the current opportunity set is saturated or capacity is full, or even give capital back in low opportunity periods.
This seems so basic and logical (not to mention widely documented) as to hardly qualify as "interesting"... but then, I guess I forgot the locale...
Quote from oldtime:
he'd have to invest a billion dollars a day on top of what he already has in cash.
This is the same issue I'm having.
I use my performance numbers to raise capital. And having to put new money into my best ideas at sub-optimal prices has been a hindrance to my performance so far.
Accepting new money without it hindering the performance has been an ongoing issue, but so far, I just accepted new money and put them into fund at the beginning of the next month.
yeah, well I guess you have to decide, do you want to be in the trading business or the money management business?Quote from Ripley:
This is the same issue I'm having.
I use my performance numbers to raise capital. And having to put new money into my best ideas at sub-optimal prices has been a hindrance to my performance so far.
Accepting new money without it hindering the performance has been an ongoing issue, but so far, I just accepted new money and put them into fund at the beginning of the next month.
Quote from oldtime:
trading business or the money management business?
In the early years of a hedge fund, the performance is extremely important. After I have $1+ billions, the performance wouldn't be that big of an issue, since you don't have that much of a need to attract new capital, as you were when you were without the billions.
Your investors are there to jump aboard your equity curve. The timing of jumping in and out is why i assume your investors are willing to participate in either a formal or verbal "lockup" period. If 3 old investors own xyz @ $20 and new investor comes in @ $25 and you decide to wait for better pricing. Suddenly xyz is acquired for $40 then what? Decent chance investor #4 got referred by any one of the 3.
Quote from Ripley:
New money coming into my fund is negatively affecting my fund performance.
This is so because if I'm holding onto a stock at an average price of $20, and when the new money is coming in, the stock maybe worth $25, and I would have to add more of that share at a higher price. Or on a profitable short position, I would be adding more onto a profitable position at a lower price.
How can I keep my performance up while adding new money coming into the fund. Any thoughts or ideas on this would be greatly appreciated.
Take money at particular intervals when the fund books profits or losses (on a mtm basis). Normally at the end of the month (but could be end of quarter or end of year).
Presumably the stock is still a buy at $25 at the end of the month. The returns from $20 to $25 have been "booked" at the end of the month and if you drop from $25 to $20 you will post a loss of 20% in the next month. So your returns don't really change by adding more money.
High watermarks, return calculations are independent of your current assets, which is actually very nice. Nothing sucks more than being down and having your risk capital cut in half and a requirement to make back the return in dollar space.
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