Thinking about starting a small hedge fund

ScroogeMcDuck

ScroogeMcDuck

Compensation formula: 20% of cumulative excess returns above VTI. No aum fee. I keep all of my money in the fund.
Style: wherever the alpha is. Enough said. No more than 125% net long tho.
LPs can redeem N*10% of their holdings with N months notice.

Keep AUM under 100M so I don't have to file 13Fs that leak the strats, and so I can use strats that don't scale. Pro-rata mandatory redemptions of the LPs to keep the size under 100M. So, pretty soon all my LPs will be cashed out and I'll just be trading my own account again. Starting a fund would just be a faster way to get from 5 to 100.

How hard is it to raise 50M from LPs without telling them anything about the strats?
 
ScroogeMcDuck said:
Compensation formula: 20% of cumulative excess returns above VTI. No aum fee. I keep all of my money in the fund.
Style: wherever the alpha is. Enough said. No more than 125% net long tho.
LPs can redeem N*10% of their holdings with N months notice.

Keep AUM under 100M so I don't have to file 13Fs that leak the strats, and so I can use strats that don't scale. Pro-rata mandatory redemptions of the LPs to keep the size under 100M. So, pretty soon all my LPs will be cashed out and I'll just be trading my own account again. Starting a fund would just be a faster way to get from 5 to 100.

How hard is it to raise 50M from LPs without telling them anything about the strats?
More...

it’s super hard to raise 50mm after telling them everything about your strategy.
 
If you have never done it before and have to ask, VERY hard.

ScroogeMcDuck said:
Compensation formula: 20% of cumulative excess returns above VTI. No aum fee. I keep all of my money in the fund.
Style: wherever the alpha is. Enough said. No more than 125% net long tho.
LPs can redeem N*10% of their holdings with N months notice.

Keep AUM under 100M so I don't have to file 13Fs that leak the strats, and so I can use strats that don't scale. Pro-rata mandatory redemptions of the LPs to keep the size under 100M. So, pretty soon all my LPs will be cashed out and I'll just be trading my own account again. Starting a fund would just be a faster way to get from 5 to 100.

How hard is it to raise 50M from LPs without telling them anything about the strats?
More...
 
ScroogeMcDuck said:
Compensation formula: 20% of cumulative excess returns above VTI. No aum fee. I keep all of my money in the fund.
Style: wherever the alpha is. Enough said. No more than 125% net long tho.
LPs can redeem N*10% of their holdings with N months notice.

Keep AUM under 100M so I don't have to file 13Fs that leak the strats, and so I can use strats that don't scale. Pro-rata mandatory redemptions of the LPs to keep the size under 100M. So, pretty soon all my LPs will be cashed out and I'll just be trading my own account again. Starting a fund would just be a faster way to get from 5 to 100.

How hard is it to raise 50M from LPs without telling them anything about the strats?
More...
No Offense intended, but this read like someone thinking about a new business and brainstorming catchy names for the LP. Short on the details, a bit of logistics, and not much else there. I am sure Chat GPT could come up with a better outline of the logistics, at that.

Just remember you are in a competition for money.

Couple of things:

  • If you has 50Mil and you were going to allow others to join in, then sure there might be interest. Otherwise you are tossed into the bucket of "aspiring" and "unproven".
  • You need to be well networked. In fact that might be MORE important than your actually strategy etc.

BTW: When someone offers these things to you, it reads like a menu of choices (system providers), not a one off. The thing is, there is NO shortage of folks wanting to "invest" your money to you. People also know a fool and his money are departed. In that way money is a curse!
 
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ScroogeMcDuck said:
Compensation formula: 20% of cumulative excess returns above VTI. No aum fee. I keep all of my money in the fund.
Style: wherever the alpha is. Enough said. No more than 125% net long tho.
LPs can redeem N*10% of their holdings with N months notice.

Keep AUM under 100M so I don't have to file 13Fs that leak the strats, and so I can use strats that don't scale. Pro-rata mandatory redemptions of the LPs to keep the size under 100M. So, pretty soon all my LPs will be cashed out and I'll just be trading my own account again. Starting a fund would just be a faster way to get from 5 to 100.

How hard is it to raise 50M from LPs without telling them anything about the strats?
More...

It's all about how good the strategy is. If you have a strategy with an annualized return of 40% with a Sharpe of 3.0, you can charge them 2 and 30 and reveal nothing to them. They will literally be begging to invest. I have such a strategy I trade with my own money, not making it available to OPM due to capacity constraints.
 
Since I have experience with Cap Intro, have Hedge Funds as customers and have invested in a number of Hedge Funds, CPOs and CTA with my money, I can tell you 100% that is not accurate. The 2%/30% is possible but uncommon, but the "reveal nothing to them," a big NO. There are a few types of allocators; Wealth investors, other hedge funds, family offices and fund of funds. The last two will do an enormous amount to due diligence. Sometimes months, sometimes years. They have teams that not only want to meet and talk to you about you and your business, but also require data to analysis themselves. They also have mandates that vary. A typical one is that their minimum investment is no more than a set percentage of your fund. As an example, their minimum investment might be $5mm and no more than 5% of the fund AUM. That means they also do not look at any pooled asset with less than $100mm AUM. There are some that only look to be the angel investor. They want to get in early. Help you with your track record and then help raise money after a few years. They expect not only very low fees, but also a share in the business or general partnership. The hedge funds that might look, are typically a multi-strategy fund looking to add a strategy they do not have right now. I'm not sure how common that this. I have only spoken to one that did that. They were a bond fund looking to invest in SMA for a futures or equity strategy with about 5% of their assets.

With under $100mm in AUM, your target market will be Wealth investors looking for a certain type of investment that they neither have the time or experience to do on their own. You do not need to give away how you process data, but you will need a little more than a basic description of your trading. They will want to understand what you trade, who makes the decisions, what other team members are there, how do you manage risk etc. They will want to know about your past through a bio. They want to know what to expect and how they get out if you do not meet your expectations.

In summary, revealing nothing to them might work with friends and family but not strangers.


R1234 said:
you can charge them 2 and 30 and reveal nothing to them.
More...
 
Robert Morse said:
Since I have experience with Cap Intro, have Hedge Funds as customers and have invested in a number of Hedge Funds, CPOs and CTA with my money, I tell you 100% that is not accurate.
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good advice Robert. Given you’ve probably seen all kinds of pitches, what have been the most common mistakes you’ve noticed?
 
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