Starting a Hedge Fund

Originally posted by tntneo


the myth of the hedgefund for new (and usually not successful) traders is obviously linked to the idea that if they can't make money it's because, well, they don't have enough money.
of course it's silly. but then it sounds so good to trade without even one penny from your pocket, they think.
I agree with gene. it's because they never tried they think there is no pressure in actually trading others people money. of course there is. and it is big.

anyway, my point here is to separate between the 'hedgefund' which is in fact a simple corporation or LLC, and the real hedgefund which is regulated and a complex entity (usually without the trader's money).

I agree with both sides here that anyway, this should not be an excuse to avoid learning and the hardwork of actual trading.

tntneo
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IMHO the point of setting up a fund, be it hedge fund, commodity pool, CTA etc. etc. is to gain greater leverage and greater profit. Simple mathematics. If I can earn 30% on my own money with a conservative strategy and have 100K to trade with, that's only 30K a year. But if I can get a group of high net worth investors to give me $10 million to trade (peanuts), and I can earn 30% on that ten mil and take 20% of the profit as incentive, I've put an additional $600,000 in my pocket with no extra effort (paperwork isn't really extra effort because it can all be outsourced). I don't care if a trader can make 80% a year- another trader who is a good businessman and can get the leverage of OPM will see earnings 100 times any solo trader's winnings. Look at Paul Tudor Jones; he started his fund with $300,000 two decades ago and now runs more than five billion- he got there collecting profits on OPM (and making his clients VERY happy along the way!)

If you have the skills, a fund is a way to leverage your gains by offering your services to other investors who are willing to pay you for that skill. Period. It's a normal business, except instead of making shoes or cars you make profits.

By the way, I've checked around with guys in the know and the consensus is that a domestic hedge fund can be set up for approx. $10,000 and all the regular paperwork can be outsourced for a modest charge on assets (typically 1-2% per year with a minimum fee of XXX). There's no reason to think the costs are stratospheric, paperwork is paperwork no matter how complex it is, and the basic structure of a hedge fund- an LLC set up as manager of an LLP- is just not that big a deal. Don't believe the hype about already needing to be wealthy to get in the game. Ain't true.

If your trading method is good enough and you have a reasonable capital base from which to start, the numbers are hardly insurmountable. It doesn't take millions, just trading ability and common sense- plus the right connections to bring in a few wealthy investors.

I agree that the idea of needing more money to attain profitability is absolutely ridiculous. The only reason to need bigger funds is from a money management perspective, and in an era where a guy can do 100 share lots for a dollar, you can trade with as little as ten grand and still practice good management.

Either the skills pay the bills or they don't. Period. I think the problem is just that the majority of traders are unprofitable wannabes engaged in a mutual circlejerk.
 
Well, I thought I would put in my 2 cents. I am a broker, with 10 mil under management (used to be 80 2 years ago), and I have run 3 different funds since 1993.

My first experience, I never raised enough capital to make the endeavour worthwile. My second experience, I raised a couple of mil and had decent returns (20%+ for 2 years) but the fees I earned were LESS than what I earned from brokerage commissions from 1 account!

The 3rd fund was a much larger entity, with multiple partners, traders, managers and had institutional capital investors including calpers.

let me tell you about running a hedge fund. attorney set up for LLC docs is 15k. ongoing attorney work is another 15k per year. Accountant is 15k to do the k1's audit the returns, so add another 15k per year. AIMR performance reporting software like Axys, advent or whatever you use will cost 1% of assets. You can get soft dollar arrangements to cover all research, quotes, etc but you still need an office (yes institutions will not come visit you at your house), a secretary, and sales people. You need to be at the hedge fund expo in New York as well as the one in Europe every year (add another 5k in travel expenses). Your "sales people need a travel allowance etc. Once you add it up it amounts to a lot of overhead.

And for what - to open an account dvp so you can pay 6 cents a share plus $25 ticket charge to trade? My fund cleared through Bear Stearns and a change in their margin requirements cost my fund a multi million dollar margin call without advanced notice.

A nameless day trading firm, was prepared to take my biz for much better margin rates, commission costs that were a fraction of our original costs etc.

The only problem with day trading firms is they don't have access to size with shorts (100,000 shares) or options 1000+ contracts.
But let me tell you something, there is a reason why Goldman backs Arca and why Schwab bought Cyber.

The future of the business is here in this forum. Lighting fast execution, access to the same technology as market makers and dirt cheap commissions - something the merrils of the world of very aware of.

It is only a question of time since the "big boys" step into this game and when they do there will only be a few firms left - with access to huge size, and everything missing now from day trading firms - like the ability to work a huge order etc.

Don't knock it, I made 20% on 10 mil and had a fee of 400k. After paying everyone, overhead etc, I netted about 80k. During this same period, I made 5 times that in commissions, and don't forget hedge fund investors are fickle. One bad year or quarter and all those assets are gone - and they don't come back. A lot of risk to make 80k.

Don't use the Soros's of the world as an example these guys are very rare. Why not look at Serge Milman making over a mil in his first year day trading (in jeans instead of a suit, on the phone instead of a plane, and at starbucks instead of some boring conference room - answerable to no one but himself)

The bird
 
Bird-
Is Serge Milman still in the game?
His story was one of the first that got me interested in trading. Just wondering if he's still around.
 
Uptik,

I am not sure if serge milman is still in the game, however I do know there are a good 30+ guys out there that have been written about pulling in more than 7 figures.

At my firm, the prop traders that I know make 20k per month net (at 50% payout) and start out with 25k equity and 2 to 1 margin.

So it can be done. Just not by most people. But it can be done. Hopefully, I will figure out how to do it.

right now, I make about 250 a day day trading. I am looking to bump that up to 1k a day before I ditch brokerage completely.

As for the hedge fund thing - bogus in my opinion. My biggest account that I ever got was a billionaire who opened up his account with a 10mil deposit. He gave me that after meeting me twice and hearing that I was up 33% for the 1st quarter when every one else was losing money.

If you can make money, nothing else matters. learning how to make it is key - their in lies the difficulty.

the bird
 
Just about everything item you listed was 50 percent higher than what it cost me for my fund.Set-up 12k....accounting fees 5k.....filings and misc. expenses 1k .All of this was reimbursed back to the general partner of the fund.So ,you put up the initial cost but you get it back once the fund is up and running.Its not a big deal at all to set-up a mgm't co.(G.P)and start trading for your limited partners.Its a very good and lucrative way to make a living.
 
Having been a prop trader for many years, and then having opened up a hedge fund last march (through default as the firm i was trading for closed) I have been on both sides of the fence. I made 68% last year in a nine month period last year in my fund. I made less money for myself than I have made in the last 10 years. Living on a payout of 20% just doesn't compare with taking home 60% of the profits. Unless and until I have 10 million in the fund, it will never make sense. I am skilled as a trader, as I have learned the art of scalping against short option positions; I am not skilled in the area of raising money. In fact, I really have no time or desire to do it, as I would rather be trading than spending time with investors. I really think true traders share that desire not to be distracted with anything that is extrinsic to actual trading. Getting together with the acct to send out the k1's, getting all the statements out, sending out the annual letters, dealing with the prospectus and the start up costs (it cost me 10k for the preparation of the books, I would say 25k in total start up costs) are all things I never used to have to bother with and really rather not bother with. The only advantage is that as a great deal of my strategy revolves around keeping overnight positions as I short option premium and time erosion works for me, I don't have to explain to some manager who is inexperienced with options why I am tying up capital overnight. However, I am sure that there are prop firms still around that allow experienced traders who have a justifiable strategy keep overnight positions; it was always my experience that the no overnight rules were put in to get bad daytraders to chop their losing trades as opposed to riding them into the ground. I know this is lengthy but it is the first time I have posted on this site and i read through 20 pages of debate between Bright and the prospective hedge fund manager. I think all in all, hooking up with a good prop firm who is well capitalized, doesn't butcher you in ticket charges and commissions, and allows you to implement your strategy, is a better bet than opening a hedge fund unless you have a hook to huge capital for your fund.
 
I agree with you about all the extra's you have to do as the manager of the fund.And I find raising more capital to be something I would rather have someone else do.Bottom line is I just really want to trade.But managing your own fund does give you freedom to trade your own style and not worry about the Risk Management Dept. of a Prop. firm getting on your case because you are holding a losing position for more than 2 days.Also, the prop. firm itself could cut your buying power back at a moments notice ,not because of your trading but because the firm as a whole is screwing up.Also, all my energies and time are being used to bring value to the prop. firm and its owners.I would love to pass on something to my kids and atleast give them the opportunity to get involved in what I do. By owning and running my mgm't. company I'm building value in my company not the prop. firm. Also, if I do the right thing I could leave it to them and the mgm't co. could go on or maybe sold.That's why I'm putting up with the added aggravation and expense of running a fund. Because I rather take a shot at building a lasting money management company vs. working for a prop. firm who receives those same benefits from me.
 
how much can one expect to pay a reputable accting firm to do the back office work of a hedge fund for a period of 1 yr, and is it worth the extra $$ to get a big 5 firm to do it. thnaks
 
Here are some annual cost estimates:

$2500 for recordkeeping by a CPA (for me, seems cheaper than purchasing, learning and having to use a software package myself, and more reliable, too).

$2500 for tax preparation.

$8000 for auditing (this seems to be an industry standard introductory offer, although big 5 firms might quote you twice that).

Is there anything else that goes into back office work?
 
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