My experiences as a Hedge Fund Startup

Thanks to everyone who has been kind enough to post on this thread and share their knowledge. There has been some very useful information posted and hopefully, other traders (and future hedge fund managers) can benefit from it.

Since my last post, I have had some very interesting experiences. I began corresponding with a man who is a very serious and successful trader. He invited me to visit him at his home and as crazy as it sounds, I did it because my gut told me it was the right thing to do. He and his wife were most gracious and generous and prepared a fantastic meal. We spoke for 5 hours about all kinds of things and it felt like 15 minutes to me (probably a lot longer than that for him). I was touched by his kindness and breadth of knowledge and I learned many things that day. I look forward to growing the friendship we established over a lifetime and I am eternally grateful for the opportunity. It just goes to show you that you never know what can come out of a posting on Elitetrader!

I have also had the opportunity to talk to many other professionals in the hedge fund field as I work to grow the distribution list of my quarterly reports. Some are managers of funds of funds, family funds, private wealth, etc. My biggest surprise is that many investors are willing to invest in a solid system with only one year's worth of audited history. This blows my mind because I personally would never consider investing in something without a minimum of 2 years of history and only then if demonstrated through diverse markets. Maybe I am too conservative...

One individual was a broker (not sure of the term) of sorts that networked investors with fund managers, specifically emerging fund managers. He asked me tell him about my situation and my fund which I did. He listened patiently and in a very nice way, communicated that I wasn't motivated enough. He was looking for HUNGRY fund managers. I find this very ironic since this is something I want very much, but I am trying to exercise patience and prudence. I get the sense that these qualities are not widely valued in the hedge fund world.

Anyway, yesterday I had a conference call with the attorney I have been using for my fund and he brought up something rather troubling that I thought was important to share with all of you. Perhaps someone with experience on this can comment...

As mentioned, I have about US$125K AUM and I do not intend to convert my incubator fund into a full hedge fund until I can raise US$5M at a minimum. He advised me to not accept anymore capital from anyone else (currently my investors are all friends or family) due to the risk and exposure; even if they are friends and family. He suggested that I do the conversion sooner rather than later to have the full protection and be able to accept more capital. I informed him that wasn't feasible since the costs associated with a full hedge fund far outweigh any fees I would collect on US$125K. I then asked him about getting commitments for the capital, converting my fund and then collecting the commited capital. He said that any such agreements would be non-binding and could leave me high and dry.

Now I could continue to trade what I have until I get it up to US$5M AUM, but that could take a long, long time! There is also the possibility that one of my current investors will be interested in contributing the difference if performance is promising. However, right now, due to the incubator status, my investors are paying nothing in fees, so where is the incentive to do that? I suppose I could always take my chances, be very careful in who I take on as investors and continue to grow my AUM until I reach the threshold amount. But I wonder if that would expose my current investors to risk, which is something I will not do!

I have brought up a lot of issues, so I'll stop here. As always, any constructive postings are welcome!

Thanks.
 
I am thinking of doing similar with a forex fund. Problem with me is im not really friends with many millionaires so that i could show them my incubation numbers. Any millionaires want to be my friend? ;)
 
Quote from HFStartup:


I have brought up a lot of issues, so I'll stop here. As always, any constructive postings are welcome!
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First of all, what is your end goal? Do you want to retire as a hedge fund manager? At what AUM do you feel you have reached your goal?

That being said, consider that you need to get to the $100mil AUM level as a properly structured hedge fund to make it truly worthwhile, and then have some successful years.

The key issue is that during the growing phase, your management fees & incentive fees will be eaten up by admin, legal, audit & accountant costs. You will essentially spend years earning for others.

Additionally, from what I have gathered, your strategy is not unique in any way and may face significant competition once scaled up. That may become a serious barrier and you need to be realistic about it. Your edge may be very limited or you may not really have an edge and may simply be fooled by randomness.

Essentially I am suggesting that you put two scenarios versus each other: 1) trading your own capital with maybe some investors under a simple structure and seek good leverage (like from Bright) versus 2) Try to get a hedge fund up & running.
 
Quote from Hydroblunt:

First of all, what is your end goal? Do you want to retire as a hedge fund manager? At what AUM do you feel you have reached your goal?

That being said, consider that you need to get to the $100mil AUM level as a properly structured hedge fund to make it truly worthwhile, and then have some successful years.

The key issue is that during the growing phase, your management fees & incentive fees will be eaten up by admin, legal, audit & accountant costs. You will essentially spend years earning for others.

Additionally, from what I have gathered, your strategy is not unique in any way and may face significant competition once scaled up. That may become a serious barrier and you need to be realistic about it. Your edge may be very limited or you may not really have an edge and may simply be fooled by randomness.

Essentially I am suggesting that you put two scenarios versus each other: 1) trading your own capital with maybe some investors under a simple structure and seek good leverage (like from Bright) versus 2) Try to get a hedge fund up & running.
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Great post!

The OP by now has enough information and experience to sit back, take a pause, and think very carefully about all the routes he can take. Further steps in registration, attorney costs, admin, staffing, etc., may well not be to his best benefit.
 
This thread should be closed. Obviously, the original poster just wants attention so he can meet ET people off-line for whatever reason. Maybe because he wants to solicit cash or he is gay. Who knows. Some of what he is saying is complete and utter BS. Did some stranger really give him 100 grand after a few hours of smile and talk? Is anyone out there that gullible? hehe. Nice try kid.

The fact is that in order to have a hedge fund you need to develop a reputation and establish a track record. Lets take Don Bright's firm for example. If you are a trader at Bright (or any prop firm, trading firm, bank, fund, etc) and are constantly hitting home runs, then you will get noticed and eventually you will move on to greater things. Maybe even Don would give you his own capital to trade.

I dont think putting yourself out there on ET is going to get you anywhere except maybe if you constantly demonstrated that you are capable of hitting constant home runs.

So I ask, instead of soliciting on ET, why dont you go to any prop trading firm or even establish a journal on ET so you can demonstrate your skills? If you constantly hit homers then someone will notice.
 
Quote from EMRGLOBAL:

Read up some more on sales tactics, how to make people like you, cold calling techniques etc..
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WRONG! I raised over 5 million a month, for the last two years. I raise money for all kinds of "Ventures." I only deal with individuals that have a minimum of 5 million net worth, not including their home. I go above and beyond the REG A rules as accredited.

Most of my clients are in the 50million to 100million range. THEY DO NOT LIKE SALES TACTICS! They can smell that "Tactic" from a mile away as a 2 bit broker or wana be capital raiser.

PM me If you want me to help you with some ideas of learning to Swim with the sharkes and raise hundreds of millions. Forget any "Sales" books or bullshit "Sales Tactics". They do not work but there are certain key fundamental rules you must play by when dealing with the Top 1% of the country.
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I've been working on a project for some time and neglected to see this. I question your logic here... Not in regards to believing that schucster techniques work on the some of the finacially saviest of people, but instead you don't believe this guy could use a boost in his tactical approaches. I said some very general things, on some of the concepts you have to keep in mind, in order to raise money successfully. Not slide the pen down the clip board to have them sign the bottom line...

It's going to be quite obvious, as you really get going, that it will be imperative you know how to be a "great communicator" and not just a good one. You're also going to need to have a deeper psychological understanding of how people perceive others, and what you need to do, in order for you to attain and retain their admiration of you. As per example... the idea of a 5 minute elevator pitch has more to do with just your "great idea".

Obviously, there's far more subject matter, that could be delved into when it comes to just those the simple things I wrote, from my suggestion.... It's also quite apparent that I was somewhat correct in my thoughts about this guy sounding like he needs to gain a bit more ruthlessnes about what he's doing. Considering it was brought to his attention that he didn't sound "hungry" enough from a potential investor.

@HFStartup... your learn as you go attitude about this is well respected and potentially might get you somewhere eventually. Although you must realize that given an example of putting you in the room with someone that is Harvard educated and possibly enjoyed being on the debate team, in the same room, talking about your investment fund... I'm sorry to say, at present, we'd eat you alive, even though you may have a great opportunity. Characteristically, if I don't see someone as sharp as I am, speaking to me, then I tend to not listen as well. Although nothing is stopping you from getting there....And this isn't meant to be a rag on you fest... it's just the thoughts you need to have in mind when you're aproaching people with giving you some of their livleyhood that aren't family and friends
 
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