Earlier this month Citi published a report indicating that anyone with less that $US300 million assets under management in their hedge fund shouldn’t even get out of bed in the morning. Crestfallen, many Wall Streeters resigned themselves to toggling spreadsheets for ‘the man’ (instead of becoming the man) for the rest of their careers. It was a dark day.
Lucky for them, however, Citi does not have the final word on this matter.
Looking for hope, Business Insider spoke with Jeff Rosenthal, the head of the Financial Services Practice Group at Anchin, Block & Anchin, a top 30 accounting firm. He’s been advising start up hedge funds since the 1980s, and says the game is tougher now than it was then, but Citi didn’t get it all right — you can still get in the game with $US25-$50 Million assets under management (or even less).
You just have to be smart about it, or you will fail. He’s seen it time and time again. Traders may trade. Investors may invest, but an investment firm is more than its strategy.
“You have to be able to put together a budget together and commit yourself,” said Rosenthal.
You have to be able to start a small business — something they don’t teach you during your time as an analyst at JP Morgan or Goldman Sachs. If you can’t do that, it’s over.
At first, since your firm will be small, surviving is the game. Maybe you’ll have a Bloomberg terminal, a few employees you’ll need to work out payroll for, and a prime broker. Rosenthal advises that you “try to instill a culture of compliance early” , but the huge compliance headaches won’t come until you’ve got $US150 million AUM.
Until that time — the time when you can attract that sticky institutional or fund of funds money — you’ll be working with fickle high net worth individuals. Try to work out a lock-in period if you can.
Even if you do get that though, plan a budget where you see yourself losing money for the first two years.
Yes, you’re a star. You’re a great trader. You’re awesome. But you will still lose money.
“The first two years are critical,” Rosenthal said. “You need good returns, a good message, and you’ll need investors to promote you as well.”
That means communicating with your investors clearly, and making sure they understand your strategy.
Before you try ANY of this, Rosenthal suggests you maybe set up a single member LLC to invest your own money for a year or so. Use a strategy you’re good at. See how it goes.
It’s a hard road ahead of that, and you’ve got to crawl before you can walk.