Starting a HF

I have 5-6 years of sell-side and buy side in both the equity and credit side. Through personal contacts, there’s a possibility of starting with $500K, work it for 3 months and then (create a track record), and then raise more. Does anyone here know what is the process to start a HF? Any experiences?

You’ll need more money (not a ton more, but a few Mil) and you’ll need a three track record before anyone besides friends and family will take a look at you. Primes are also much less eager to take smaller clients, so you’ll probably end up with a mini-prime. Just get a lawyer to paper the whole thing and you’re good to go.

Not that I know, but I would think if you are asking for advice to start one on a public forum . . . I doubt you are ready.

Just so you get a sense of what the minimal requirements for your fund to attract institutional capital are: our standards are considered liberal for an institutional investor, and we will not invest in a hedge fund unless they meet the requirements of: -PMs must have a tangible, audited track record of success managing the same strategy at his current fund or at a former, credible fund as a portfolio manager (not an analyst) -Must have at least $100 million assets under management and experience managing that amount of money -PM must have a strong pedigree (good schools, good work experience) -Fund must have solid infrastructure including an experienced operations team and a non-investment professional that manages the business on a day-to-day basis -Fund must have credible, well-known service providers including prime brokers, administrators, auditing, and custodial Of all the funds that meet those minimum requirements, we probably end up investing with 2-3% of the ones we take serious looks at. Good luck!

Thanks for the advice. I guess you’ll hear from me in a couple of years, farley013. In terms of the lawyer doing the paperwork, how long does it take to be able to start operations?

Hi latincfa from my own experience setting up a hedge fund (even the legal side) can take as much as a year. If you are to do things properly, you will need to incorporate different companies (Master Feeder Fund structure?) to cater for different types of investors… there are many alternatives depending on whether they are US based, etc. You need a Private Placement Memorandum, Limited Partnership Agreement, Investment Advisor Agreement, Investment managers Agreement, perhaps depending on how you structure the fund. You will also need a Fund Administrator (who will also vet the previous documents and require some modification). Getting a respectable law firm to do all this can cost anything from 200K USD to 1MM USD (no kidding). Fund Administrators may not even take you on as a client if you are so small. You may also consider getting a Prime Broker, too, and this requires substantial paperwork. Unless you have a larger AUM to begin with, it’s not economically viable to start up a hedge fund with 0.5MM USD. Better to trade it as a managed account on behalf of your investors.

I am wondering if latincfa is perhaps based in South America (just because of his name), which might render some of the advice/comments obsolete.

From my own experiences in the industry, I doubt you will fund a credible HF Administrator with under $5 million. Even at that level be prepared to pay probably anywhere from $5-$10K per month to them.

500K is not enough to start a hedge fund. You will have expenses, and 500K will not cover them. You need a couple of mill unless you have a special situation. A three month track record? I’ve had farts that last longer than that. No one is going to care whether you beat the market for three months. Three years is the minimum. Unless perhaps I misread what you wrote (it’s not clear).

wilier’s statements are accurate.

willer, what are the implications of trading as a hedge fund vs as a managed account on behalf of investors. I’m not sure of the difference.

farley has the best comments. Be prepared to overcome each of those hurdles long term.

even if you manage it out of your house or something there is no way the fees off of 500K would pay 1/10th of your expenses particurally if you want to make your results documented enough to raise new capital.

$500k isn’t serious enough money to start a real fund. This is more like moonlight capital to me. That is, manage the friends and family money pro bono until you’ve collected enough assets and reputation to make the leap. Of course, you’ll have to tangle with: conflicts of interest with your current firm, not having the credibility of being a “real firm” and getting people to actually pay you later among countless other hurdles.

all good points above, not to mention 1% of assets if you’re something like a 1/20 fee structure would make you a whopping $5k annual paycheck. Doubt that it’s going to pay the bills. I work in Prime at not even a big Prime and we’re pretty hard 25mil+ minimums for assets, revenue mins of a few hundred k a year or a prime will boot you or slap you with montly fees to make up the difference. Morgan/GS probably wouldn’t talk to you unless you were multiple hundred millions in AUM, at least $500k-$1mm revs to them. I think UBS kicked out a ton of clients earlier this year not making them at least $250k a year revenues. not to discourage you at all, but from my experience working with some start-ups, if you can’t get at least like 25-50mil to launch, there’s a very good chance it’s not going to work out well.

$500K to start a hedge fund? the amount of fees you take home based on such a small asset base will be so minimal, you’d probably be better off playing with monopoly money!!!

so this is why so many HFs last such a short time…500k? Really? Are you trying to be profitable at all with this? I don’t have all the info in the world, not trying to knock you, but look at a basic breakeven analysis and you should realize this is not going to happen.

The list of top 100 HF’s that started with less than $10M is extensive.

latincfa, are you really talking about a hedge fund, as in an organization with trading, marketing, operations, compliance staff to support, or are you talking about just implementing a hedge-fund-like strategy, which requires a workable investment strategy, and some friends/angel investor types to fund it? You can dream about it growing large enough to turn into a hedge fund, but I don’t see how you are going to be able to support the required staff on fees from $500k worth of capital. On the other hand, you could implement something like a long-short strategy or global macro w/ETF strategy, develop a track record, and maybe hope to be acquired or hired by a multistrategy fund.