Starting a Hedge Fund with no Credibility

Quote from taowave:

Beyond a shadow of doubt,this is the way to go.....

But you will need to spend 2 years there
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other than high comms, one problem with that is the risk of back-engineering... if you have a quant model that works, be under no illusion... any party with access to your complete trading record will throw absolutely everything at cracking your model... thats how most edges come and go... be warned!

whereas if you set up a small fund, split your trades across min. 2 execution brokers, on the one hand thats going to cost you a little more, K- or margin-wise, OTOH neither your brokers, nor your fund administrator - if you choose well and ensure they only access net (aggregated) EOD trade data - will have access to the full detail...
 
Quote from 2cents:

if you've traded it for these few months with real money (being generous, $25K - $200K) and the ratios & P&L look good, you may want to grow via managed accts first, attract a few less-demanding HNW guys... but of course an incubator or other type of low-cost fund / portfolio structure wld enhance your credibility, allow you to continue to build a "valid" track record from the institutional investors' perspective, so that within another 12 mths of listing on CTA etc performance databases you wld start getting calls.

Prime brokers are good help as well but only when you've established a "valid" track record. lawyers and accountants? well, tap them for $$$, they cld be your 1st HNW investors if you know how to do it!

best of luck!
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Hi Guys... very interesting discussion.

When you say "managed accounts", are you under the same regulations as you would be under if you ran an actual "fund?"

Also, what advantages/disadvantages would one have running a "fund" as opposed to managing a group of peoples accounts?

Thanks!
 
Quote from webent:

My business partner and I want to start a long/short equitiy hedge fund. We have been working very hard on a quantitative model. Now that we've been trading it for a few months, we have confidence in our model, and the return *should* be good enough to interest some investors (at least 30% annually, more if we choose not to reduce volatility).

We have enough funds between the two of us to seed a small hedge fund, but are more interested in growing it with investors' money. We think our method should easily scale up to at least $100m before we need to start making compromises.

Unfortunately, we have math/computer science backgrounds, and think breaking into the industry is going to be tough.

**Where should we start?**

We've been talking to lawyers and accountants about starting an incubator fund, but I'm not convinced it will get us closer to our final goal (investors). Will any prime broker deal with us, and introduce us to capital? Will developing a track record from an incubator fund really help us?


Thanks
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A few months? A few months? Are you shitting me? OMG. Come on man, I'm trying to refrain myself here. Two months is not a track record. Five years is a track record, ten even better. This is what really scares me about the hedge fund industry. And the scary thing is, I think this guy is the rule, not the exception. Man oh man. Scary stuff.
 
Quote from Maverick74:

A few months? A few months? Are you shitting me? OMG. Come on man, I'm trying to refrain myself here. Two months is not a track record. Five years is a track record, ten even better. This is what really scares me about the hedge fund industry. And the scary thing is, I think this guy is the rule, not the exception. Man oh man. Scary stuff.
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Maybe I should rephrase... After 4(!) months I now have enough confidence to start approaches that could possibly attract investors in the future. If anything, I should have started down this path sooner. I'd rather not be asking this question in 10 years, as you so wisely advise.


Thanks for the advice everyone (else).
 
Quote from bootize:

Hi Guys... very interesting discussion.

When you say "managed accounts", are you under the same regulations as you would be under if you ran an actual "fund?"

Also, what advantages/disadvantages would one have running a "fund" as opposed to managing a group of peoples accounts?

Thanks!
More...
if u're not happy with your managed accts provider / prime broker, and want to transfer yr clients to another managed accts provider, you lose tons of time and potentially a few clients etc in the process... i shld know... have done it twice, with 20-30 clients each time... massively annoying

with a fund, it takes about 1-3 days tops to switch prime brokers / custodians, execution brokers etc, move required margins / total asset base etc from one institution to another... no impact to client base... brokers know this => gives u more bargaining power...

the fund admin takes care of AML/KYC stuff, subscriptions / redemption - all u the trader / manager want to know on a daily basis is how much $$$ u have at play, not whether yr client John has pulled $10K from his acct or is 'planning to...' - spewing NAVs, ratios, reporting, and if you choose the right partners they can help a fair bit with capital intros etc...

also potentially more tax-efficient, depending on the setup u go for... and the lesser risk of your strategies / models being back-engineered by yr prime broker, as touched upon in my earlier post...

having said that, i've had a few pretty good years with a managed accts setup... no upfront costs (no need for lawyers, tax & accting consultants etc), no running costs, 100x leverage, access to my preferred ECNs, low transaction costs... but i've now found "the right partners" to get my fund up & running along similar terms, therefore a no-brainer... http://www.elitetrader.com/vb/showthread.php?s=&threadid=82397
http://www.elitetrader.com/vb/showthread.php?s=&postid=1298665#post1298665 fyi
 
Get a year under your belt, make your mistakes with small money and if the returns are good, the money will follow form FOF, 3rd Party Marketers for emerging managers and fund incubators.

Come on Mav......10 years mean nothing as the environments always change and so should the strategies and methods that are deployed

I will take a good 2-3 year track record over a average 10 year record as part of any Funds of Funds. What have you done for me lately, is the attitude for the hedge funds that are now FOF as they need to get money placed and working for them.
 
The fees for setting up a incubator fund are very minimal. Under 10K. The state registration and filing requirements are less stringent since your not dealing with other peoples money. The whole point of the incubator fund is gain visibility.

If your managing 25 million or more then registration is needed by the SEC, and filing as a investment advisor is needed also when your dealing with OPM. For state registration if your dealing with 5 million and less or under 15 people in your fund, then state registration is not needed.

Once you start dealing with OPM, all the headaches of it start appearing. The system your trading has to be rock solid with extreme discipline. You cant let OPM modify your system.

Once your visible and are being audited by a reputable accounting firm, then your fund is tracked by all the distributors of liquidity. If the system beats the indexes, thats all that most anyone is looking for. Again most investors will get nervous if your drawdowns exceed 5%. Even if your returns compensate for the drawdowns.

Spreading the orderflow and hedging in multiple accounts, its hard for brokers to get a wind of your system. An entry signal can be sent to one broker and exit signal to another, then redistributing funds evenly at the end of the week, is one method.
 
Also make sure if you can, that your liquidity is not coming from Drug Cartels. Once you start going offshore, there is a lot of dirty money looking to get parked.
 
Quote from Spectre2007:

Also make sure if you can, that your liquidity is not coming from Drug Cartels. Once you start going offshore, there is a lot of dirty money looking to get parked.
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duuuude... while that is true... can u give me a list of serious funds that don't have an offshore setup?... c'mon...
 
Quote from 2cents:

if u're not happy with your managed accts provider / prime broker, and want to transfer yr clients to another managed accts provider, you lose tons of time and potentially a few clients etc in the process... i shld know... have done it twice, with 20-30 clients each time... massively annoying

with a fund, it takes about 1-3 days tops to switch prime brokers / custodians, execution brokers etc, move required margins / total asset base etc from one institution to another... no impact to client base... brokers know this => gives u more bargaining power...

the fund admin takes care of AML/KYC stuff, subscriptions / redemption - all u the trader / manager want to know on a daily basis is how much $$$ u have at play, not whether yr client John has pulled $10K from his acct or is 'planning to...' - spewing NAVs, ratios, reporting, and if you choose the right partners they can help a fair bit with capital intros etc...

also potentially more tax-efficient, depending on the setup u go for... and the lesser risk of your strategies / models being back-engineered by yr prime broker, as touched upon in my earlier post...

having said that, i've had a few pretty good years with a managed accts setup... no upfront costs (no need for lawyers, tax & accting consultants etc), no running costs, 100x leverage, access to my preferred ECNs, low transaction costs... but i've now found "the right partners" to get my fund up & running along similar terms, therefore a no-brainer... http://www.elitetrader.com/vb/showthread.php?s=&threadid=82397
http://www.elitetrader.com/vb/showthread.php?s=&postid=1298665#post1298665 fyi
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Thanks 2cents :)

I have a personal successful track record, and now have people inquiring about "giving me money to play with." This has started me thinking about managing a fund, or something of that nature. I know how to trade itself, but need guidance on the "running a fund" aspect. It almost sounds better to run several managed accounts first, then several years down the line, go for the full fund itself.

Does that sound plausable? or is there a smarter way? Thanks!
 
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