How do Hedge Funds get around the 90% Failure Rate?

As I said earlier, there is only one minor problem with the whole idea of starting a hedge fund....."who in the heck is going to give you a $billion to begin with?" I know a "fool and his money are soon parted" - but I always ask "Then, how in the heck did the fool get his money to begin with?" (other than inheritance or the lottery maybe, LOL.

Us peons had to work for a few decades to get rich, and most likely the rest of the world will likely have to do the same.

But, if you find someone willing to donate, I have 400 traders who will gladly accept donations, LOL.

All the best,

Don
 
Hedge funds in the end are mostly about relationships. Most of the highly successful ones were founded with OPM accumulated through long standing relationships.

For some to say that you need 1B to start a successful hedge fund is simply stupid to say the least. If you have a knack for making money and know some people, most likely they're going to give you some money. Remember these people move in within circles most of us mere "mortals" will never ever even brush up against. Now, with all this being said, it's about who do you know.

Success is catchy, so the more success you are able to demonstrate the more money inflows you're going to see. If you're a successful trader that consistently makes money, there are people out there that will be more than happy to throw money at you. How fast can you make it grow? How much money will they give you? Those are variables that are in your direct control over time.

Look at SAC and D.E. Shaw Group. Those are hedgies built over time by adding layers and layers of trading complexity as they grew. It's called start small and grow. Take a prop shop owner's opinion as just that, the perspective from a guy that's running a prop shop everyday.

To the OP, hedgies overcome the failure rate through many different ways. Application of Darwinistic principles, advancement meritocracy to almost cannibalistic levels, effective risk management techniques, multiple market strategies and the problems of having a core group of traders HAVING to do well on EVERY TRADE become diminished.

Also, there's a lot of truth to the previous statement that these are professional traders you're talking about. They're not TOTALLY on the "eat what you kill" diet plan. They've got their mortgage, car, vacation, etc... bills paid for before they ever roll out of the rack each morning. Believe it or not, there's a certain degree of market edge they have simply through their positions.

The "at home joe trader" has a whole ration of psychological issues they have to overcome before they even switch on their monitors each morning that never even enter into the professional trader's realm or thought process. Hence the HUGE discrepancy between "professional" and "home game" traders.

Oh yeah, they don't call it a "young man's game" for nothing either. Perspective has a lot to do with trading in general. Personally I believe this single aspect is probably the most overlooked thing that is responsible for the demise of most that attempt this game.

Good Luck!
 
I agree with the "you don't need a $billion" statement for sure. And I also agree that a good trader can make a lot of money with only a few $million to trade with. And, that goes full circle to my oft-made point of "why give away the ranch?" - when, with a small amount of risk capital, we will let you use a few $million and you get to keep all the profits.

Many can get to the point of no mortgage, etc., and devote more time to building wealth on their own.

At that point, maybe then they it would make sense to bring in a hundred million or so of OPM, and you would have the track record to actually bring in some $$.

My 2 cents....

Don
 
Algorithm


Hedge funds in the end are mostly about relationships. Most of the highly successful ones were founded with OPM accumulated through long standing relationships.

For some to say that you need 1B to start a successful hedge fund is simply stupid to say the least. If you have a knack for making money and know some people, most likely they're going to give you some money.

###########################

...suspect ,exist another way for this person ,which wish OPM

http://www.pfgca.com/CTA_Challenge.htm
 
Quote from Algorithm:

Hedge funds in the end are mostly about relationships. Most of the highly successful ones were founded with OPM accumulated through long standing relationships.

For some to say that you need 1B to start a successful hedge fund is simply stupid to say the least. If you have a knack for making money and know some people, most likely they're going to give you some money. Remember these people move in within circles most of us mere "mortals" will never ever even brush up against. Now, with all this being said, it's about who do you know.
More...

This is the most accurate post in the entire thread.

I work in a hedge fund and we manage single funds (i.e. Equity long/short, STIR Futures) as well as a fund of hedge funds (FoF). We have seen our fair share of hedge fund success and failures, and would attribute the failure of most start-up hedge funds to operational failure. Managing a hedge fund is a combination of managing the money put on your charge (your portfolio), and manging a business. It is a fallacy to even assume that managing a hedge fund is simply one step up from managing your own money in your trading account.

From the author's original post, I would assume that he understands a proper hedge fund (i.e. one that attracts investors) cannot be managed by a single person. However, his question has completely missed the point of a start-up hedge fund NOT failing.

As assumed correctly, most hedge funds start with 1 or 2 people with seemingly great investment/trading ideas. This rightfully means that the "trading" responsibility lies in the hands of the founding principals. Most of the back office tasks (yes, there are reports to be generated) can initially be tasked to the fund's service providers. Most funds enlist the help of prime brokers - the large Investment Banks we all love - to provide reconciliation reports, risk reports, etc.

Having said this, the next people a start-up fund usually seek to hire are not traders, but administrative staff. You need people to manage the business aspect of running a hedge fund, not manage the money (that's the principals' job). Remember, we're talking about a start-up fund here. If the founding principals of the fund have got no trading/investment edge to be able to handle the trading responsibilities of the fund, he/they should not start one in the first place.

Business responsibilities include liaising with service providers, investors, compliance, risk management, back office, etc. Most hedge funds fail from not being able to manage operational risk (Read: Amaranth). This article should give some rightful respect to operational risk: http://www.edhec-risk.com/site_edhecrisk/public/Interview/RISKArticle.2005-06-16.4823.

This is the longest post I ever had on ET ... I'll put up another one on the costs of running and operating a hedge fund if there's interest.

Cheers.
 
Quote from lifegauge:

This is the longest post I ever had on ET ... I'll put up another one on the costs of running and operating a hedge fund if there's interest.

Hi Lifegauge,

Nice post, it would be great if you can post about running and operating a hedge fund.

Thanks, PB
More...
 
Quote from lifegauge:

This is the most accurate post in the entire thread.

I work in a hedge fund and we manage single funds (i.e. Equity long/short, STIR Futures) as well as a fund of hedge funds (FoF). We have seen our fair share of hedge fund success and failures, and would attribute the failure of most start-up hedge funds to operational failure. Managing a hedge fund is a combination of managing the money put on your charge (your portfolio), and manging a business. It is a fallacy to even assume that managing a hedge fund is simply one step up from managing your own money in your trading account.

From the author's original post, I would assume that he understands a proper hedge fund (i.e. one that attracts investors) cannot be managed by a single person. However, his question has completely missed the point of a start-up hedge fund NOT failing.

As assumed correctly, most hedge funds start with 1 or 2 people with seemingly great investment/trading ideas. This rightfully means that the "trading" responsibility lies in the hands of the founding principals. Most of the back office tasks (yes, there are reports to be generated) can initially be tasked to the fund's service providers. Most funds enlist the help of prime brokers - the large Investment Banks we all love - to provide reconciliation reports, risk reports, etc.

Having said this, the next people a start-up fund usually seek to hire are not traders, but administrative staff. You need people to manage the business aspect of running a hedge fund, not manage the money (that's the principals' job). Remember, we're talking about a start-up fund here. If the founding principals of the fund have got no trading/investment edge to be able to handle the trading responsibilities of the fund, he/they should not start one in the first place.

Business responsibilities include liaising with service providers, investors, compliance, risk management, back office, etc. Most hedge funds fail from not being able to manage operational risk (Read: Amaranth). This article should give some rightful respect to operational risk: http://www.edhec-risk.com/site_edhecrisk/public/Interview/RISKArticle.2005-06-16.4823.

This is the longest post I ever had on ET ... I'll put up another one on the costs of running and operating a hedge fund if there's interest.

Cheers.
More...

IMO you should not have any big problem with administration and management of STIR single hedgefund. One of the "easiest" to manage hedgefund styles. Equity long / short different story - different style...
 
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