My experiences as a Hedge Fund Startup

heech · Jan 19, 2011

Congratulations on the milestone... best of luck to you.

That said... I don't like to pretend to be a know-it-all, but note what I said in my first post in this thread:

"My take-away from your story is that you may have a strategy with alpha, but it needs time to mature. I'd suggest you carefully monitor for style-drift, don't take short-cuts, and instead focus laser like to *this* strategy: what makes it work, what are the inherent risks and how can they be hedged, etc. "

Frankly, I as an investor wouldn't be looking to pay a manager to experiment with my money. Do that on your own dime, with your own funds. I'm paying you to implement a specific strategy.

Ghost of Cutten · Jan 20, 2011

Quote from heech:

Congratulations on the milestone... best of luck to you.

That said... I don't like to pretend to be a know-it-all, but note what I said in my first post in this thread:

"My take-away from your story is that you may have a strategy with alpha, but it needs time to mature. I'd suggest you carefully monitor for style-drift, don't take short-cuts, and instead focus laser like to *this* strategy: what makes it work, what are the inherent risks and how can they be hedged, etc. "

Frankly, I as an investor wouldn't be looking to pay a manager to experiment with my money. Do that on your own dime, with your own funds. I'm paying you to implement a specific strategy.

I fully agree. Basically, you lost under 1% on your main strategy in a hostile market - that's not bad. You lost 5%+ on experiments, where you had no idea whether they would work or not. Losing almost 6% for the year on proven strategies is one thing, losing 6% on coin flipping is quite another.

You effectively multiplied your loss by a factor of 8 by experimenting. IMO this is a serious mistake. I would recommend in future you either do no experimentation at all with fund capital, or at most risk say 1% per annum on 'experiments' - in the latter case, you must disclose this to investors.

Generally, investor capital should only be risked on proven methods. That is especially true for startup funds. Experimentation is what your own capital and research is for. If you want to experiment on other people's money, you must make clear it's an experimental trading pool, not a hedge fund.

Now is Now · Jan 20, 2011

I have to agree....had to re read 'experimental trades' twice to believe what you were saying...lesson learned...I hope..

Good luck with your fund for 2011 and keep us posted with your quarterlies...

NiN

HowardCohodas · Jan 20, 2011

Quote from imawesome:

6% down on a year when the S&P was 13%??? Look mate, quit now and give that money back to your so called "investor". You could have put that money in CD or mutual fund and come out better then you did.

If you are down 6%, then might as well join up with Don Brite and he will show you where you went wrong. If you are down 6% during a banner year for the S&P, then do yourself a favor, throw in the towel.

It's really not our standards that are important. It is his investor's standards. It is appropriate to suggest ways he could do better. I am uncomfortable suggesting he should throw in the towel.

Rodney King · Jan 20, 2011

Quote from Ghost of Cutten:

Generally, investor capital should only be risked on proven methods. That is especially true for startup funds. Experimentation is what your own capital and research is for.

This is good advice for the OP, but... it's often unclear where the dividing line is between "proven" and "experimental" strategies, especially for discretionary traders. I imagine Geo. Soros would say all his trading is experimental. Also, people tend to recategorize "experiments" as "proven" after the fact if the trades happen to work out well...

heech · Jan 20, 2011

Quote from Rodney King:

This is good advice for the OP, but... it's often unclear where the dividing line is between "proven" and "experimental" strategies, especially for discretionary traders. I imagine Geo. Soros would say all his trading is experimental. Also, people tend to recategorize "experiments" as "proven" after the fact if the trades happen to work out well...

An unknown manager can't raise (substantial) funds on the basis of "experimental" discretionary strategies. The OP apparently lucked into a single investor who has a lot of money to throw around... great for him. Turning that into a business model is just not viable.

LeeD · Jan 20, 2011

Quote from imawesome:

If I was an "investor" in his fund, then I would make him throw in the towel by redemption. NO WAY I would let someone lose my money when the market is up.

Perhaps, the "angel investor" contracts locks the money in the fund for a specified period like 2 years. There might be a clause that lets the investor take money out in the case of extraordinary drawdown but 6.5% is painful but not extraordinary.

For those who point out stocks were up on the year, remember the OP only started the fund in August and therefore missed the extraordinary bull market that started in March.

I don't understand why all the flaming. The OP actually went out of his way and did something. He established a hedge fund. Further, he came to the forums and wrote about his experience with extraordinary opennes.

Are people just jealous that OP is getting paid even when he doesn't make money?

heech · Jan 20, 2011

Quote from LeeD:

Perhaps, the "angel investor" contracts locks the money in the fund for a specified period like 2 years. There might be a clause that lets the investor take money out in the case of extraordinary drawdown but 6.5% is painful but not extraordinary.

Unless the manager was George Soros, what could possibly motivate an investor to agree to this?

Are people just jealous that OP is getting paid even when he doesn't make money? [/B]

I think the vast majority of replies have been critical, but constructive.

As far as jealousy, I launched my fund with $1.5mm in Feb of last year. I hope to cross the $5mm AUM mark next month.

CPTrader · Jan 20, 2011

Quote from heech:

An unknown manager can't raise (substantial) funds on the basis of "experimental" discretionary strategies. The OP apparently lucked into a single investor who has a lot of money to throw around... great for him. Turning that into a business model is just not viable.

Agreed. The question is how do you define "experimental discretionary strategies".

I would argue that every discretionary global macro strategy is "experimental". Indeed, as I wrote this, I recall George Soros mentioning in one of his books - I believe the Alchemy of Finance - that he described his trading as a "real-time experiment".

CPTrader · Jan 20, 2011

I do not see how losing 6% in a year when the S&P was up 13% is criminal. Even if the strategy is positioned as a long/short equity strategy tradig S&P 500 sticks and using the S&P 500 as the benchmark. Even if ths is the case, a 6% loss is disappointing , but is not crimianl and should NOT in my opinion be grounds for redemption, unless there are other factors at work: poor risk managent, style drift, over-concentration, etc. If those factors do not exist - then this is simply a bad year. Disappointing but, in my opinion, as an investor, neither criminal nor grounds for redemption.