7 ms·
Number of hedge fund startups lowest in nearly two decades
- lordnacho 8y agoFormer hedge fund manager here. It's a good summary, but there's a big piece missing. Setup costs are higher now, a lot of it due to regulatory changes. One of my contacts (and former customers) told me with recent European changes coming in, you need a good few hundred million bucks AUM to make it worthwhile. A fair few potential founders would be able to find a few tens of millions from friends and family, but a lot fewer can find a hundred bucks. If you're backed by a big name this isn't a problem, hence you still get the occasional massive launch. The part about the fees is also pretty important. 2/20 is from tales of yore. Any significant ticket will ask for a discount as well. So it's just that much less attractive to launch.
- whatok 8y agoYeah, none of the MIFID compliance stuff is easy and it's to the point where you don't want European investors if you're an American entity.
- jason_slack 8y agoDo you have any sort of documentation about this (although I am in the USA)? I'm starting a mini hedge fund now with so much less money (under 6 figures) and perhaps I'm missing something?
- arthurcolle 8y agoIIRC Hedge fund has to be funded by accredited investors, and usually have significantly more capital than under <1mm, but I'd imagine you would want to co sult a securities/specialist legal counsel for a question on forming a fund
- jeletonskelly 8y agoYou might want to consider classification as a "Proprietary Trading Firm" instead of a hedge fund
- jason_slack 8y agoThis actually makes more sense, I am discovering. Thanks for bringing it up as I just sort of made up mini hedge fund as a term
- charlesdm 8y agoHow can you make money with a mini hedge fund? I've looked into setting up something, and at the minimum you'd need a few million (and that's even keeping everything super lean) for it to make sense money wise.
- jason_slack 8y agoWell, so far everything I am doing is 99% automated based upon my own tools, etc. Edit: Dr. Ernest Chan has written 3 really good books on Quantitative/Algorithmic trading. Essential reads.
- ColanR 8y agohave they been useful yet, or just sounded good?
- jason_slack 8y agoExtremely useful. Plus Dr Chan was helpful when I emailed him with a few questions about concepts in his books.
- ColanR 8y agoawesome.
- bizkitgto 8y agoWhat platform are you using for trading/algo?
- jason_slack 8y agoA few dideferent platforms. AlphaVantage, Interactive Brokers, other data platforms too.
- deleted 8y ago[deleted]
- Havoc 8y agoDepends on who's money your accepting really. Outside money = lots of red tape
- yellowstuff 8y agoMore anecdotal evidence in support of this: a friend of mine with a lot of experience in the finance industry looked into starting his own fund, and determined that you'd need $150mm and a full time compliance officer on day one for it to be practical. Another friend did start a fund with a few million under management, but essentially just to establish a track record so he could raise enough money to be worth it.
- charlesdm 8y agoI guess it depends on how serious you are? If you're just one person managing money, including a significant amount of your own wealth, then I guess you can do things relatively cheaply. If you want to grow big however, with a decent size investment team, the expenses all adds up quickly.
- whatok 8y agoInstitutional investors are not going to allocate capital to a team of one. You can outsource a decent amount of back office functions but you are still going to need to manage some things in house.
- charlesdm 8y agoYes, I am aware. But family offices will if you have proper relationships with them (essentially F&F money). You can raise small funds (i.e. $5 to $50m) from family offices. If you can take 20% of an annual 10% gain on $50m, that's a million a year -- pretty great lifestyle wise for a one person band.
- ecshafer 8y agoThose are horrible returns, that is borderline nearly unethical. You would have higher returns and pay less than 1% just putting it in the vanguard 500.
- 8y ago
- osrec 8y agoSetup costs aren't that much to be honest. Some prime brokerage depts at banks will even help you get started, often for an ongoing portion of your fund's management fee, so there isn't anything to pay at the start. They'll even handle compliance, monitoring and accounting for you. Generally, you can get your fund going for under a 100k GBP in London, providing you have the required regulatory capital (if you're going down the regulated route, that is). Hiring people, office etc etc gets expensive, but a lot of 'funds' we've helped set up are 1 or 2 man bands, working out of a co-working space with colo'd execution infrastructure in Equinix, based out in Slough.
- whatok 8y agoTalking about "colo'd execution" makes me think you are thinking of a particular strategy which the costs make sense for but not the rest of the majority.
- konschubert 8y ago> A fair few potential founders would be able to find a few tens of millions from friends and family, Rich kids
- alanmeaney 8y agoThere's data that disputes the couple of hundred million to break even story. Source: https://www.hedgeweek.com/2017/07/11/253832/emerging-hedge-fund-managers-are-profitable-below-usd100-million https://www.hedgeweek.com/2017/07/11/253832/emerging-hedge-f... “The key finding of the survey is that these managers can be profitable at a small size. One third of managers surveyed said they were profitable with less than USD50 million. We therefore dispute the claim that you need USD200 million or more to break even. We think there is tight evidence that you can do it at a lower AUM number,” asserts Capstick. Breaking it down by strategy, the survey found that global macro funds need the most assets to break even: USD132 million, followed by event-driven (USD108 million) and multi-strategy funds (USD98 million).
- whatok 8y agoNo one goes into this business to breakeven. I'm very doubtful that a majority of these smaller funds survive very long but really no great way of knowing. Macro funds until this year have just been sucking. Let's say you're getting 1/15 on 132mm and returned 10% (10 is generous given how a lot of these funds have performed) for the year. That's 1.32mm management fee and 1.98mm in incentive for 3.3mm total. That's really not a lot of money to go around to get startup hedge fund talent.
- princetontiger 8y agoI agree with you. I know plenty of smart friends who have left the industry. There's about ~9,000 hedge funds in the US, but I would personally avoid any fund with less than $1B+ in AUM unless you got several percentage points of the fund's profit generation or a chance to run a book. That takes the list down to maybe 600-750 hedge funds in the US that are worth working for... that list will probably get 50% smaller in the next couple years. A lot of people are down this year against the S&P 500 up 10% and the Nasdaq up 20%
- anonu 8y agoThank you ETFs. On the other hand, in finance and investing, what is old is new. I don't doubt that hedge funds will have a resurgence or that active money management will find footholds in different vehicles. For example actively managed ETFs.
- wetpaws 8y ago'Actively managed etf' is an oxymoron.
- conjectures 8y agoI think you mean 'active index fund'.
- anonu 8y agoWhy? You can have hedge fund strategies embedded within the legal structure of an ETF.
- freddie_mercury 8y agoNo it isn't. The SEC approved it with this exact language > Applicants request an order that would allow Funds to operate as actively- managed exchange traded funds (“ETFs”) It happened back in 2017 in Investment Company Act Release No. 32810. Not sure how you missed that.
- schnevets 8y agoI always figured hedge funds thrived in more volatile situations. The years of consistent-yet "boring" growth that we have seen since the recession is not a fertile environment for alternative strategies.
- mathattack 8y agoSome play volatility. It’s also a game of betting against the trend. When the trend goes in one direction for long enough, you get burned taking the other side.
- mathattack 8y agoInteresting points on volatility and the rate environment. I wonder how much is other big picture issues. - The buyers are getting more savvy and don’t want to pay high fees for whatbthe can do in house. - More high risk money is going to private securities. - For some strategies (derivatives) there are less people to trade with. (Fewer suckers in the game) - Fewer smart people are going into finance. (I’m not sure this has gone on long enough to impact hedge fund startups)
- whatok 8y agoLow vol and rate environment is the primary cause which kinda drives your first two points. Investors aren't allocating as much to alts and what they are is shifting more to PE. PE did well over the last crisis because of long lockups and mark to model vs mark to market. Any hedge fund that invests in public securities doesn't have that luxury to tread water. As far as your first point goes, I don't think investors are getting more savvy but they are under pressure due to bad performance and high fees associated with some of the funds they invested in. Generic long/short equity funds are more or less able to replicate in-house and some are trying out ETFs to sub for other strategies but none of these have the same return profile as the actual strategies.
- mathattack 8y agoMy impression is a lot of LPs are asking “why am I paying 2/20 or 1.5/15 to get returns that are either 40% correlated to a passive fund, or don’t beat the market?” I think another big issue is that it’s just plain hard to beat the market on a consistent basis.
- whatok 8y agoYes, agreed but am wary of comparing any proper hedge fund's returns over a short time frame vs the market. They are supposed to be absolute return vehicles. By nature of (supposed) uncorrelated returns, a lot of funds are not going to beat the market if it just goes up and to the right but definitely should be outperforming in other markets.
- 8y ago
- MrEfficiency 8y agoHow and why does this happen? I dont quite understand what would encourage someone to take outside investment money unless its necessary to build production. Maybe I'm so small time, I just dont understand, but Snapchat survived without taking investment from my understanding.
- freddie_mercury 8y agoI think maybe you don't know what a hedge fund is? Because your question doesn't really make any sense? Anyway, the answer is: hedge funds want to take money for 2 reasons: 1. The bigger the hedge fund, the more famous the manager is. They get to meet Presidents, talk on CNN, get invited to Davos, and other famous people perks. You get to say you "won". 2. The hedge fund charges fees based on the assets under management; the more money you take in, the more money you personally make.
- MrEfficiency 8y agothank you!
- billmalarky 8y ago>Snapchat survived without taking investment from my understanding. Ignoring the cost of development (which is reasonable given how simple the app was when it launched), Snapchat has incredibly high infrastructure costs. It runs on google cloud (you pay a huge markup for cloud services - it's just often worth it because you can scale up and scale down to match actual need but I assure you snapchat was not scaling down) and is media heavy (read high bandwidth bills). Snapchat received $2.65 billion in investment pre-ipo!!! $2.65 billion! https://www.crunchbase.com/organization/snapchat#section-ipo-stock-price https://www.crunchbase.com/organization/snapchat#section-ipo...
- nabla9 8y agoOne of the major trends in last two decades is increased correlation (especially during bear markets). No matter how you diversify the portfolio, it will correlate with others more. There is more correlation between individual assets and between different asset classes. Between 1980-1999 the correlation between US and foreign stocks was 0.47 - 0.49. Between 2000-now its 0.88-0-89 Moving between stocks, bonds and alternatives produces declining value relative to the past. U.S stocks correlate more with international stocks, bonds correlate more with stocks, raw materials correlate more with the rest. I think it's natural to expect less value from hedge fund strategies in general. Maybe private equity investing helps but how much?
- village-idiot 8y agoIs this a sign of an asset bubble, a consequence of globalization, increased trading sophistication, or something else?
- MR4D 8y agoThe increased correlation is a sign of more integrated economies (globalization). For instance, the US is highly dependent upon China for manufacturing. So when the US hits a recession, and we spend less money, less money goes to China as well, causing lower growth or a recession on their side. That's simple correlation example, although there are second and third order effects that are significant as well. Independently, bubbles have their own flavor on top of that, but usually concentrated to a particular sector (could be a straightforward sector like "tech", or as large as "equities", as was the case due to central bank easing around the world). Trading sophistication tends to cause faster reactions (e.g. currency goes down, but their stocks go up in the same day, or even same hour). Decades ago, the trading was not as interlinked, so people couldn't make a global decision an implement in multiple markets at the click of a mouse.
- leelin 8y agoInteresting point on why increased correlation hurts traditional stock pickers and market timers. Does this make a case for quantitative hedge funds doing better? Quant funds are in a good position to put on a large basket of long and short positions (with leverage), and therefore can separate individual stocks from their confounding market factors. Of course, it presumes the fund has a strategy giving them enough conviction to bet on individual stocks / securities.
- scotty79 8y agoI would hope that Buffet bet is solely responsible for this trend but people are not that smart to accept actual proof that something that they believed in for so many years does nothing beneficial or even does harm.
- tim333 8y agoI imagine Buffett has played a part both with his bet and arguing against them as a wise investment.
- inputcoffee 8y agoSo... does that mean this is the best time to start a fund because there is little competition? Or the worst because there is little opportunity?
- dollar 8y agohttp://fortune.com/2017/01/20/public-companies-ipo-financial-markets/ http://fortune.com/2017/01/20/public-companies-ipo-financial... Former hedge fund manager here. This never gets mentioned, but there are fewer publicly traded companies than there were in the late 1980s. There’s more money and fewer opportunities for a hedge fund to differentiate, so it’s harder to get outsized returns without excessive risk. Meanwhile, the finance industry has convinced people it’s “impossible” to beat the index in the long run.
- whatok 8y agoThat doesn't explain non-equity strategies sucking too.
- Analemma_ 8y ago> Meanwhile, the finance industry has convinced people it’s “impossible” to beat the index in the long run. Did the finance industry do that? All I see when I look at the finance industry is people desperately trying to convince me that I can beat the index if I give them lots of money. I think what convinced people it’s impossible to beat the index in the long run is the continuous failure of active funds to do that.
- tim333 8y ago>Hedge Funds Trounced Markets Over the Long Term Looks very iffy to me. Googling survivorship bias "The flagship investable HFRX Global Hedge Fund Index, for example, has undershot the non-investable HFRI Fund Weighted Composite Index every year since 2003, by an average of 560 basis points." https://www.ft.com/content/16e4fb60-46ad-11e0-967a-00144feab49a https://www.ft.com/content/16e4fb60-46ad-11e0-967a-00144feab... knocking that off the 10x 20 year return shown for the HFRI would reduce that to a 3.6x return How it works is a fund company launches the super fund and the wow fund. Then the super fund goes up 20%, the wow down 20%, then as a holder of the wow fund you get a letter "the wow has been discontinued and merged with the super fund" Then the company claims all its funds are up 20%. An awful lot of them pull that kind of thing and you have to correct for it to get useful stats.