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More 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

More 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 ago
I 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 ago
  Institutional 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 ago
    Yes, 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 ago
      Those 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.
      - whatok 8y ago
        Different investors have different investment priorities.
      - yellowstuff 8y ago
        It depends. If you actually made 10% a year, every year for 20 years, and never lost money: A) You are either Jim Simons or Bernie Madoff. B) Investors would be tripping over themselves to pay 20% fees.
      - jjeaff 8y ago
        Higher than 10%? Only if you've been following the market for the last 7 or 8 years. Average market returns will be closer to 6 or 7%.
    - yellowstuff 8y ago
      You make a few unrealistic assumptions, and you're ignoring opportunity cost. Small funds charge more like 1 and 10-15%, your example assumes 0 and 20%. You ignore expenses; besides the normal costs of any business, like legal and accounting services, hedge funds usually have a Bloomberg Terminal ($24k/year) and usually other expensive research, as well as expensive compliance and fund administration services. $50mm is a lot of money to raise unless you know a lot of rich people and have an established track record as a good investor. Someone like that can make a very good salary as an employee of an established fund, and not have to deal with the extra hassle of running a business. The flip side is they probably also have a high net worth, and are keeping 100% of the gains from whatever they personally invested. But on balance running a $50mm hedge fund isn't as much of a slam dunk as you might think. The regulatory and investment environment is pushing things to a winner take all situation, where there are fewer, larger hedge funds.
- moorhosj 8y ago
  “If you want to grow big however, with a decent size investment team, the expenses all adds up quickly.” Wouldn’t this be true for any startup looking to “grow big”?
kaitai 8y ago
Right. Over a chat before a professional event, a friend here said these days he'd want $200mm and compliance people and in 'the good old days' 100mm was plenty. I don't know that there is any one regulation that makes this so.
- wjnc 8y ago
  AIFMD / MIFID come to mine although the regulatory burden seems quite low with those two (comparing to insurance Solvency II). I would venture that the willingness for 2 and 20 has dropped to more like 1 and 10 or less. That would explain the double minimum size as well.

charlesdm 8y ago

I 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 ago
Institutional 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 ago
  Yes, 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 ago
    Those 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.
    - whatok 8y ago
      Different investors have different investment priorities.
    - yellowstuff 8y ago
      It depends. If you actually made 10% a year, every year for 20 years, and never lost money: A) You are either Jim Simons or Bernie Madoff. B) Investors would be tripping over themselves to pay 20% fees.
    - jjeaff 8y ago
      Higher than 10%? Only if you've been following the market for the last 7 or 8 years. Average market returns will be closer to 6 or 7%.
  - yellowstuff 8y ago
    You make a few unrealistic assumptions, and you're ignoring opportunity cost. Small funds charge more like 1 and 10-15%, your example assumes 0 and 20%. You ignore expenses; besides the normal costs of any business, like legal and accounting services, hedge funds usually have a Bloomberg Terminal ($24k/year) and usually other expensive research, as well as expensive compliance and fund administration services. $50mm is a lot of money to raise unless you know a lot of rich people and have an established track record as a good investor. Someone like that can make a very good salary as an employee of an established fund, and not have to deal with the extra hassle of running a business. The flip side is they probably also have a high net worth, and are keeping 100% of the gains from whatever they personally invested. But on balance running a $50mm hedge fund isn't as much of a slam dunk as you might think. The regulatory and investment environment is pushing things to a winner take all situation, where there are fewer, larger hedge funds.
moorhosj 8y ago
“If you want to grow big however, with a decent size investment team, the expenses all adds up quickly.” Wouldn’t this be true for any startup looking to “grow big”?

kaitai 8y ago

Right. Over a chat before a professional event, a friend here said these days he'd want $200mm and compliance people and in 'the good old days' 100mm was plenty. I don't know that there is any one regulation that makes this so.

wjnc 8y ago
AIFMD / MIFID come to mine although the regulatory burden seems quite low with those two (comparing to insurance Solvency II). I would venture that the willingness for 2 and 20 has dropped to more like 1 and 10 or less. That would explain the double minimum size as well.