Hedge Fund Startups: Labor Complications

[BSD]

Good read:

"Running a Hedge Fund Is Harder Than It Looks

THE NEW YORK TIMES

Deal Book

Published: August 18, 2008

Only a few years ago, it seemed so easy to start up a hedge fund. So easy, in fact, that Ronald G. Insana, then one of CNBC’s best-known anchors, tried to get in on the action with his fund of hedge funds.

But now that Mr. Insana has been forced to shutter his fund, his story is a cautionary tale for those who may be considering hanging their own shingle, Andrew Ross Sorkin writes in his latest DealBook column.

While Mr. Insana’s arrested foray into the world of hedge funds isn’t a large-scale flameout, Mr. Sorkin says, it’s an increasingly familiar storyline about the real hardships of running a hedge fund.

Running a Hedge Fund Is Harder Than It Looks on TV

By ANDREW ROSS SORKIN

Do you remember a time, only a short while ago, when virtually anybody could start a hedge fund? It seemed so easy: billions of dollars were being thrown around like confetti, even at first-time managers. You could make money with your eyes closed. Or so it seemed.

Ronald G. Insana was one of the people who chased that dream. Yes, that Mr. Insana — the man who spent more than a decade as one of CNBC’s most prominent anchormen, interviewing some of the biggest titans in business and trying to make sense of the daily gyrations of the market.

In March 2006, Mr. Insana left the network to try his hand at becoming one of those titans, setting up a fund to help investors get into hedge funds, a so-called fund of funds. Paul Kedrosky, the writer and investor, said at the time that Mr. Insana’s announcement “reminded him a little of Lou Dobbs going to Space.com at the peak of the dot-com bubble.” Mr. Dobbs’s adventure, you may recall, didn’t turn out well; he’s back on TV.

Two weeks ago, Mr. Insana announced that he was throwing in the towel. Though his career detour doesn’t rank on the flameout scale anywhere approaching the Space.com debacle, it is an unusually instructive and cautionary tale.

One of the big raps against hedge fund managers is that their fee structure is so rigged that managers can get rich even if they never make a penny for investors. Eric Mindich, the former Goldman Sachs whiz kid, left the firm in 2004 to start Eton Park Capital Management and immediately raised more than $3 billion. His firm charged a 2 percent management fee and 20 percent of the profits with a three-year lock-up — handing him a $60 million paycheck before he even opened the door.

But most hedge fund managers aren’t like Eric Mindich. They don’t start off with $3 billion and they don’t put out their shingle with a guarantee of riches. Instead, they’re like, well, Ron Insana.

If there was one thing Mr. Insana had built up over the course of his career in journalism, it was great contacts. He knew everybody in the hedge fund business, which is why, when he started Insana Capital Partners, he chose to create a fund of funds.

In his role as manager of Insana Capital Partners, he would act as a kind of hedge fund middleman, directing money to various hedge funds. The fund itself was grandiosely called Legends, which, while perhaps pretentious, made sense given the funds he could access. His clients would be invested in SAC Capital, managed by Steven A. Cohen; Icahn Partners, managed by Carl C. Icahn; or the Renaissance Technologies Corporation, run by James H. Simons, perhaps the most successful hedge fund manager on the planet. These funds are typically closed to the public.

In exchange for getting his investors behind the velvet rope, he charged a 1.5 percent management fee and took 20 percent of all profits. That may not sound like a bad deal — but consider that those fees come on top of the fees charged by the hedge funds themselves. (In the case of Mr. Simons, in particular, the fees are astronomical: a 5 percent management fee and more than 40 percent of the profits.)

Over the course of more than a year, Mr. Insana raised about $116 million. It was a respectable number, to be sure, but it wasn’t $3 billion. And here is where Mr. Insana ran into trouble.

As an investor, Mr. Insana didn’t exactly have the wind at his back. During the 14 months his fund of funds was up and running, the Standard & Poor’s 500-stock index fell more than 15 percent. While some hedge funds managed to eke out gains, many did not. Ultimately, Mr. Insana’s fund lost 5 percent.

In the mutual fund business, beating the S.& P. would be more than enough to survive, and even prosper. Mr. Insana would have been a hero. But the hedge fund business is far more cut-throat. For a small fund like Mr. Insana’s, it is imperative to make money regardless of whether the S.& P. is up or down — and because he didn’t, the 20 percent portion of his fee structure was worth nothing.

That left his management fee, which amounted to $1.74 million. (That’s 1.5 percent of $116 million.) On paper, that may seem like a lot of money. But it’s not. Like many first-time fund managers, Mr. Insana was forced to give up about half of the general partnership to his first investor — in this case, Deutsche Bank — in exchange for backing him. After paying Deutsche Bank, Insana Capital Partners was left with only about $870,000.

That would have been enough if it was just Mr. Insana, a secretary and a dog. But Mr. Insana was hoping to attract more than $1 billion from investors. And most big institutions won’t even consider investing in a fund that doesn’t have a proper infrastructure: a compliance officer, an accountant, analysts and so on. Mr. Insana had seven employees, and was paying for office space in the former CNBC studios in Fort Lee, N.J., and Bloomberg terminals — at more than $1,500 a pop a month — while traveling the globe in search of investors. Under the circumstances, $870,000 just wasn’t going to last very long.

Finally, most hedge funds have something called a high water mark. It requires hedge fund managers to make investors whole before they can start collecting their 20 percent of the profits — regardless of how long that takes. Hedge fund managers don’t get to start from scratch every Jan. 1 the way their mutual fund brethren do.

In the end, the rock was simply too heavy for Mr. Insana to keep pushing uphill. On Aug. 8, he sent a letter to investors explaining why he was closing shop. “Our current level of assets under management, coupled with the extraordinarily difficult capital-raising environment, make it imprudent for Insana Capital Partners to continue business operations,” he wrote. He said he planned to take a job with his pal Mr. Cohen at SAC. Mr. Insana declined to comment for this column.

In truth, there are thousands of Mr. Insanas desperately trying to raise money from nondescript little offices across the country. Some of them raised $10 million, some raised $100 million or more. And, as money has gotten tighter, and the bloom has come off the hedge fund rose, some have raised none at all.

Such was the case of Dow Kim, the co-president of global markets and investment banking at Merrill Lynch, who left the firm in May of last year to strike out on his own. With expectations of raising several billion dollars, he hired more than 30 people. Last week, he shuttered the business before he had even begun. In the coming months, Wall Street is going to be littered with such flameouts.

Although the big boys get most of the ink, Mr. Insana’s is a far more common story — and far more representative of what is happening in the land of hedge funds today.

Mr. Insana probably should have seen it coming. In 2002, he wrote a book called, “Trendwatching: Don’t be Fooled by the Next Investment Fad, Mania, or Bubble.” Oops."

LINK: Running a Hedge Fund Is Harder Than It Looks - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

 

[MrGecko]

You should here about PNMP!

 

[BSD]

GJ, Dragons Den eh, had to go google for that, but I see what you mean...

First one I found, and a real gem at that apparently:

"Sarah Lu had Deborah enchanted by her personalisable Youdoodolls in the den."

"personalisable Youdoodolls" ?!?



Mr.G, PNMP searches come up with some very strange stuff, whats that then ?

EG google hit No 1:

Find all PNMP Coordinator jobs in Richmond, TX. Pnmp coordinator job search made simple at SimplyHired, the largest search engine for jobs.

;-)

 

[MrGecko]

I thought those dolls are flying off the shelves????

anyway, PNMP is currently in it's infancy. Arabian and I are moving into the entertainment business, I shall have to consult him before I divulge any information you'll understand. We might have to set up some sort of NDA.

 

[BSD]

PNMP is currently in it's infancy. Arabian and I are moving into the entertainment business, I shall have to consult him before I divulge any information you'll understand. We might have to set up some sort of NDA.

Hey, no probs, best of luck with your venture, sounds interesting !

Are you going to stick with trading also ?

I'd give you some good luck reps but seems I'm all reppped out at the moment.

Btw, been googling around a bit, seems like Dragons Den had a very successful trader on the jury at some point:

Richard Farleigh - Wikipedia, the free encyclopedia

Own web site:

Richard Farleigh

PS; Mr. G, see that on his web site, the "got ideas" part ??

Might be interesting.

 

[arabianights]

I think we'll keep it under wraps for now

P.S. If anyone here has any contacts in the adult entertainment business please get in touch with Gecko or I

 

[BSD]

AN, thats how I fill my coffers in dry spells

Good luck though !!

 

[MrGecko]

NB: If you are involved in the Adult entertainment business, you can touch Arabian all you want, just keep your hands (and others) the hell away from me.

BSD - empty coffers? dry spells? we are, infact, looking for the opposite.

 

[BSD]

I am always willing to help out on a pro bono basis in the casting department should you be understaffed there.

Er, female casting, that is, though.

 

[MrGecko]

"pro bono" made me giggle

 

[BSD]

Hey, thats just my nice and helpful side

 

[BSD]

Richard Farleigh, this trader who had a spell on Dragon Dens jury and who made it onto the list of Australias 200 richest people through trading initially at an investment bank and later at a hedge fund, has on his web site a short synopsis of a book he wrote describing what he sees as success relevant in making it in trading / investing:

"When I started a career in an investment bank in Sydney in my early twenties, I did not believe that I could out-perform the markets. As a former economist and chess player, investment and trading seemed to be just gambling. I had no idea how the markets could offer any opportunities.

Gradually however I came to believe that market prices are predictable, and within a few years I was running a trading desk dealing in hundreds of millions of dollars.

Because I wanted a long and prosperous career I developed a repeatable methodology which was based on observation and reasoning, not just on one-offs and luck.

I had many beliefs which were against conventional wisdom. Markets tend to under-react, not over-react. Big obvious ideas offer great opportunities. It is safe to invest with a consensus view. Contrarian trading is usually irrational. It is best to enter and exit the share market at the right times instead of always staying invested. Price trends are well known but underutilised. Chartists are just astrologers. Investment and trading are the same.

Some things I just tried to do better than other investors. These were things like being sure that I was chasing a genuine opportunity, managing my risks and coping with my losses.

I also developed some trading systems, which were still being used years after I left the bank.

As my trading results started to attract some attention, I was frequently asked to give a presentation of my ideas to other professional traders. Question times often continued on to dinner and to the bar. I learnt a lot from these sessions. Like me, others were interested in an approach to investing which was based on first principals. I found that anecdotes were the best way to make a point. And by presenting the ideas as laws, it showed clearly how the methodology works, and it made a handy summary.

Years later, I am still using the same approach, and I have found that as well as the professionals, there are a lot of amateurs who are keen to find out how markets work and how to improve their investment performance. These are secrets that they want to discover.

In this book I will try to reveal those secrets and the thrills and pains I experienced in finding them. My ideas are presented as 100 different laws spread evenly over ten chapters.

My first trading experience resulted in a big loss. I was lucky! I learnt quickly how tough it can be. The most common mistake is to assume that investment success is easy. This is encouraged by so called “expert” views which appear in the media and imply that market prices are somehow flawed, and that there are plenty of opportunities.

The irony is that in thinking it’s too easy, investors make it more difficult. It leads them away from the truth: the starting point must be that market prices are normally about right, and that any opportunities can only be found by identifying their cause and understanding how they work. We need to be careful, experts are vastly over-rated. Most professionals in the markets are not actually outguessing the price, but are making money from clients, transactions and commissions.

The markets are increasingly tough. Many opportunities that investors pursued years ago have simply disappeared. Speculation increasingly requires that the fundamentals are fully supportive. Even governments find it hard to push prices to the wrong levels.

Fortunately I have found one shortcut in the investment world which works very well: the approach in these laws can be used for many different markets. I have used the same methods successfully over twenty years with currencies, bonds, property, stocks and private companies. It has enabled me to pursue investment opportunities wherever they may be found.

An investor needs to spot genuine opportunities in order to make good consistent returns. A few market professionals can rely on the advantages of superior information, high quality analysis or client orders to help them predict future price moves. But for various reasons these advantages are dwindling, and anyway the ordinary investor needs something more accessible. Fortunately there are opportunities offered by market behaviour which are long lasting and can be spotted without enormous research or inside information:
There remain patterns and anomalies in the markets
Markets are slow to react to structural influences
Small companies offer more opportunities
Markets go further than generally expected
Markets move in underlying trends, and
A view on the fundamentals can be combined
with price movements to manage trading positions.
When these are pursued with sensible risk management the results can be stunning.

Over a period of time, even the best investors will inevitably suffer losses. Unfortunately even good ideas can lose money just as bad ideas can sometimes make money. There is inevitably a high degree of chance or luck involved. The most important thing will be to manage the risks and to “stay in the game”. Investors need to think about how far a price can move the wrong way. They also need to diversify, be able to cut losing positions, and to be able to withstand the stresses involved.

I have spent my professional life looking for patterns and anomalies. The idea is not only to make money where the market offers an opportunity, but also to be aware of what to expect from different markets. This is very helpful because a good idea can often point to more than one type of investment. One example is that a strong economy is bullish for both stocks and property, but property may be the easier play because it has smoother cycles.

Another type of pattern in the markets is that crisis situations almost always provide opportunities to calm investors who have kept some powder dry.

Big ideas can make big money. There is a host of examples. The big falls in inflation, technological innovation, emerging economies, and China’s appetite for raw materials are just a few. The big ideas cause big but slow changes in many markets. These are often not expected by economists and analysts who often struggle to see the woods for the trees.

Investors should look for these big ideas, and ignore anything which is too obscure. For those small things it is normally too difficult to out-analyse the analysts.

For investors in main stream markets, the big idea that they are pursuing is often the state of the economy. It’s too hard, say, to make money on the broad stock market when the economy is going into a recession, so at that time bonds are a better bet. A useful way for those investors to keep an eye on the economy is by a simple checklist of the positives and negatives.

I am convinced that small companies offer more opportunities than larger companies. There is a greater chance that they are mis-priced in the market because there is a big variation in their quality, they are often involved with new products and they are not as widely followed by analysts and investors.

For a small company, the competence of the management is the most important feature. Other things investors need to look at are of course, the company’s products and markets, and its ability to handle growth.

Time and time again I have watched market prices go a long way, and surprise just about everybody involved. Just recently, there have been moves like the rise and fall in the NASDAQ, the rise in the oil price, the rise in house prices and the weakness of the US dollar. These market moves are opportunities, because in each case, the market takes its time to react to big ideas and big changes. All the way along, people are sceptical and they don’t expect the price to carry on. So investors need to expect the unexpected. They shouldn’t cut winning positions too early, and they should accept that the old price levels are history.

I am able to show that trends have operated across nearly all markets for a long, long time. These price trends are a gift! A market that has moved higher is more likely to continue moving higher than to suddenly reverse. The equivalent applies for a falling market. Although trends are well known in the markets, they are not used very well. But this bias can be used to make money – for years I have had a lot of success using simple systems which only look for trends, and trends can help decide the best way to time investments.

There are solid reasons why trends exist and will persist in the future. Market information spreads gradually, and the reaction is delayed by inertia and scepticism. Rising prices can actually lead to more, rather than less, buyers in the market. Economic cycles also help prices move in trends. So despite the common belief, markets do not usually over-react.

Even the best investment ideas can come unstuck due to bad decisions on when to buy and sell. The best technique for entering the market is to wait for a price trend to verify a bullish or bearish view. So it is not a good idea – unless there is market panic – to buy into falling markets. Being a contrarian means fighting against trends and not acknowledging that markets can go further than expected. It may work occasionally, but it is against the odds. Similarly, add to winning trades, not losing trades, and don’t be scared if you are investing alongside the consensus view. For a price to go a long way it will require consensus agreement at some point.

The decision to exit should only be made when the reasons for the investment are no longer sound, or when the price trend has reversed. Sticking with winning trades for as long as possible is the only way to make big wins.

I believe that really good investors can avoid temptation. They have the discipline to know when there are no genuine opportunities and to not take excessive risks. In these situations, it may be useful to keep an eye on a variety of markets and to see if any price trends develop. This may highlight when something is happening which is worth investigating.

In these quiet times, be careful because even just wealth preservation is not simple because of taxes and inflation. Sophisticated retail products may appear good on the surface but look closely. And with a passive portfolio, management and brokerage fees should be kept to a minimum."

LINK: Richard Farleigh

This here is particularly important imo:

"The best technique for entering the market is to wait for a price trend to verify a bullish or bearish view. So it is not a good idea – unless there is market panic – to buy into falling markets. Being a contrarian means fighting against trends and not acknowledging that markets can go further than expected. It may work occasionally, but it is against the odds. Similarly, add to winning trades, not losing trades, and don’t be scared if you are investing alongside the consensus view. For a price to go a long way it will require consensus agreement at some point."

Classic Livermore stuff: the trend IS your friend.

 

[BSD]

Richard Farleigh:

"I started in investment banking 20 years ago at the Bankers Trust Australia in Sydney. I was quite intimidated because I was quite shy. I think it was a brave decision by an investment bank to hire me as I'd had come from the protected environment of a central bank. The dealing room, in those days, was boisterous - people threw things at you, and you regularly got sworn at for things that weren't your fault.
Fortunately Jillian Broadbent, a then director at Bankers Trust, took me under her wing. I was floundering in the first few months because I didn't really know what my role was. In that environment you are expected to make something of yourself, spotting the opportunities, which I wasn't doing. I think that one of her bosses wanted to sack me, but she resisted and said: "Let's give him a bit more time." And I certainly owe her that or I might be driving a bus now.

Jillian is now a board member of Reserve Bank of Australia, the country's central bank. She is very artistic, into the art world, a fantastic family woman and at the same time an incredibly switched-on businesswoman. I wanted to adopt her whole personality, to be the male version of her.

She instilled in me the importance of remaining rational under pressure, which sounds blasé, but it is really important even now, when you look what the market has been doing recently. A dealing room is like a school playground - it's probably even worse.

I had a fantastic economics teacher at Narwee high school in Sydney. Peter Rolfe really brought me out of my shell. I'd grown up in a foster home, and even though I had a good relationship with my foster mother I wasn't at all close to my foster father. In those days, if you were a foster child, everyone at school knew. Sometimes you would suffer negative prejudice and sometimes people would think: "I'll put the time in with this kid." You get both.

Without realising it I kind of latched on to Peter, who very generously gave me his time and support. This gave me confidence. He also made economics exciting, which can be hard to do.

I've been in touch with him in the last few years. When you leave school, you walk out without saying thank you properly. You don't realise at that age. It's later on that you think, "Bloody hell. What a guy he was."

Simply put, Peter and Jillian were just good people. People who were not only good to me, but if you look around at everything else they do, you see them helping others - just doing the right thing. And it is nice to know in the business world - and in the school playground - that that exists."

LINK: My mentors: Richard Farleigh of Dragons' Den | Money | The Guardian