I found this little aside in Gary Gorton’s 2010 Journal of Economic Literature review of 2008 financial crisis books–The Big Short and The Greatest Trade Ever–pretty funny:Some of the most interesting material in the books concerns how hedge funds operate. Opening a hedge fund is problematic. The founder has a secret. Either the secret is that the founder has no new ideas. Or, the founder’s secret is a new idea. If the founder has no new idea, that cannot be revealed. If the founder has an original idea, he also can’t share it with investors because they might steal it. “Competitors might figure out the trade for themselves and buy the same insurance, driving up the cost. That made Paulson reluctant to provide details of his trade. It was a stance that made it more difficult to raise money” (Zuckerman, p. 127‐8). Indeed, Paulson’s friend Jeffrey Greene does steal the idea. Michael Burry has the same problem: “If I describe it enough it sounds compelling, and people think they can do it for themselves. . . If I don’t describe it enough, it sounds scary and binary and I can’t raise the capital” (Lewis, p. 58).
By the time I had capital to set up a low-vol strategy fund myself I was soon in litigation that exhausted my capital, but when I didn’t have capital and was trying to convince others, a common reply was, ‘why isn’t everyone else doing it?’ Now the problem is everyone is doing it (low vol investing).
A take away is that hedge funds are all fundamentally opaque. Another is that you can’t start a hedge fund unless you or a very close associate, has at least a million or two to invest.