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.
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.
“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).
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.
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?
One of the major trends in last two decades is increased correlation (especially during bear markets). No matter how you diversify the portfolio, it will correlate with others more. There is more correlation between individual assets and between different asset classes.
Between 1980-1999 the correlation between US and foreign stocks was 0.47 - 0.49. Between 2000-now its 0.88-0-89
Moving between stocks, bonds and alternatives produces declining value relative to the past. U.S stocks correlate more with international stocks, bonds correlate more with stocks, raw materials correlate more with the rest.
I think it's natural to expect less value from hedge fund strategies in general. Maybe private equity investing helps but how much?
The majority -- perhaps the vast majority -- of headge funds are long/short funds.
In the canonical example, if they think that Pepsi will perform well because of some new health products, then they will go long Pepsi and short Coke. The idea is that all the other events they haven't looked at: a crash, currency shifts, people decide sugar is bad for you, NYC soda ban etc will hit both companies equally hard. The only thing they want to bet on is their single hypothesis.
They can't always do this cleanly, but to the extent they can, they diminish some of the risk around the correlation of asset classes.
Interesting point on why increased correlation hurts traditional stock pickers and market timers. Does this make a case for quantitative hedge funds doing better?
Quant funds are in a good position to put on a large basket of long and short positions (with leverage), and therefore can separate individual stocks from their confounding market factors. Of course, it presumes the fund has a strategy giving them enough conviction to bet on individual stocks / securities.
Former hedge fund manager here. This never gets mentioned, but there are fewer publicly traded companies than there were in the late 1980s. There’s more money and fewer opportunities for a hedge fund to differentiate, so it’s harder to get outsized returns without excessive risk. Meanwhile, the finance industry has convinced people it’s “impossible” to beat the index in the long run.
> Meanwhile, the finance industry has convinced people it’s “impossible” to beat the index in the long run.
Did the finance industry do that? All I see when I look at the finance industry is people desperately trying to convince me that I can beat the index if I give them lots of money. I think what convinced people it’s impossible to beat the index in the long run is the continuous failure of active funds to do that.
Thank you ETFs. On the other hand, in finance and investing, what is old is new. I don't doubt that hedge funds will have a resurgence or that active money management will find footholds in different vehicles. For example actively managed ETFs.
Low vol and rate environment is the primary cause which kinda drives your first two points. Investors aren't allocating as much to alts and what they are is shifting more to PE. PE did well over the last crisis because of long lockups and mark to model vs mark to market. Any hedge fund that invests in public securities doesn't have that luxury to tread water.
As far as your first point goes, I don't think investors are getting more savvy but they are under pressure due to bad performance and high fees associated with some of the funds they invested in. Generic long/short equity funds are more or less able to replicate in-house and some are trying out ETFs to sub for other strategies but none of these have the same return profile as the actual strategies.
Looks very iffy to me. Googling survivorship bias "The flagship investable HFRX Global Hedge Fund Index, for example, has undershot the non-investable HFRI Fund Weighted Composite Index every year since 2003, by an average of 560 basis points." https://www.ft.com/content/16e4fb60-46ad-11e0-967a-00144feab...
knocking that off the 10x 20 year return shown for the HFRI would reduce that to a 3.6x return
How it works is a fund company launches the super fund and the wow fund. Then the super fund goes up 20%, the wow down 20%, then as a holder of the wow fund you get a letter "the wow has been discontinued and merged with the super fund" Then the company claims all its funds are up 20%. An awful lot of them pull that kind of thing and you have to correct for it to get useful stats.
I would hope that Buffet bet is solely responsible for this trend but people are not that smart to accept actual proof that something that they believed in for so many years does nothing beneficial or even does harm.
I always figured hedge funds thrived in more volatile situations. The years of consistent-yet "boring" growth that we have seen since the recession is not a fertile environment for alternative strategies.
Some play volatility. It’s also a game of betting against the trend. When the trend goes in one direction for long enough, you get burned taking the other side.
I think maybe you don't know what a hedge fund is? Because your question doesn't really make any sense?
Anyway, the answer is: hedge funds want to take money for 2 reasons:
1. The bigger the hedge fund, the more famous the manager is. They get to meet Presidents, talk on CNN, get invited to Davos, and other famous people perks. You get to say you "won".
2. The hedge fund charges fees based on the assets under management; the more money you take in, the more money you personally make.
>Snapchat survived without taking investment from my understanding.
Ignoring the cost of development (which is reasonable given how simple the app was when it launched), Snapchat has incredibly high infrastructure costs. It runs on google cloud (you pay a huge markup for cloud services - it's just often worth it because you can scale up and scale down to match actual need but I assure you snapchat was not scaling down) and is media heavy (read high bandwidth bills).
Snapchat received $2.65 billion in investment pre-ipo!!! $2.65 billion!
[+] [-] lordnacho|7 years ago|reply
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.
[+] [-] yellowstuff|7 years ago|reply
[+] [-] alanmeaney|7 years ago|reply
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).
[+] [-] osrec|7 years ago|reply
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.
[+] [-] jason_slack|7 years ago|reply
[+] [-] whatok|7 years ago|reply
[+] [-] princetontiger|7 years ago|reply
[deleted]
[+] [-] konschubert|7 years ago|reply
Rich kids
[+] [-] nabla9|7 years ago|reply
Between 1980-1999 the correlation between US and foreign stocks was 0.47 - 0.49. Between 2000-now its 0.88-0-89
Moving between stocks, bonds and alternatives produces declining value relative to the past. U.S stocks correlate more with international stocks, bonds correlate more with stocks, raw materials correlate more with the rest.
I think it's natural to expect less value from hedge fund strategies in general. Maybe private equity investing helps but how much?
[+] [-] inputcoffee|7 years ago|reply
In the canonical example, if they think that Pepsi will perform well because of some new health products, then they will go long Pepsi and short Coke. The idea is that all the other events they haven't looked at: a crash, currency shifts, people decide sugar is bad for you, NYC soda ban etc will hit both companies equally hard. The only thing they want to bet on is their single hypothesis.
They can't always do this cleanly, but to the extent they can, they diminish some of the risk around the correlation of asset classes.
[+] [-] leelin|7 years ago|reply
Quant funds are in a good position to put on a large basket of long and short positions (with leverage), and therefore can separate individual stocks from their confounding market factors. Of course, it presumes the fund has a strategy giving them enough conviction to bet on individual stocks / securities.
[+] [-] village-idiot|7 years ago|reply
[+] [-] dollar|7 years ago|reply
Former hedge fund manager here. This never gets mentioned, but there are fewer publicly traded companies than there were in the late 1980s. There’s more money and fewer opportunities for a hedge fund to differentiate, so it’s harder to get outsized returns without excessive risk. Meanwhile, the finance industry has convinced people it’s “impossible” to beat the index in the long run.
[+] [-] Analemma_|7 years ago|reply
Did the finance industry do that? All I see when I look at the finance industry is people desperately trying to convince me that I can beat the index if I give them lots of money. I think what convinced people it’s impossible to beat the index in the long run is the continuous failure of active funds to do that.
[+] [-] whatok|7 years ago|reply
[+] [-] anonu|7 years ago|reply
[+] [-] wetpaws|7 years ago|reply
[+] [-] mathattack|7 years ago|reply
- The buyers are getting more savvy and don’t want to pay high fees for whatbthe can do in house.
- More high risk money is going to private securities.
- For some strategies (derivatives) there are less people to trade with. (Fewer suckers in the game)
- Fewer smart people are going into finance. (I’m not sure this has gone on long enough to impact hedge fund startups)
[+] [-] whatok|7 years ago|reply
As far as your first point goes, I don't think investors are getting more savvy but they are under pressure due to bad performance and high fees associated with some of the funds they invested in. Generic long/short equity funds are more or less able to replicate in-house and some are trying out ETFs to sub for other strategies but none of these have the same return profile as the actual strategies.
[+] [-] tim333|7 years ago|reply
Looks very iffy to me. Googling survivorship bias "The flagship investable HFRX Global Hedge Fund Index, for example, has undershot the non-investable HFRI Fund Weighted Composite Index every year since 2003, by an average of 560 basis points." https://www.ft.com/content/16e4fb60-46ad-11e0-967a-00144feab...
knocking that off the 10x 20 year return shown for the HFRI would reduce that to a 3.6x return
How it works is a fund company launches the super fund and the wow fund. Then the super fund goes up 20%, the wow down 20%, then as a holder of the wow fund you get a letter "the wow has been discontinued and merged with the super fund" Then the company claims all its funds are up 20%. An awful lot of them pull that kind of thing and you have to correct for it to get useful stats.
[+] [-] inputcoffee|7 years ago|reply
Or the worst because there is little opportunity?
[+] [-] scotty79|7 years ago|reply
[+] [-] tim333|7 years ago|reply
[+] [-] schnevets|7 years ago|reply
[+] [-] mathattack|7 years ago|reply
[+] [-] MrEfficiency|7 years ago|reply
I dont quite understand what would encourage someone to take outside investment money unless its necessary to build production.
Maybe I'm so small time, I just dont understand, but Snapchat survived without taking investment from my understanding.
[+] [-] freddie_mercury|7 years ago|reply
Anyway, the answer is: hedge funds want to take money for 2 reasons:
1. The bigger the hedge fund, the more famous the manager is. They get to meet Presidents, talk on CNN, get invited to Davos, and other famous people perks. You get to say you "won". 2. The hedge fund charges fees based on the assets under management; the more money you take in, the more money you personally make.
[+] [-] billmalarky|7 years ago|reply
Ignoring the cost of development (which is reasonable given how simple the app was when it launched), Snapchat has incredibly high infrastructure costs. It runs on google cloud (you pay a huge markup for cloud services - it's just often worth it because you can scale up and scale down to match actual need but I assure you snapchat was not scaling down) and is media heavy (read high bandwidth bills).
Snapchat received $2.65 billion in investment pre-ipo!!! $2.65 billion!
https://www.crunchbase.com/organization/snapchat#section-ipo...