I'm not saying this is total bullshit, but here are my thoughts.
You started with 150k and now have 5MM, which you regard as a success. Yet, two years of 500% returns alone will bring you from 150k to 5MM. You propose that in order to be successful you need strong numbers for the first years. Of the 5MM you have now, what proportion is from those sophisticated investors, and what proportion was the result of growing your initial 150k?
My thought is that if you are able to maintain such returns with controlled leverage and risk, as you seem to propose is necessary to attract investors, you don't even need the trouble of running a hedge fund. You might as well trade for yourself. 5MM is actually a micro-scale operation. Operational costs necessary to attract serious money are not even worth it when you can generate that kind of returns on a 5MM asset base. 2% mgmt fees represent barely 100k of those assets. Knowing that a huge share of those assets are probably yours, assuming you are not bullshiting on your returns, and knowing that increasing assets can significantly decrease the performance you have on your own money (which you probably don't get fully compensated for by your perf fees), I don't even see why you are running a hedge fund in the first place.
The fact is also that any 'sophisticated' investor in his right mind will not go for funds that have triple digit returns (eg. 523%) that were produced in a so called 'risk controlled' fashion (at least in your opinion) because this is simply unsustainable and the likelihood that there's something you are not telling or that you cooked your numbers is simply too high. In order to generate 523% returns for two years, you need to *take* the risk. And every sophisticated investor knows about:
1) the cost of blowing up and the fact that your final payoff is zero whenever you reach that point
2) the fat tails of returns distribution and the fact that once in a while, they will meet traders who pretend they can maintain such performance while in fact their last two years were the result of pure luck.
Institutions see people who want their funds seeded all the time, and among those, they do see astronomical numbers once in a while (law of large numbers!). Yet that doesn't make them more credible.
Going to the second point (hedge fund hiring), this is exactly why hedge fund managers hire people with good pedigree, ivy league diplomas, industry experience in bulge bracket banks as prop traders or analysts with impeccable track record (eg. never blew up or bleed to death). They all know about the beginner's luck. What they want are sustainable skills.
It is true that if you are unable to prove that you can provide such sustainable skills, you are better off by yourself. Starting a hedge fund might not be the way to go though, unless you know people who have blind trust in your skills (as opposed to experienced hedge fund managers, who actually know what they are doing). Maybe getting a trader or analyst position in a lesser known firm for a few years in order to prove yourself is a better alternative.
Note that nearly every big name (if not every) in the world of hedge funds, and investments in general, has usually worked in the securities industry at some point. They may not have all been goldman partners, but they at least made some money for a known firm before making money for themselves. Patience and humility are key to succeed in this business.
As for those who did have enough patience, ambition, combativeness and discipline to prove their skills in the securities industry, starting a hedge fund might not be the best alternative either. Joining an reputable firm, negociating your pay package, significantly participating in performance, and leveraging the firm's name and exiting operations to make even more money is most likely the preferred path.
But once again, go tell that to people who blindly believe that the american dream is about everyone being successful, as opposed to having a chance at success. I'm not trying to break dreams here but those who were unable to make their way in the investment world have a very slim chance of becoming billionaires by setting up their hedge fund. That's the way it is.
Quote from ProfitTakgFool:
Let's talk returns...........in order to attract wealthy investors to your fund, assuming you don't currently have connections, you need to generate strong returns. A return of 10% per year will get no one's attention. A return of 523% per year, for example, will get jaw-dropping responses. If you mention a number like this you will have more inquiries than you know what to do with. However, and this is a very big however, you will attract some very intelligent and sophisticated investors who will ask some very important and prepared questions, which will focus primarily on risk. If you cannot demonstrate that you can generate strong returns with a minimal amount of risk, or reasonable amount of risk, you will not get many intelligent or affluent investors. I didn't start my fund until I could demonstrate that I could continue generating strong returns on a declining degree of risk. Until you can achieve this kind of performance you are not qualified to start a hedge fund. You have to have an incredible understanding of the relationship between <b>risk and reward.</b> High returns can be generated with declining amounts of risk but it's incredibly difficult. If you are generating 523%-type returns with a fully leveraged account you're not ready to start a hedge fund. Study the Sharpe Ratio and be prepared to tell your investors how you manage risk and balance the trade-off between risk and reward.
More on Returns.....if you have one negative year you will probably be out of business unless you have had many positive years prior to this bad year. Investors invest in these types of ventures with the full expectation of realizing strong returns. Oddly enough, investors are very familiar with the relationship between risk and reward and demand high returns in exchange for high risk. You have to be able to deliver these returns consistenly. One bad year out of 10 won't hurt you much but 3 bad years out of 4 or 5 and you'll be out of business.
Hedge Fund managers can and do often blow up. Obviously, this does signal the end of your fund but not necessarily the end of your career as a Hedge Fund manager. If you have a track record and you blow up it is highly likely you will get investors to help you start over if your blow up was caused by an unusual market event, such as the one we are experiencing now. That being said, however, you should be experienced in managing money through trending, non-volatile markets, and non-trending, volatile markets. If you don't have this experience you aren't ready.
The next question I received was something to the effect of, "How do I get a job at a hedge fund."
I tried in vain to get a job at a hedge fund and couldn't. In fact, I never even got an interview at a hedge fund so I started trading my own account and started my own hedge fund when I felt I was ready -- after many years, and many blown accounts.
It has been my experience that hedge funds only hire Ivy League-type graduates, unless you know someone in the industry. XYZ State isn't going to get it done, unfortunately. If you have an education from XYZ State it doesn't mean you can't go to Ivy League MBA. To get into this industry you have to do something that puts you head and shoulders above the crowd. Have you worked on or developed something "proprietary?" Have you been published? Do you trade now? If so, how are your returns? Show Hedge Fund managers that you have something to offer that other candidates don't. That's how you land these jobs. The competition is fierce. Everyone wants to work at a hedge fund. It's more likely that you'll be more successful starting your own hedge fund rather than trying to hook up with an existing hedge fund. The lines are long for these jobs.
Alright....all other hedge fund employees/managers are more than welcome to jump on this thread, if they so choose, to add to the limited amount of information I've just provided. I will monitor the thread from time to time and try to answer questions that arise. Please don't PM me because I have more PM's than I can possibly answer. If you have questions post them here for everyone to see.
Good trading to all!
