Starting a hedge fund

[Pekelo]

So if anyone here has any input, comments, war-stories, etc about running their own fund I'd appreciate reading it. Thanks. [/B]

For a start, read Biggs: Hedgehogging

This book is an interesting and easy read on the hedge fund industry. Although the author gets distracted easily and gets into offtopic subjects, you still get a good picture, specially about the difficulty of rising money.

And he had 30 years of experience and track records....

 

[Tatnic]

Quote from Moneyball:

Yes, there are probably more people who run/trade for hedge funds on here than you think. My point is, unless you have family money or big time connections, it's going to be nearly impossible to raise money from strangers with zero track record. Don't take this the wrong way, but why would someone give you their money when you've never traded your strategy with real money, when they can go out and give it to thousands of people who have instead? I support paper trading and backtesting to a degree, but it's a different world from trading real money, real time. There's no psychology involved in backtesting, you don't have to answer to your investors when you have a 5%-10% drawdown, etc. There's only so much you can explain to people, most won't even care about what exactly you're doing, as long as you're producing above average returns. With no track record, that's hard to do.

I've traded real money for decades so I have something to go by. At the very least, I know how hard it is to be successful at trading day in and day out. My model is hardly a trading model and I'm hoping that that will be one of its selling points.

But you're right, I have no track record trading other people's money so I'm pretty sure I'm looking at an incubator fund for a few years, although I don't expect the results to be markedly different than a real hedge fund. The strategy will be the same.

 

[Tatnic]

Quote from Pekelo:

For a start, read Biggs: Hedgehogging

This book is an interesting and easy read on the hedge fund industry. Although the author gets distracted easily and gets into offtopic subjects, you still get a good picture, specially about the difficulty of rising money.

And he had 30 years of experience and track records....

thanks...I'll check that out.

 

[LongView]

Tatnic:

Its not a market timing model per se, and I'd rather not say how often since I had to work pretty hard at figuring that out. Sorry.

With all do respect, Tatnic, I am not asking you what dates you adjusted and exactly how you adjusted. I am just asking how often.

What I was attempting to do was run through a basic interview process with you. Starting with the easy questions. If you are not able to give possible investors some idea of what is going on then good luck getting them to invest.

The questions and the grilling get much, much harder than that. There are ways of telling people exactly what you do with out giving away your bread and butter.

Just seeing how you could sell.

 

[Tatnic]

Quote from opt789:

Correct, those of us who know what we are talking about will not provide answers, but I will provide some warnings.

I would like to say you have a 1% chance of succeeding but it's not that good. If you are serious then put up your own money, at least 100k, and contact someone like: http://www.greencompany.com/HedgeFunds/LaunchServices.shtml
I have not used them but their incubator strategy seems logical. You just have to be prepared to trade for years, without charging anyone any money, to get a track record. Even when you have a proven track record that stretches 3 years you will still have a very hard time raising money. There are thousands of funds with track records and managers with pedigrees who have a lot of trouble raising money.

Anyone who tells you that it won't take years and even then be incredibly difficult doesn't know what they are talking about. An anonymous posting website is not the best source of serious information.

I'm sure you are at least 99% correct and I appreciate your comments and all the others who have responded. If nothing else it will make me think hard about this and whether or not I can do the hard work required.

The easy part has been done, well, at least the fun part. I didn't expect this to be a cake walk but then anything worth doing isn't.
And its not like having an incubator fund is a total waste of time...at least it can be earning some money in the interim.

 

[Diamond Geezer]

and after reading Barton Biggs book if your are still not convinced of the way the industry is going (away from small funds toward huge funds - the so called "institutionalization" of the business), then grab Barrons magazine of March 26th (the weekend before last).

Barrons interviewed several existing and wannabe managers in that edition. One guy, John Maloney the co-founder of M&R capital, an investment firm (not a hedge fund) with more than $550 million in assets under management and 25 year track record managing pension fund and high net worth individuals money is struggling still to get his hedge fund off the ground. This despite generating 12-14% returns after fees in a long only strategy for his clients. That's a real track record with real money.

I quote "Four years after his (hedge) fund opened its doors, it had less than $10 million despite strong performance." And, "It's been a frustratingly slow process" he says.

Now, at $10 mill AUM after costs and taxes, this guy is making no real dough on his fund. How would you compare your chances next to his? The person who posted that you have maybe a 1% chance of getting this done is being wildly optimistic in my opinion. I'm not judging you I know nothing about you except that you sound very naive in your posts.

Best of luck though!

 

[formikatrading]

Fund performance is important, but volatility, correlation with benchmarks and maximum drawdown are all important considerations as to whether you can attract money. Also, is the methodology scalable -- in other words, how big can you get before you lose your edge?

 

[formikatrading]

One thing I would add is while your performance is decent (as well as that of John Maloney -- referenced by a previous poster), the numbers aren't stellar -- and from an investor standpoint, you give up transparency, flexibility and liquidity with a hedge fund so would an investor be willing to give up those things for just a little bit of outperformance? Now, if you're outperforming with significantly less volatility and drawdowns, then maybe you have something.

 

[Tatnic]

Quote from LongView:

With all do respect, Tatnic, I am not asking you what dates you adjusted and exactly how you adjusted. I am just asking how often.

What I was attempting to do was run through a basic interview process with you. Starting with the easy questions. If you are not able to give possible investors some idea of what is going on then good luck getting them to invest.

The questions and the grilling get much, much harder than that. There are ways of telling people exactly what you do with out giving away your bread and butter.

Just seeing how you could sell.

Lets see if I can answer that without divulging too much info. I just don't want to make it too easy for someone to duplicate this methodology.

I ran the model based on 4 different re-balancing time frames, and I came up with one that was better than all the others by a fairly decent margin over the 10 year period. I can tell you that one of the worse time frames was the most frequent one if that's any help.

 

[dhpar]

Hi Tatnic,

first I wish you good luck. You are right that your performance is not stellar. It seems to be highly correlated to equity markets :eek: suggesting that you are not adding much alpha (but maybe only leveraged beta).

Question is why you want to start HF in the first place. Is trading OPM tempting when you are confident about your strategy and can take 100% of profits instead of 20%? Why don't you just trade your million up and have a nice life without all the reporting crap and very likely low or no taxes (if you get set up properly).

Set up offshore vehicle and make 25%+ for few years. Then if you really want to manage OPM you will have no problems to get them - people will come one by one ....IMHO


P.S. and do not tell any sucker your strategy - returns should speak for themselves!