Starting a hedge fund

Quote from Tatnic:

I have some comparison's with the S&P 500 over the past 7 years which proves my point that my mix is a conservative, non-correlated plan (and I understand that backtesting is no guarantee of future success, but if you knew how simple my plan is you might think otherwise):
2006: -0.65% worse than the SP500
2005: 11.83% better
2004: 3.22% better
2003: 5.59% better
2002: 23.09% better
2001: 16.51% better
2000: 24.27% better
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A few observations, none particularly positive. Sorry.

- Highly unlikely that you will attract money from anyone but closest friends/family with only backtested numbers, especially since they are not particularly impressive. Folks with serious money to put with an advisor are generally not stupid, and there are many competing opportunities.
- Trading OPM, you will find, is a different world from trading your own money, in many ways. Whatever emotions you feel in your own trading - and we all feel them - will be signifcantly increased. Are you prepared for that? Are you sure?

To build a track record in real time, and to help you overcome the psychological hurdles of trading OPM and answering publicly for your results, start small with someone you trust who will give you some freedom and support for a year or so. If you can hack that, then move on and up. If you can't, then at least your lack of success will be easier to handle.

As a friend and informal advisor to some very wealthy folks, I've sat in on a number of presentations by fund/trader wannabies who were pitching backtested strategies. Sorry to say, at last check only a couple had any funds, and none were profitable after fees and expenses, despite some very impressive backgrounds and hypothetical numbers.

To use an old but useful phrase, "Money talks and B.S. walks."
 
Quote from Willleung:

What's your track record, Tatnic?
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As many have already pointed out, I'll have a hard time selling this without a few years of results, so that's what I need to start on. I have mixed results from trading over the past few decades, nothing to write home about. Lots of tuition paid.

My plan discussed in this thread has nothing to do with trading, its investing in a longer time frame. The only trading is when the mixture gets re-balanced and that's not based on anything but the calender. Pretty boring, eh?
 
Quote from Tatnic:

As many have already pointed out, I'll have a hard time selling this without a few years of results, so that's what I need to start on. I have mixed results from trading over the past few decades, nothing to write home about. Lots of tuition paid.

My plan discussed in this thread has nothing to do with trading, its investing in a longer time frame. The only trading is when the mixture gets re-balanced and that's not based on anything but the calender. Pretty boring, eh?
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Sorry Tatnic, decided to withdraw that...

I am on the 15min time frame, I know the word boredom...

LOL..


Good Luck, mate.
 
Quote from hajimow:

Titanic:

Can't you start with your sibilings, parents, friends, neighbors,....
Then if you give them good return, they will bring more clients.
One question: hedge funds have more freedom compared to mutual funds. I expect them to have better returns than mutual funds but..... Look at JAOSX, WWNPX,... They are good mutual funds with good return. I expect hedge funds should have at least 40% more return than them but....
I was reading pit ball book and I was surprised how his poor customers were ripped off with like 8% commission for 17% return.
Another note: A hedge fund has a minimum investment much higher than a mutual fund that increases the risk.

A good business would be to find 20 mutual funds and actively spread the customer's money in them and just charge them 1% commission. This way, the clients would feel more secure and you can raise more moeny and then trade with your own money for fun.
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I picked up bigg's book the other day while waiting for the movies to start and found some more data on funds that corroborates what I posted initially. The average fund has lousy returns, and the average fund of funds has even poorer returns but smaller drawdowns. I can't help but focus on the lousy returns aspect of most hedge funds and wonder why? I wonder if it has to do with the simple fact that there are too many funds out there chasing the same investments? Or maybe its because there are more than a hand full of hedge funds with very negative returns that really drag down the averages?

Bottom line is that no one can go into any hedge fund based on past performance (which is no different than back-testing IMO) and expect the same going forward. They have to make an educated guess as to how the fund will perform under varying, unfavorable market conditions and discount past returns. Everyone's all hopped up about leverage and private equity buyouts and can't see anything but higher prices and blue skys....sounds an awful lot like 2000 with the nazdaq.
 
Quote from Tatnic:

I picked up bigg's book the other day while waiting for the movies to start and found some more data on funds that corroborates what I posted initially.
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Some more from his book...

he claims that the median return for all hedge funds for the 6 year period ('98~2003) was 7.8%, compared to the SP500 which returned only 3.8% annually over that period. He said that the fund of funds return was only 6.3%!

My model's returns for that period were 9.17%...due to the mixture of stocks and bonds and rebalancing of the model, not the trading/timing. I plan to read his book and find out more about what the average drawdowns are for the different classes of funds.

This model, which is basically a fund of funds model, beats the average fund of funds easily, by as much as 300 bbp over really tough market periods. I've calculated the maximum monthly drawdown to be 6.12% and it took 6 months to recover that drawdown. The next worse monthly drawdown was 4.82% and it took it 4 months to recover that one. This is what I would call a RESILENT model. For example, if I start the model right before the bubble burst in Aug. 2000, the model would have returned 12.29% annually through March of 07, as compared to the SP which has only returned 0.35% over that same period.
 
There was another interesting part to finding a good hedge fund, mentioned in Bigg's book.

It is being too successfull. Once a hedge fund has been performing well for 3-4 years, investors start to pull out money, because they believe (quite often correctly) that the managers become too complacent,etc.

There is a certain cycle for hedgefunds, and it is better to pick a currently underperforming one then a highflyer...
 
Titanic

I believe your edge or your marketing edge can be that you guarantee returns over CD rate which is 5% and anything over 50% will be yours. I remember there was a guy in the market wizards 2 book which was investing on mutual funds and he guaranteed that you would not lose money and his return was pretty impressive. If you can do what I said and have a minimum investment of 20K, you will be successful.
 
Quote from Pekelo:

There was another interesting part to finding a good hedge fund, mentioned in Bigg's book.

It is being too successfull. Once a hedge fund has been performing well for 3-4 years, investors start to pull out money, because they believe (quite often correctly) that the managers become too complacent,etc.

There is a certain cycle for hedgefunds, and it is better to pick a currently underperforming one then a highflyer...
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There's alot of truth to that. Many who invest in mutual funds are always chasing the year's best performers, which in many cases turn out to be next year's biggest losers.

I have a very simple weighting method that I apply to stocks and funds which discounts the most recent performance in favor of longer-term returns. The best rated stock I've found under that rating method is HANS. One of the worst is IBM.
 
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