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Someone asked about how difficult it is to get outside investment.... It's usually very difficult and it takes a lot of money to run a proper fund. Let's say

Someone asked about how difficult it is to get outside investment.... It's usually very difficult and it takes a lot of money to run a proper fund. Let's say you raise $50M. You can maybe charge 1 and 20,meaning you get 1% of assets each year for running the fund and 20% of profits. 1% of $50M( and keep in mind this is a large raise for someone without a track record on the sell side or inside another fund) give you $500,000 a year to pay: - salaries( lets say you pay yourself $100,000 all in plus the same for a single analyst - a Bloomberg terminal $30,000 including data feeds - market data feeds you need $25,000/year for basic market data and fundamental data that you are allowed to warehouse(you can't store data you get from the Bloomberg terminal). - rent $50,000/year for office space - outside lawyer fees and outside accounting fees $100,000/year - similar fees for someone to run your back office, roughly $100,000/year. And on the other side of expenses you have the money making side of things. Which as the OP pointed isn't great. If you return 10% on the 50M you get to keep 20% of that so a 10% return gives $5M in profits and you keep $1M. That allows you to bonus out yourself and analysts on good years. If you lose money one year then you get no bonus and have to bonus out the employees out of the retained earnings you kept from previous bonuses. it usually gets worse as most funds have what's called a high water mark. This means you don't collect the performance fee until your fund gets back to the high water mark. So if you are down 10% one year you need to make that back before you start to make any performance fee, which is why most funds shut down if they go down more than 20%. As to raising money.....Anyone can show a model that makes money. that doesn't mean its easy to create a model, its just that there are alot of people capable of building such a model. Its the risk management that people with money are really looking for and sadly that's just really hard to show out of a model as part of the risk management is things like positions sizing and showing your model doesn't pile into one asset class or trade correlated products. it bodes well for the OP that they talk about market regimes as, IMHO, this is one of the biggest risk management tools that aspiring traders ignore. And this risk management is why people ask for a track record of more than a year.

muggermuch 4y ago
Thank you for this comprehensive response! I have often found myself struggling to explain the difference between building a strategy or trading system (which reduces to a technical/intellectual challenge) and running a hedge fund (essentially running a complex information-driven business). Your cost breakdown really puts matters into perspective. > it bodes well for the OP that they talk about market regimes I concur. Market regimes (modeling, detecting, reasoning about them) are too delicious of an intellectual puzzle to resist.
rmah 4y ago
Working in the industry, I can confirm that the above numbers are approximately correct except for the employee costs -- those are roughly double and up. You also need to hire a fund administrator, auditors and compliance firms (maybe $50k to $100k per year each) which add on even more costs. And you can't skip the lawyers, outside administrator, outside compliance, etc. as they are required by regulations/law.
HFguy 4y ago
This is actually way too optimistic. Your first 1-2 seed investors will: - Only pay 1 and 10 (1% fixed fee and 10% of PNL) - They will also get ownership of the actual fund management firm and will get that in the form of 20% of REVENUE (not equity, revenue, think about that) This is one reason new fund formation is way down. The economics are bad for years. Know a bunch of HF people that started vc-backed tech firms instead. The other reason is 10+ year run where stocks, bonds, private firms and real estate just went up. No need for diversifying return streams.
- HFguy 4y ago
  BTW, data costs also too low. Just a BB terminal around 30k and a lot of extra data from BB costs extra (can be 200-300k per additional product). For quant strategy probably looking at 500k up to 2M for data initially. And you will likely be at a disadvantage to existing firms that have been collecting data for years. And that is at the low end. Spent many millions per year for 1 strategy at last large firm. And that was small fraction of total firm spend.
- ackbar03 4y ago
  I guess if you have a reasonably profitable strategy it probably just makes more sense to run it with your own money? I guess the only reason why you would want to trade as a hedge fund is if you want to scale up, but most strategies aren't really that scale-able anyways from what I understand, since when you start trading in any real significant size you start moving the markets.
- chollida1 4y ago
  Ha, you need a better network:) I don't know too many people who have started funds in the past 5 years, but of the 3 who did, none gave up any ownership in the management firm. That's a suckers game and the only people who would need to give up any ownership are people who are very green:)
  - collegeburner 4y ago
    facts, the people i know who started funds in the past few years gave no ownership. they alsp made the numbers work down starting at about $75mm iirc, tho it's a lot easier once past $500mm.
pid-1 4y ago
> a Bloomberg terminal $30,000 including data feeds > market data feeds you need $25,000/year for basic market data and fundamental data that you are allowed to warehouse(you can't store data you get from the Bloomberg terminal). Total nitpick: you can get those using soft dollars. But your numbers are spot on. In my job we estimate running a hedge fund with AUM < 250MM is just not worth it.
- chollida1 4y ago
  Sure, if you generate enough commissions to pay for them, which is not a given, assuming the size of fund we are talking about.
TrackerFF 4y ago
Hardest part is raising those $50M - even more so if you have zero professional experience in high-finance. Getting a foot inside investment banking, hedge funds, private equity, etc. is extremely competitive to say the least. I think the best shot for any outsider programmer would be to seek (and team up with) those finance professionals that are already thinking about exiting to start their own funds, and in the need of some technical partner...but even then, you're also competing against experienced devs. already in the field. In the end, it is just really, really difficult for outsiders to just enter this sector, if they have any hopes of working with any substantial amount of capital. I guess the better option would be to make some product you can sell as SaaS to the masses, or figure out how to manage thousands and thousands of low-$ investors.

muggermuch 4y ago

Thank you for this comprehensive response! I have often found myself struggling to explain the difference between building a strategy or trading system (which reduces to a technical/intellectual challenge) and running a hedge fund (essentially running a complex information-driven business). Your cost breakdown really puts matters into perspective. > it bodes well for the OP that they talk about market regimes I concur. Market regimes (modeling, detecting, reasoning about them) are too delicious of an intellectual puzzle to resist.

rmah 4y ago

Working in the industry, I can confirm that the above numbers are approximately correct except for the employee costs -- those are roughly double and up. You also need to hire a fund administrator, auditors and compliance firms (maybe $50k to $100k per year each) which add on even more costs. And you can't skip the lawyers, outside administrator, outside compliance, etc. as they are required by regulations/law.

HFguy 4y ago

This is actually way too optimistic. Your first 1-2 seed investors will: - Only pay 1 and 10 (1% fixed fee and 10% of PNL) - They will also get ownership of the actual fund management firm and will get that in the form of 20% of REVENUE (not equity, revenue, think about that) This is one reason new fund formation is way down. The economics are bad for years. Know a bunch of HF people that started vc-backed tech firms instead. The other reason is 10+ year run where stocks, bonds, private firms and real estate just went up. No need for diversifying return streams.

HFguy 4y ago
BTW, data costs also too low. Just a BB terminal around 30k and a lot of extra data from BB costs extra (can be 200-300k per additional product). For quant strategy probably looking at 500k up to 2M for data initially. And you will likely be at a disadvantage to existing firms that have been collecting data for years. And that is at the low end. Spent many millions per year for 1 strategy at last large firm. And that was small fraction of total firm spend.
ackbar03 4y ago
I guess if you have a reasonably profitable strategy it probably just makes more sense to run it with your own money? I guess the only reason why you would want to trade as a hedge fund is if you want to scale up, but most strategies aren't really that scale-able anyways from what I understand, since when you start trading in any real significant size you start moving the markets.
chollida1 4y ago
Ha, you need a better network:) I don't know too many people who have started funds in the past 5 years, but of the 3 who did, none gave up any ownership in the management firm. That's a suckers game and the only people who would need to give up any ownership are people who are very green:)
- collegeburner 4y ago
  facts, the people i know who started funds in the past few years gave no ownership. they alsp made the numbers work down starting at about $75mm iirc, tho it's a lot easier once past $500mm.

pid-1 4y ago

> a Bloomberg terminal $30,000 including data feeds > market data feeds you need $25,000/year for basic market data and fundamental data that you are allowed to warehouse(you can't store data you get from the Bloomberg terminal). Total nitpick: you can get those using soft dollars. But your numbers are spot on. In my job we estimate running a hedge fund with AUM < 250MM is just not worth it.

chollida1 4y ago
Sure, if you generate enough commissions to pay for them, which is not a given, assuming the size of fund we are talking about.

TrackerFF 4y ago

Hardest part is raising those $50M - even more so if you have zero professional experience in high-finance. Getting a foot inside investment banking, hedge funds, private equity, etc. is extremely competitive to say the least. I think the best shot for any outsider programmer would be to seek (and team up with) those finance professionals that are already thinking about exiting to start their own funds, and in the need of some technical partner...but even then, you're also competing against experienced devs. already in the field. In the end, it is just really, really difficult for outsiders to just enter this sector, if they have any hopes of working with any substantial amount of capital. I guess the better option would be to make some product you can sell as SaaS to the masses, or figure out how to manage thousands and thousands of low-$ investors.