Did you miss the point that this is more a satirical commentary about hedge funds (with some genuine information for the curious thrown in) rather than a serious how-to guide?
I didn't miss that point - but given that I had actual interest in how Hedge Funds start (as I believe most do), I was pretty let down when the article decided to go the humorous route. That, and it wasn't that humorous given my first expectation.
- A long & phenomenal track record of making a LOT of money trading for big name firms, ideally in a new or "hot" market
- Have clout and a great reputation in the city or on wallstreet, pref both
- Have lots of "ins" with big fund and asset managers who can connect you to people who have a $100m to invest.
I think the internet is helping change how hedge funds are started and people are hired, possibly for the better.
I'll give a couple observations:
1. It's becoming easier to find people with good track records.
No, I am not talking about KaChing or Covestor. There are actually two sites that exist where you can apply for entry. They are heavily populated by people who already work at hedge funds, so the process is pretty rigorous. One is SumZero operated by Divya Narendra (the guy who sued Zuckerberg), the other is VIC run by Joel Greenblatt (runs Gotham Capital, professor at Columbia).
In these sites, you post investment ideas which are then rated by the community. Because the community consists mostly of hedge fund analysts, it is pretty tough to get a good rating. But for those that do, it becomes easier to get jobs or raise capital. Greenblatt in particular uses his site to identify talent and in the past has seeded members (Michael Burry is one of them). In general, the sites help in networking which is the key (IMO) to landing a HF job or raising capital.
2. Blogs and an online presence are helping connect inexperienced students of investing with hedge fund managers/wealthy people.
I know a few people who started blogs where they posted investment ideas and news, and then went on to use their online presence to network in real life.
One of these people attracted $1M in seed funding from a well known investor, who then would routinely introduce him to other businessmen/wealthy individuals and helped raise capital. This was a kid that managed to start a $15M fund straight out of undergrad. A couple of others followed a similar path. Started a blog > used it to network > wrote and published books > networked some more and eventually raised capital to start small funds.
I also think some of the barriers to entry in the HF biz are coming down, a little bit. I had 3 interviews last week that all came as a result of having an investment blog. It's interesting because most of the people at these firms have had years of experience working at investment banks and graduated from ivy league schools (both of which I lack).
3. It's becoming easier to market yourself/your fund.
I see a lot of young/new fund managers offer to do interviews for blogs where they go into their investment process and how they think about markets, plus a few past and current ideas. These interviews work as wonderful marketing tools.
Some funds will also leak their investment letters to bloggers which will contain all sorts of returns data and more about their process. This is kind of a sketchy area because you really are not supposed to be advertising returns to the public. Usually what happens is, the letters stay up for a while and then are taken down after a period of time.
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Now, the people I've seen that take this path generally start small funds in the single to double digit millions. They all have offices they rent and they take a very small personal salary. But after a year or two of good returns, it's been pretty easy for them to scale up. One has went from $5M in AUM to $50M in just a few years.
I'm the technical guy behind SumZero and I'd have to say that your comments are spot on. It can be very difficult to get a good rating on the site, those ideas that do tend to be exceptional and get a significant amount of attention.
Also, and sorry for the plug, but I think it is relevant here. If you are interested in seeing the quality of ideas that come through SumZero you should sign up for our individual investor mailing list - http://sumzero.com/retail/users. Each week we send out a top idea to the members on the list. edit: There are some sample ideas on that page.
"There are actually two sites that exist where you can apply for entry. They are heavily populated by people who already work at hedge funds, so the process is pretty rigorous."
Here's an idea: let HN users above a threshold post ideas into the site. I recall hedge funds investing in startups.
http://www.hackernewsers.com has already devised a way to verify its accounts against underlying HN accounts. Users can also link to a Stack Overflow account, and in theory users should be able to link to freelancer sites for gathering metrics on a user.
I'd have a way whereby hackers can take a YC application form and submit it to sumzero users: either all, a named list, or upon request. Have a way where feedback can be given as well. If not the YC application form, then they can pick from say 5 different submission forms, all varying in detail and types of information submitted.
The biggest difference between VIC and SZ is that VIC requires members to stay anonymous whereas SZ posts your full name and where you work whenever you post an idea. You can often figure out the identity of a VIC member because you'll see them post the exact same idea on SumZero at the same time. So that's eroded a bit of the anonymity.
Some people disagree with the lack of anonymity, they think that without it people will be influenced when it comes to rate ideas. It's been my experience so far that this is actually not the case. Well rated ideas mostly get there on their own merit.
Great insights, thanks! What I personally struggle with is learning all the necessary knowledge and lingo, coming from a different field - it's so much harder to even get to the point where you might come up with an investment idea of your own when you're not doing it professionally (yet).
On sites like VIC, you can grab a guest account where you see ideas that are 45 days old. SumZero also has their weekly idea e-mail which Conor mentioned above. From there, I think you can get a really good understanding of how to lay out your investment thesis and what kinds of factors are relevant.
I spent a good amount of time reverse engineering ideas on VIC before submitting my own. You'll pick up all kinds of relevant metrics/industry lingo by doing that.
> you post investment ideas which are then rated by the community. Because the community consists mostly of hedge fund analysts
With the premise that I know pretty much zero about that industry, posting good ideas to people with the talent and connections to execute them seems like a good way to get ripped off. What's the "yeah, however ..." or "well, in reality ..." ?
Most of the time people post ideas after they've invested in them. So if the idea is for stock X and you believe it is worth $20 but it only trades at $10, having your argument get sent out to market participants who might have more capital than you is beneficial. You might make them aware of something they missed and bring attention to the company -- which could push the stock price up as more people catch on. That's beneficial to you.
Since sites like SumZero and VIC have a ton of buyside members, which is a rather small community of people who spend a ton of time talking to each other, it's pretty unlikely someone is going to get away with stealing your idea and claiming it as their own. They will probably get called out on it.
The other benefit to posting ideas is you can get criticism and see if your logic is flawed or maybe that you missed something in your analysis.
I will always remember an idea posted on VIC by a guy who ran about $400M in assets at the time. This was in 2007 and it was for a financial company. A few commenters asked questions relating to the company's ability to accurately estimate customer default rates. Rather than defend his thesis, he simply said they should move on because apparently they aren't interested in the company. What happened? Management at the company did incorrectly estimate loss rates and as a result the company crashed. It dropped ~80% and this was close to 10% of that fund manager's portfolio.
This makes a lot of sense. Investing seems to be a specialized skill, and finding talent isn't the same as hiring "generally bright people" (the top ivy league kids).
I think I'm paraphrasing Burry, who said if any one school had figured out how to pump out great investors, it would be the most expensive school in the world.
I really hope other industries consider this type of approach, cherry picking standout/non-traditional talent, that independently build some type of track record. Actually, I believe YouTube eventually hired the student who created instant, so it might already be happening.
Do you know how things look on the operational side? For a fund with $1M AUM, how much of the costs are legal or for getting the business up and running? It would be interesting to see a breakdown of the process involved in starting a hedge fund and how similar it might be to starting a startup YC-style.
It depends on how much back office work you want to do yourself. A lot of young fund managers get enamored by the prospect of being able to spend all their time looking for investments that they forget about the administrative work required to run a fund.
A friend runs a $3M fund where audit, legal, book-keeping/accounting costs about 0.8% of assets. This guy does A LOT of the back office work himself. You can actually hire other firms to do stuff like cut checks, client contact, etc. It just raises your costs.
Also, what some young guys will do is sell a percentage of the hedge fund business up front, in order to secure capital that will pay for initial start up costs, compliance, a living salary for the first year. So maybe you will sell 20-30% of equity in the fund up front to get that.
What interesting little tid-bits you've dropped in this comment. I wonder, could you follow up with a more full-fledged article? I don't see your blog linked to your account on here but I'd love to read something like this.
So when you talk about the ideas posted to these sites are they the type of ideas that would fall under trading or are they more of the idea that would fall under core concepts for a fund? Like anyone who hangs around HN I've got ideas for companies but I've also got ideas involving frameworks for the start-up industry much like a VC, neither of which are trades. Is this the kind of site to bounce off conceptual ideas?
For these sites, when I refer to ideas I mean investment ideas. These are straight up write ups on why you should invest in Company X or Y.
VIC recently added a discussion forum which leads to a bit of discussion on things that are maybe more conceptual, where you can ask questions and get advice.
SumZero has a private messaging system and I think it leads to a lot of contact between members privately, which enables people to find peers to seek advice from as well. Each member has a profile, so the profiles will tell you how long people have been in the business, who they previously worked for, what their areas of expertise are - that sort of thing.
It's a mostly useless list. The main problems are just like with startups - finding the right people, getting your product right and fundraising.
Amongst the questions not answered at all:
- How do you find good co-founders if you're not amongst the analyst legions at GS, MS or some other bank?
- How do you set your fund up, legally, technically, strategically, and foremost financially? Who funds you if every institutional investors wants either a prior track record or a list of credentials (partner/MD at mega-bank etc.)?
- How much money gets spent immediately on Bloomberg terminals, other database subscriptions etc?
- And: How do you make money? How do you go about executing an idea?
After reading "The Big Short" and "The Quants" and having worked on the extreme periphery of investment banking I am also moderately interested in how these folks actually get started.
I like how he described raising money for equity as "one step up from human trafficking... they try to own part of you." A different view on a process that's totally normal in the startup world...
it's funny that the reward of starting a hedge fund is 'marry that yoga instructor'.
1. seems like a pretty indirect strategy for getting what you want.
2. quite an insult to the yoga teachers.
It's an insult that respected, powerful men want to risk half their net worth to marry someone? Take a look at the NYT wedding announcements some time, and note the facial expressions of everyone who is insulted in such a manner.
as far as your "indirect strategy" comment goes, this is something that i have been thinking about. on the one hand it's extremely inefficient to try to build great wealth in order to get a date; on the other hand, sublimated sex drive can be a powerful impetus... known colluder dave mcclure, for example, says that a good reason to start a startup is that "you can't get laid".
The author seems to think that financial reform has done anything to harm the ability of big banks to extract dollars from productive humans. It has not. Among other things, it has granted FOIA-immunity to the SEC, so that in addition to failing to regulate the industry, it can now ensure that nobody knows for certain that it fails to regulate the industry.
- Buy a flute
- Blow into one end
- Press the various buttons and levers
- Make sure you perform at least once at Carnegie Hall