Starting your own fund

As opposed to taking on individual clients with individual policy statements I’m considering starting a few equity portfolios which each running a different investment strategy…and allowing my pool of potential clients to investment in these funds. Thoughts on this? Investment fees - A percent of assets under management plus a piece of gains? What would be a “typical” fee structure? Legal - Obviously I’d need to talk to someone who specializes in investment law, but what sort of legal structures are available? If it’s offered privately to a limited number of investors hopefully there is some minimal-hassle legal form. Operations - lots of things to think about, cash flows, return tracking, taxes, etc. Does anyone with relevant experience have any (intelligent) comments or interested in discussing offline?

there is an article on net about needing 20mm to start a small fund… see if you can find it… it goes though a lot of the costs

purealpha Wrote: ------------------------------------------------------- > Investment fees - A percent of assets under > management plus a piece of gains? What would be a > “typical” fee structure? It depends on the fund. Typical for the hedge fund industry is 2% of assets and 20% of gains. Some go lower to attract capital, some go higher if they have very good long-term track records. You may not be thinking of starting a “hedge fund” (wasn’t specified), but keep in mind that “hedge fund” is a very big term. People tend to think of the mega-billion dollar funds, but there are plenty of $20-100MM funds out there too where people are doing exactly what you are talking about – basically managing long / short (or long only, if that’s your game) equities. I know a number of “hedge fund” managers who are managing ~$50MM on their own – one man operation. They pay for the legal stuff, as you mentioned (I have no knowledge of how this works) and operations (below). Research can be obtained in a number of ways (First Call, etc.) or through placing trades with various sell-side firms. > Operations - lots of things to think about, cash > flows, return tracking, taxes, etc. You can get a prime broker to clear all of your trades for a flat fee of $750K per year. There may be a discount of some sort for very small funds, but I am not sure about that. I have a friend who works processing accounts at a prime brokerage and he told me that the average hedge fund has 6-7x leverage LOL. Makes me feel pretty good about how the stability of the market! Starting a fund is really easy, actually. You basically fill out some paperwork. Attracting and retaining capital is tough, though. A lot of the brokers I work with invest in smaller AUM funds that have no lock-ups. Strong performance will result in a flood of capital (loosely defined, anyway, we’re not talking billions here). If the performance goes south, that money comes right back out (literally with a few clicks of the mouse). So it really depends on what kind of fund you have in mind. It seems like everyone these days is opening a fund. Fund managers with enough skill (or luck) to beat the market consistently (or succeed at some other strategy they may have), will stay in business, the others will close and be replaced by new, budding funds. I hope that helps a little.

Great information. My situation exactly. The two personal portfolios I run are up 130% and 35% YTD…now everyone from the school days who’s making decent cash wants to throw money into them. I want to expand to be able to accept cash flow from a limited number individuals, and keep things very private, low expense, and low paperwork. I know some guys at firms who do the manager of managers thing, who are potential (and much bigger) clients, but in the immediate-term it would only be friends and family. One man operation all the way, and then see how things go. Again great comments, very exciting.

purealpha, any chance you could send me your e-mail address? I am also interested in beginning a fund in the future and I would find it very beneficial to learn a little about how you got to where you are now. My e-mail is

Great comments. I think many of us on this forum fantasize about started hedge funds someday. But, According to historical evidence, the average hedge fund survives for around five years.

Wow. What an original business concept.

I think its great you want to start your own fund. That being said, I can’t wait to see how many people want to start a fund during a downturn or recession…

kkent, that’s not fair at all. The business model in this industry doesn’t really require tweaking. It’s all about how you manage the money. It’s like making fun of a guy who invents the next big thing and starts a manufacturing business to build it. Wow, manufacturing, what an original business concept. Others: The industry is not kind to new managers. Clearing for $750K? I don’t know where you got that figure, I’ve heard of fee-custody arrangements for small funds but the fees are usually onerous. It’s going to cost $100-150K in fees to get the fund set up. Prime brokers will likely not take you on with under $10MM AUM. You’ll need at least one year of performance and a decent resume to attract any institutional money. Most institutions will have a limit of being a max of 20%of any fund, and they want to allocate a decent amount of money to a fund (a “tiny” 5BB pension fund with a 7% allocation to hedge funds needs to put $350MM to work, and they don’t want to put 1MM into 350 hedge funds, they want to put $50MM into 7 hedge funds, and that means you need to have $200MM already to get this money). Also, (and most importantly), you’ll never get anyone to pay you 2/20 if you don’t have some sort of differentiator. Saying you’re going to buy CROX and short BZH is not a differentiator.

^ He’s right except that 100-150K to set the fund up. You can pay someone that much and you will have to do nothing. For $150K, you could have really great legal work and every last thing done for you while you take a vacation then have an out of the box hedge fund. There are definitely people who do that, but the paper work is not hard and most things you can just rip-off from the web and mix and match to suit your needs. That’s all the law firms do anyway (except the rip-off their own stuff). If you do the main part of the work yourself (if a lawyer tells you it’s difficult he’s either lying or a moron), you can get by on $20K of legal work. If completing a CFA charter is an 8 on the 1-10 difficulty scale, legal work for setting up a hedge fund is like a 3. It’s amazing people get so much money for it.

Damn. I should have known my stupid lawyers didn’t need me to airship them that oriental mustard.

You airshipped them oriental mustard and they’re stupid?!

LOL, Holdside, what in the original poster’s post could possibly give you the idea that he’ll do any better managing money than the other 90% of fund managers that fail to beat the indexes? What next big thing has this guy invented??? It’s entirely fair to point out that 1) that is the most unoriginal and boring idea I’ve ever heard and 2) what the heck makes this guy think he is any better at managing money than the rest of the complete losers out there who do? I’m not calling this guy a loser, btw, I’m just pointing out that this is like saying, “I’m thinking about starting a computer company that builds laptops similar to Dell or IBM laptops. They’ll cost the same amount of money or more, have no track record of success, and hopefully they’ll perform just as well, but who knows?”

kkent. you’re green with envy.

Good points, Holdside. I didn’t say it would be easy. Clearly, attracting the money is much harder than filling out the paperwork needed to “start” a fund. Anyway, that’s a whole other issue in and of itself. You can get prime brokerage for $750K / year – I have looked into it. It may differ for the size of the fund, etc. but I know several people that have started their own funds lately and this figure is inline with the prices they are paying. Anyway, I think the idea of starting a fund is pretty appealing, but keep in mind that the people who are effectively attracting capital are people who established track records and credentials. You can’t really get a look unless you have either 1) some kind of impressive resume – worked at GS, went to Harvard, etc. or 2) have some kind of established, long-term track record of at least 3 years. You probably need both. Anyway, three years seems to be the magic number that at least attracts a marginal amount of attention. Anything less seems like a fluke. Great, you returned 100+% this year. How are you planning to do that again next year? And so on… There are a ton of people who want to quit working for the man to start their own funds, but it’s important to realize that a lot of the large money is already invested in established funds. Why should a pension fund pull its money out of a hedge fund that is presumably working to give it to YOU to manage? There isn’t a good reason unless something goes wrong with the other fund or you have some really phenomenal track record / strategy that no one can match (unlikely).

Yep, I’m green with envy.

kkent Wrote: ------------------------------------------------------- > Wow. What an original business concept. What business are you running? Oh, you work for somebody else’s company? What an original career path!!!

FIA, wow, apparently you’ve missed a lot. I was hired as an investment banking analyst in spite of mediocre grades, a state university degree, and no internship–you know why? Because I started my own company, my own original company using an original concept, which was what got me a ton of attention by those firms (already discussed this on numerous occasions here). Plus I’ve got 2 dozen pretty original ideas right now, including a not-for-profit idea, written down in an Excel document. I fully intend on pursuing one of these ideas, but it’s tough to raise capital as a 22-year-old with minimal experience and limited relevant contacts. Maybe it’s a bit smug, but starting ANOTHER fund among the ten thousand other existing funds seems like a cheap ripoff of entrepreneurship, especially when it would be more ethical to tell your prospective clients that they are almost certainly better off putting their money in an index fund than investing with you.

I’m sure purealpha really appreciates your “constructive” criticism kkent, there is no need to be so jaded. He came here for advice on how to start his own fund not your insight on how indexing is god’s gift to investing which you preach in quite a few of your posts. I’m not discrediting it whatsoever, but seriously man let it go.

lakai, you don’t see a fundamental problem with selling a product to the public that you know is inferior to an existing product? That’s pretty effed up. You do understand that the vast majority of money managers raise billions of dollars in AUM under the false pretense that they have a better product than an existing product? You don’t see a problem with selling this inferior product to a doctor, or a computer programmer, or a teacher who isn’t classically trained in investing? I worked at a restaurant one time. I hated my job, and not because it was different than the last restaurant I worked at, but because we sold inferior quality food at high prices. But because of our customers’ legitimate ignorance about the stuff we put in our food and the cleanliness of the restaurant, they were unaware that they were being taken. The restaurant did nothing illegal, but I felt the restaurant’s very existence was fundamentally wrong. Starting another garbage fund is not much different. (BTW, thanks for stalking my posts, lakai. I know it’s a backhanded compliment, but I’ll take all the compliments I can get.)