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If you think you’re going to be like Ray Dalio or Dan Loeb, starting an incredible hedge fund from your apartment, it’s time to let go of that dream.Over the last 10 years, starting your own fund has gotten way more complicated than it used to be.
Gone are the days when a guy with a Bloomberg machine could convince investors to fork over that 2% and 20% (the common hedge fund compensation scheme) because of their investment thesis or their trading prowess.
“You’re looking for a team more than a player,” said Jason Ader, founder and CEO of alternative asset manager Ader Investments. “It used to be a Kobe Bryant or a Lebron James could start a fund by just being who they were.”
Now what you really need is a team — you need all of the Lakers. Plus Phil Jackson. And tons of support staff.
What’s happened is that the industry has gotten so crowded that now there’s sort of a template for the hedge fund business plan, so seeders have to be really careful and really get through the noise before they give their money to anyone.
On top of that, increased regulatory scrutiny means that the less sexy parts of the business are more vital than ever.
Being a great trading is great, but that skill can be learned or outsourced to a firm like Cantor Fitzgerald, Ader told us. Now, having that talent is less interesting to seeders than the skill of your hedge fund’s number crunchers.
“You need a good compliance officer who has the ability to be independent and to supervise. There are some pretty high profile personalities… that start a fund and it’s critical that they hire someone who can think independently.”
And your compliance officer needs a third party checking their work as well.
This is on top of all the other things seeders want to see from a hedge fund start-up — things like a significant chunk of money from general partners so they have skin in the game, great research, investing talent (which is hard to come by), and creative ideas.
“Often very talented investors don’t know what they don’t know about the operational side of the business,” said Don Rogers the founder and managing partner of boutique seeding firm Stride Capital. His firm specialises in hand-picking one, two, or three investments a year that it really believes in and helping those hedge fund managers with the operational side of the business.
“Many firms that fail, fail because of operational issues as opposed to investment issues, and the two are kind of correlated,” said Rogers.
Rogers gets 10-20 leads on managers a week from investors, other managers etc. — it’s really an active dialogue with the Street.
“We are the team that is out spending exceptional, unique talent, ensuring that the operational side of the business is there and helping teams execute by being engaged with them… there’s a lot of copy catting out there a lot of unoriginality out there… the mean is becoming a true average.”
So if you want to start your own fund, try to stand out… and start making draft picks for your team.