And you need to know what machinery you'll need too. Capital requirements, counterparty agreements, access to stock lending, cost requirements, IT requirements, everything.
Some of the newer shops say you can keep your own IP. Haven't checked whether it's true, but most people I know are sceptical.
Say I set up a fund holding a low cost s&p500 index ETF, but at the end of each year sold naked puts with a ~1/25 risk of ruin to earn ~4% return. Therefore my fund consistently makes 4% over the market index, except for 1/25 years when it explodes and loses everything. Because the volatility is low, my sharpe ratio is good (until it explodes), correct?
Assuming it can stay in business >10-15 years won't I be a billionaire hedge fund manager by then and then change to a low risk strategy that only makes 1-2% more than market index with very low risk of ruin and just let my investors lose interest and quit the fund over the next decade while I continue to earn fees from them?
Anything that's both simple and mechanical is gonna have problems attracting investment. The guys you're talking to are gonna have problems justifying giving you 2/20 for buying a fund and selling options.
Or should. I've met a lot of investors who didn't ask the right questions.
Regarding the Sharpe, if they know what they're doing they're not just using the textbook version either. There's a paper by Andrew Lo about it, well worth a read, not terribly complex math.
https://www.researchgate.net/publication/228139699_The_Stati...
Do hedge fund investors keep an eye on whether you do what you say? How did Bernie Madoff go for so long if that's the case?
Of course the mechanism is simple and mechanical, but that isn't how you'd market it to investors.
I'll go read the Lo paper...
Madoff was the cause of all the due diligence, though I'd say Europe was a bit different from the US at the time.