How to start your own hedge fund...

So you want to start your own hedge fund…

Firstly, you should come up with a solid name. Pirate themes are always popular - Corsair Capital, Galleon and so on. Many people use their own names - Paulson, Fisher. Slightly more creative is to put together an acronym from your children’s names. A surprisingly common tactic. The divorce rate is rather high amongst hedge fund managers, so best to avoid your spouse’s name. Many names seem to derive from a street that the founders have their offices, such as Pershing Square. Alternatively, you can convey strength by choosing strong names - Fortress, Citadel, Platinum or even Seawolf!

You’ll need really swish offices. Mayfair if you’re in London. Greenwich, Connecticut if you’re US based. Hire a very tall and imperious looking, scary receptionist to keep visitors in awe. It also helps to have a few illustrious names on your advisory board. No actual company executives as they might ask questions, best to go for government policy types or superstar academics.

The large asset owners (pension funds, government sovereign wealth funds) who you’ll have to raise money from, hire pension fund consultants like Willis Towers Watson or Mercer to advise them on what to invest in. Sample themes are - Chinese infrastructure, North American timber, distressed debt. Reverse engineer these investment consultant reports as a cheat sheet for what your investment thesis should look like - build what they’re going to advise the pension funds to invest in shortly. Try this link.

Don’t bother figuring out how to implement the investment strategies you’ve decided on. The big management consultancy firms, including McKinsey, run hedge fund consulting practices. For a few thousand dollars, well maybe more like a few hundred thousand dollars, you can hire some clever consultants to actually come up with an investing plan for you.

Next, build a robust team of investment managers. Only the best will do. It always helps as head of a hedge fund if you have to keep bringing in scarily smart people to explain your fantastic plan, so don’t learn too much (plausible deniability).

Remember Harvard & Cambridge lend old-school credibility. But throw in a little Stanford or MIT as things are going quant. Make sure they’re under 30 and hungry or you’ll have a lot of human resources problems. Also make them all “partners”, that way you don’t have to pay them too much unless they make you money (“upside”).

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Asset gathering

No point having all those sexy strategies if you have no money with which to invest. You’ve got to go for the easy fundraising here - large, bloated pension funds where the trustees are slightly checked out and happy to just take their consultants “advice”. Even better a mega pension fund that is going to be in the news soon for not meeting its liabilities… they’ll take anything that promises them huge returns in the short term.

Assets under management (AUM)

So now you’re a bona fide hedgie! Congratulations. Make sure you’ve charged them the full 2% management fee that you get paid no matter how you perform. Also don’t compromise on charging the full 20% performance fee in case you actually beat the market. Shocking I know, but it occasionally happens.

If you’ve managed to raise $100 million, congrats! At 2% you’re making $2 million a year. A bit of office space, an MBA or two will cost you, but it’s not a bad life. If you work hard and keep at the fundraising, with a little luck from the market gods, you can raise a billion. 2% of a billion is $20 million. Keep this up for 5 years and you have $100 million in the bank. Well done, you can now have the Bentley, yacht and other essential hedge fund trappings.

What about performance you ask, the task of actually making money for your investors? Dear reader, there are way too many other things to think about to worry about minor details like performance. If you don’t hit the jackpot the first time round, don’t panic, close your fund, take a little break and come back and try again.

If my simple solution to creating your own hedge fund still sounds too hard, you can check out an old post on the easy peasy way to make a killing in day trading.