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Comment by lordnacho | Hacker News Reader

Former hedge fund manager here. It's a good summary, but there's a big piece missing. Setup costs are higher now, a lot of it due to regulatory changes. One of my contacts (and former customers) told me with recent European changes coming in, you need a good few hundred million bucks AUM to make it worthwhile.

A fair few potential founders would be able to find a few tens of millions from friends and family, but a lot fewer can find a hundred bucks. If you're backed by a big name this isn't a problem, hence you still get the occasional massive launch.

The part about the fees is also pretty important. 2/20 is from tales of yore. Any significant ticket will ask for a discount as well.

So it's just that much less attractive to launch.

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More anecdotal evidence in support of this: a friend of mine with a lot of experience in the finance industry looked into starting his own fund, and determined that you'd need $150mm and a full time compliance officer on day one for it to be practical. Another friend did start a fund with a few million under management, but essentially just to establish a track record so he could raise enough money to be worth it.

Right. Over a chat before a professional event, a friend here said these days he'd want $200mm and compliance people and in 'the good old days' 100mm was plenty.

I don't know that there is any one regulation that makes this so.

AIFMD / MIFID come to mine although the regulatory burden seems quite low with those two (comparing to insurance Solvency II).

I would venture that the willingness for 2 and 20 has dropped to more like 1 and 10 or less. That would explain the double minimum size as well.

I guess it depends on how serious you are? If you're just one person managing money, including a significant amount of your own wealth, then I guess you can do things relatively cheaply.

If you want to grow big however, with a decent size investment team, the expenses all adds up quickly.

Institutional investors are not going to allocate capital to a team of one. You can outsource a decent amount of back office functions but you are still going to need to manage some things in house.

Yes, I am aware. But family offices will if you have proper relationships with them (essentially F&F money). You can raise small funds (i.e. $5 to $50m) from family offices.

If you can take 20% of an annual 10% gain on $50m, that's a million a year -- pretty great lifestyle wise for a one person band.

You make a few unrealistic assumptions, and you're ignoring opportunity cost. Small funds charge more like 1 and 10-15%, your example assumes 0 and 20%. You ignore expenses; besides the normal costs of any business, like legal and accounting services, hedge funds usually have a Bloomberg Terminal ($24k/year) and usually other expensive research, as well as expensive compliance and fund administration services. $50mm is a lot of money to raise unless you know a lot of rich people and have an established track record as a good investor. Someone like that can make a very good salary as an employee of an established fund, and not have to deal with the extra hassle of running a business. The flip side is they probably also have a high net worth, and are keeping 100% of the gains from whatever they personally invested. But on balance running a $50mm hedge fund isn't as much of a slam dunk as you might think. The regulatory and investment environment is pushing things to a winner take all situation, where there are fewer, larger hedge funds.

Those are horrible returns, that is borderline nearly unethical. You would have higher returns and pay less than 1% just putting it in the vanguard 500.

It depends. If you actually made 10% a year, every year for 20 years, and never lost money:

A) You are either Jim Simons or Bernie Madoff.

B) Investors would be tripping over themselves to pay 20% fees.

Higher than 10%? Only if you've been following the market for the last 7 or 8 years.

Average market returns will be closer to 6 or 7%.

Different investors have different investment priorities.

“If you want to grow big however, with a decent size investment team, the expenses all adds up quickly.”

Wouldn’t this be true for any startup looking to “grow big”?

There's data that disputes the couple of hundred million to break even story.

Source: https://www.hedgeweek.com/2017/07/11/253832/emerging-hedge-f...

“The key finding of the survey is that these managers can be profitable at a small size. One third of managers surveyed said they were profitable with less than USD50 million. We therefore dispute the claim that you need USD200 million or more to break even. We think there is tight evidence that you can do it at a lower AUM number,” asserts Capstick.

Breaking it down by strategy, the survey found that global macro funds need the most assets to break even: USD132 million, followed by event-driven (USD108 million) and multi-strategy funds (USD98 million).

No one goes into this business to breakeven.

I'm very doubtful that a majority of these smaller funds survive very long but really no great way of knowing. Macro funds until this year have just been sucking. Let's say you're getting 1/15 on 132mm and returned 10% (10 is generous given how a lot of these funds have performed) for the year. That's 1.32mm management fee and 1.98mm in incentive for 3.3mm total. That's really not a lot of money to go around to get startup hedge fund talent.

Setup costs aren't that much to be honest. Some prime brokerage depts at banks will even help you get started, often for an ongoing portion of your fund's management fee, so there isn't anything to pay at the start. They'll even handle compliance, monitoring and accounting for you.

Generally, you can get your fund going for under a 100k GBP in London, providing you have the required regulatory capital (if you're going down the regulated route, that is). Hiring people, office etc etc gets expensive, but a lot of 'funds' we've helped set up are 1 or 2 man bands, working out of a co-working space with colo'd execution infrastructure in Equinix, based out in Slough.

Talking about "colo'd execution" makes me think you are thinking of a particular strategy which the costs make sense for but not the rest of the majority.

Do you have any sort of documentation about this (although I am in the USA)? I'm starting a mini hedge fund now with so much less money (under 6 figures) and perhaps I'm missing something?

How can you make money with a mini hedge fund? I've looked into setting up something, and at the minimum you'd need a few million (and that's even keeping everything super lean) for it to make sense money wise.

Well, so far everything I am doing is 99% automated based upon my own tools, etc.

Edit: Dr. Ernest Chan has written 3 really good books on Quantitative/Algorithmic trading. Essential reads.

What platform are you using for trading/algo?

A few dideferent platforms. AlphaVantage, Interactive Brokers, other data platforms too.

have they been useful yet, or just sounded good?

Extremely useful. Plus Dr Chan was helpful when I emailed him with a few questions about concepts in his books.

awesome.

You might want to consider classification as a "Proprietary Trading Firm" instead of a hedge fund

This actually makes more sense, I am discovering. Thanks for bringing it up as I just sort of made up mini hedge fund as a term

IIRC Hedge fund has to be funded by accredited investors, and usually have significantly more capital than under <1mm, but I'd imagine you would want to co sult a securities/specialist legal counsel for a question on forming a fund

Depends on who's money your accepting really. Outside money = lots of red tape

Yeah, none of the MIFID compliance stuff is easy and it's to the point where you don't want European investors if you're an American entity.

> A fair few potential founders would be able to find a few tens of millions from friends and family,

Rich kids

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