Raising Money for a Hedge Fund

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dafugginman

how would one go about doing this. please, don't say friends and family, because i don't know any wealthy people ;)

can you work with financial advisors and provide some sort of referral fee? they have an established clientele and would already know who would be suitable to have a portion of their portfolio in alternative investments. i don't remember reading about that in the series 7 material.

you can't actively solicit clients or advertise. so no cold calling, direct mail marketing, etc, but, would that change if you register as a NASD broker dealer, have a license?
 
Without an audited track record outside your own small personal retail account and a background from a large investment bank where you already have some good contacts, friends and family is all you got.....
 
Hedge Funds: Game Over



Hedge-Fund Managers Make Midair Pitches

Small-Fry Firms' Hopes Take Off On Eos Flight of Captive Investors Amid Delicate Time for Industry

—Wall Street Journal


There was an interview in, I believe, Barron’s several years ago, consisting of a roundtable discussion among some of the smartest minds in technology investing.

When the subject came to microprocessors—the chips that drive the computers we all use—and whether to invest in market-leader Intel or perennial Number Two AMD, one of the smartest of the smartest minds at the table said this:
.
“It’s game over—Intel won.”

Unfortunately for the magazine's readers, AMD stock proceeded to triple while Intel languished. In hindsight, his words had been spoken at or near the absolute bottom in AMD’s stock price, precisely because all the bad news about AMD that made it such an easily dismissed company in the pages of a financial magazine had already been reflected in the stock price.

Things could only get better for AMD, and they did, thanks to a new CEO and a new generation of microprocessors that caught Intel flat-footed, making AMD—not Intel—the microprocessor stock to own at the very moment it was declared “game over.”

Which is why I hesitate to declare anything so bold as “game over” for anything but, say, the Red Sox without Manny Ramirez.

Still, once in a while, things get so out of hand—such as last summer’s Time Magazine cover article about “Why We Love Our Homes,” which marked the absolute top in the U.S. Housing Bubble—that the phrase comes to mind and refuses to leave.

And Friday’s Wall Street Journal article about hedge fund managers pitching their funds on New York-to-London flights is about as obvious a sign of a top as I have seen since, well, “Why We Love Our Homes.”

I have tried to figure out how to excerpt the article, with appropriate comments, as I did the housing story last summer, but I find the hedge fund article is so full of fin-de-siecle whoppers that commentary merely detracts from the entire experience.

It begins thusly:

As Eos Airlines Flight 2 lurched amid heavy turbulence on Saturday night, hedge-fund manager Kurt Hovan tried to stay on course, making his pitch to a prospective investor.

The 25-minute sales job by Mr. Hovan, manager of a $21 million health-care fund, fell flat. The investor didn't bite -- he said the fund was too tiny and its investment team too green.

Mr. Hovan was one of a handful of small-fry hedge-fund managers whose hopes took off with the Eos flight. Each paid $3,900 for a round-trip seat on the New York-London trip. The draw: to mingle with captive big-time investors and make sales pitches over champagne and canapes. Investors rode free of charge.

"It's speed dating for hedge funds," says Bartt Kellermann of Global Capital Acquisition, which raises money for hedge funds. If investors express interest, Mr. Kellermann arranges follow-up in-flight dinner dates.

For the rest of it, including the hedge fund manager who believes he deserves a 2-and-20 fee structure because of his returns since inception all of 18 months ago, I will only suggest you dig up Friday’s newspaper or, more realistically, check it out online and read it from beginning to end.

As Time Magazine’s everybody-in-the-housing-pool cover story last summer proved, the smart money does not invest in a trend when it is front-page news—especially not when cracks in the foundation, such as the Miami condo market back then, and the Amaranth fiasco today, are visible.

Which is why I’m calling “game over” in hedge fund land. Buyers on the New York-to-London flights, beware...or at least insist on a longer track record than Britney Spears' latest marriage, which, for the record, will be two years in November.


Jeff Matthews
I Am Not Making This Up
 
Can't tell you anything about hedge funds, but when I started as a CTA, I kept an audited track record for a couple of years, then posted it, along with my disclosure doc, etc. on Autumngold & Barclay's for a while, and money found me. If you have a good record at least a few years long, reasonable drawdowns, good equity/margin ratios, good risk profile, etc., IB's & others will find you, it's not that big a universe of good money managers. Lots of people will especially give small sums to "emerging" CTAs, bigger institutional money wants to see 4 or 5 years, and see how you handle bad markets and drawdowns. And keep in mind that returns aren't the only, or even the first thing that people look for. Lots of institutional managers look for lack of correlation with their other managers and markets. For some, it's much more important that you be able to "smooth" their overall equity curve than for you to make 20%/year. If you are looking at managing futures/options money, you might go to the NFA website and look at their materials on starting a CTA/CPO.
Hope that helps,
Jessie
 
What's your edge? Is the edge real and scalable or are you just the lucky trader per survivorship bias? Why would someone invest in your fund instead of one of the 1000's available with extensive track records? Do you have a niche?

Just some questions to ask yourself prior to going down the hedge fund path.

surf
 
Good advice, especially about scaleability and edge. I was initially surprised at how many institutional managers wanted to know exactly what I did, assuming that my "proprietary" methods were my business. The truth is that they would rather have me do it (and pay me for doing it) anyway than steal "my ideas", but it was important to them that my methodology "make sense" and that there was an understandable (to them) reason for me doing everything I did. they even went through my trading records and asked why I did specific trades, or exited a trade when I did. The other piece, scaleability, was equally important as I attracted larger money. If you trade natural gas or rice, you aren't going to be able to do what you can if you trade treasuries or the S&P, you will get killed on bad exits, and they know what your liquidity issues are likely to be. But, like I said, for me the first step was demonstrating a consistent few years with (most important) a good risk profile. I don't know of a single money manager or IB that would rather see a trader that makes 80% one year and loses 35% the next, versus somebody that can consistently make 15% annually. It's just too hard for them to deal with the client hand-holding that is required with very high volatility accounts, even if they are more profitable.
Good trading!
Jessie
 
'I kept an audited track record for a couple of years, then posted it, along with my disclosure doc, etc. on Autumngold & Barclay's for a while'

Jessie,

Can you elaborate on A&G process a little more, what are minimums for the time period of record, assets in program, number of clients etc. etc.
 
it worked for some on here, but it seems like posting track records is only limited in effectiveness. there are tons of funds with <5 million in management with 5 year track records of 30-40%.

i'm not sure i'd want to go the hedge fund route, but the issue of raising money when not around money is a large hurdle. hopefully we'll get some other ideas.
 
One thing that did help me was that my track record was similar to what funds & IB's were looking for. First, I would disagree that there are a lot of people with a 5 year track record of 30%/year. That would be an amazing record, and that alone would easily land you in the Futures Magazine annual "Hot New CTA's" article and have people throwing money at you. But, that said, I was told on more than one occasion that a return of 50%+ in one year would raise serious red flags, that it was not necessarily a good thing, and would make them think long and hard about putting money with me. The thinking is that to do that, you would typically have to take risks that would make most people uncomfortable. One thing that was repeatedly cited as a good thing in my trading was that I rarely used even 10% of my available margin. Had I regularly used 25% or more, lots of money managers would not have even considered me. Another was that I had rebounded fairly quickly from drawdowns, and my drawdowns never exceeded 15% (although they would have preferred less). If I had ever had a drawdown of 25% or more, I would never have been considered by most of the managers, and if I had changed my trading style or level of aggressiveness after a drawdown, that would have ruled me out as well. So would trading thin markets in many cases; pros know how hard and expensive it is sometimes to get out of a 100 lot coffee or natural gas position in a fast market, vs the ease of doing a 10,000 lot in treasuries. It's that kind of thing that keeps money away from lots of new CTAs, especially the belief that high returns are the most important thing that people are looking for. It is important to keep in mind that for most people, the most aggressive part of their portfolio, especially if in futures/options is often strategic, not tactical, and so returns are less important than risk profile and non-correlation with other investments. It really is true that if you do those things well, and do them publicly for a few years, IBs & managers will find you.
Good trading!
Jessie
 
Quote from dafugginman:

how would one go about doing this. please, don't say friends and family, because i don't know any wealthy people ;)

can you work with financial advisors and provide some sort of referral fee? they have an established clientele and would already know who would be suitable to have a portion of their portfolio in alternative investments. i don't remember reading about that in the series 7 material.

you can't actively solicit clients or advertise. so no cold calling, direct mail marketing, etc, but, would that change if you register as a NASD broker dealer, have a license?
More...

Sorry but if you are relying on the Series 7 as a guide for anything than you are not even close to managing a Hedge Fund. Do you actually believe it is that easy ? Fund manager don't have or care about the 7, they have years of experience and a CFA.
 
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