Start your own hedge fund

Pat494

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An item on Radio4 this morning got me wondering about starting one's own hedge fund.
They gave a figure exceeding 200 million pounds for the annual salary of some of the top players of the biggest hedge funds in The City of London. Not bad for a year's work !!
Think of that leverage ---power aaaaaaaaaah
Any ideas - tax, setting up a company etc. ?
 
Gotta have a big successful HF to earn that.
Think 1.5-2% of fund annual management fee and 20% of profitshare.
You still have to make money to earn, so not as easy as it might seem.
 
Much harder than it sounds as these media pieces never tell you about all the red tape and costs
involved in running a HF.

All the nasty FSA regs to go through and you will need to raise $50mill to have a viable business
that can cover it's costs. The use of massive leverage is also a media myth as most HFs are not that
leveraged at all.
 
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Pat494 said:
An item on Radio4 this morning got me wondering about starting one's own hedge fund.
They gave a figure exceeding 200 million pounds for the annual salary of some of the top players of the biggest hedge funds in The City of London. Not bad for a year's work !!
Think of that leverage ---power aaaaaaaaaah
Any ideas - tax, setting up a company etc. ?


Most of the prime brokerages have seminars on setting up Hedge Funds- with speakers from lawyers, accountants, regulators etc etc. Show them your audited track record, and get an invite and then you'll have all the power you desire...
 
Pat,

Using TWI's figs, a smaller fund of £20m returning10% pa will get you £400,000 profit-share. That will keep you in drink, drugs and prostitutes. And still have something left over. But never take Radio 4 seriously.

Grant.
 
This is true but consider...

1) Cost of data
2) Office space (one simply must be in Mayfair @ 100 quid per sq ft) ;-)
3) Cost of FSA registration. Could do it yourself, better off paying someone else 10k
4) Cost of accountancy and audit for your company and the fund
5) Cost of offshore administrators to the fund (or you in the early days)
6) Legal and other set up costs
7) Assume you don't get paid a penny for a year at least. Maybe far longer.
8) Back office staff start at 30k a head these in London days (brain included at that price)

I estimate total annual costs in year 1 at 250k plus.

I don't wish to put you off but it requires some serious thought. There are a lot of people competing for those HF $. Ask yourself: What do I have that makes me a better proposition than the others? You must have a very good answer if you want others to believe it.

Good luck,

NQR
 
There is plenty of money about right now but investors looking for sector specific investments ratehr than macro as they like to control their sector risk.
The set up process take around a year through FSA and it is pretty expensive. Also, investors find it easier to go through process if you can take more money so showing you can absorb 100m$ makes it easier than asking for 5m$ which is really not worth the tiem and effort on investors part as it takes same amount of work. Only way to prove suitability is to already have HF or IB track record that shows you can manage these sums.
There is some depserate money out there and as a result people in secotrs like EU energy do manage to raise 50m$ despite having little or no solid track record but if you are doing the standard stuff it will be harder to gt the backing without the background.
 
NotQuiteRandom said:
For more information on generic due dilignece Qs etc see AIMA.

From their website it seems they are not for profit. Strange' I thought that was most of the reason to be a hedge fund. Perhaps I should have a better look sometime.
 
Say for instance a trader proves that he can make profits by writing a journal, I suppose there are 101 regulations to stop them inviting others to have a few quid with them and share the profits.???
 
Hedge funds are generally less regulated than traditional investment funds. For example you do not really need to report your exact holdings and strategy. Getting the business, not setting up the fund is the tough part imho. You could out-compete the traditional funds on higher performance and out-compete the other hedge funds on lower required entry capital and management costs.

Good theory... but where to find all the Ultra High Net Worth clients to bankroll the operation! :cheesy:
 
My Dream Job

Jack in everything for two and twenty!

This is one of the reasons why I am trading my own account. Aside from a slip-up on Tuesday, I am doing reasonably well slowly growing my account with minimal drawdowns. I'd love to be a CTA / hedge fund manager / someone else who manages OPM.

You can get limited power of attorney to shuffle funds for family and friends. Providing you do not hold yourself out to the public as a financial advisor, the regulations appear to be pretty lax. What about IB? They have some sort of "advisor" facility which allows person A to give person B consent to trade on their account.

If you try this with a few thousand from people you know - once you make clear to them there is a 1% chance they'll ever see it again, but if you don't lose it you'll most likely double it - then consider actually starting a fund.

At that point, hire a good law firm, and a good accountant firm. Ideally some with offshore experience. Make sure you have a good idea about where you will raise the capital before you start generating expenses. Then there is plenty of outgoings from there on.

When recruiting clients, make sure your strategy is formalised and clear, let them see how the fund has performed in the past (even if it is your own account with the same rules - as long as it shows real trades which could scale well with more AUM). Be prepared for some very tricky questions.

There is a lot to do, and I don't know 1% of all what needs to be done yet. I think before you even consider managing someone else's money, you should have made at least 15% on your own account for 5 years, with a maximum 20% drawdown. Others may have more stringent requirements. If you can do that, consider asset management. If you can't do this with your own account, re-evaluate your performance. If you are asking for 2 and 20 on a £1m account, you need to beat a notional 10% return in the stockmarket / mutual funds. You are charging 20k management fees, and 20% of profits as an incentive.

If you make 15%, 150k in a year. You charge 30k in incentive fees, and 20k in basic management fees. That leaves your clients with 100k profit - which isn't that much better than buying and holding in a few indices. Its better, but not by much.

Assume you get £10m to start with. You better make sure you have _all_ your expenses covered out of the management fee of £200,000 - because you may not profit. Some investors will want high water marks etc, so be wary of risky stuff. If you can turn a small profit, then pay yourself the incentive fee. Ensure you have enough personal funds to live off for 2 years to take the pressure off.

Hope these suggestions help - but seek professional advice.

Good luck!

---
The above comment is a statement of opinion and is not intended as financial or legal advice. If in doubt, seek professional advice.
 
Sounds pretty complicated. If you think globally (and most hedge funds do) then look at
this :

http://www.allangray.co.za/unit_trusts/performance.aspx

41.2% per annum annualised over 10 years. Management fee probably around 2% per annum.

That's just a mutual (unit trust) fund. If a hedge fund is going to munch 20% of my profits it's got to do a lot better.

The kinds of returns some of the guys are making here (see laptop1's post) are actually quite mad. I reckon you take a few methodologies (like his) that work and tone them down a bit to make them even more consistent (smaller bets, tighter stops, stricter entry). Maybe have a team of guys all working their allocation of the fund. Many guys here consider a 1% avg return per trade quite reasonable. Thats a VERY large return per annum and most likely too much risk for other peoples money. I assume most individual traders trade in this way because they do not have millions and to earn say 30% on their capital per annum simply isn't worth the effort- easier and more profitable to hold a job!

But a team of guys with good track records... being patient, methodical, disciplined and consistent in increments? I really think there are people on here that would consistently hammer well over 30%pa working in this fashion. And there are very few publicly available investments (if any) that do this at present. In all probability the the FSA would protect big business and not allow such a fund to trade publicly. But I'm sure there are ways around this if punted purely at private investors?

Of course that brings us back to the question of how to get wealthy investors on board :cheesy:
 
Say for instance a trader proves that he can make profits by writing a journal, I suppose there are 101 regulations to stop them inviting others to have a few quid with them and share the profits.???

I doubt that anyone would treat a "journal" as proof. You would need audited accounts.

CT
 
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