Friday, November 23, 2007

Starting a Hedge Fund

There is four part article starting with the above.

Important points

the first place to start is to speak with a qualified attorney with experience in creating hedge fund entities and preparing the necessary documentation for a fund.

expect to spend in excess of $30,000 on up front legal costs.

In order to secure a reputable prime broker and avoid burdening the fund with an outsized expense load, $5 million has generally been a bare minimum number.

3c1 accreditation standards are more lenient for investors ($1 million of net worth or a previous 2 years compensation of $200,000 for each year).

It has generally been feasible for a start up manager to initially employ a 3c1 structure, and if the 99 slots become fully utilized, the manager can subsequently launch a 3c7 vehicle for qualified purchasers.

an administrator provides fund accounting, NAV calculation, corporate secretary services, investor relations, subscription and redemption transactions, record keeping, documentation preparation, outsourced board representation and other services.

Prime brokers provide a very important clearing, netting, and consolidated reported function to hedge fund managers. Prime brokers also offer leverage facilities and securities lending on terms that are generally not obtainable via retail brokers.

Outside of a retainer, the industry average fee charged by marketing agents is 20% of the fees attributable to any capital raised by the marketer. If the marketer requires a higher percentage, make sure they are able to justify it.


By Timothy Sykes, a hedge fund manager, star of the reality show Wall Street Warriors, and author of the upcoming book, "An American Hedge Fund" He can be reached at

Important Points

The consultant wanted my returns audited to help me raise capital in exchange for a "slight" fee. I found a local accountant familiar with stock trading and spent a college semester’s tuition to have my tens of thousands of trades audited.

The numbers looked too good. But. ridiculous returns might be a problem.

Lesson #1:
If you consistently beat the market, you will face endless questions about whether or not you are a fraud.

I decided to form my own fund and take my chances raising capital. Still I was in college

I researched the industry nonstop for a few weeks and discovered the startup costs to be surprisingly modest.

This was before the emergence of discount hedge fund startup shops. I found the template for offering documents and lawyer fees could exceed $75,000. Since then, hedge fund boutiques had appeared, offering their administrative and startup services so startup costs did not exceed $10,000.

I chose the second least expensive boutique I could find and went along with whatever my fund administrator said because he had set up dozens of firms over the past few years.

Lesson #2:
Everything takes much more time in the real business world compared to the trading world.

I had been distracted by my quest for finding outside investors and creating all my companies that my trading had suffered as a result. Successful trading is all about focus, discipline and concentration and these lessons had been consumed by my ambition and greed. I had taken some rather stupid losses and performance deteriorated.

Lesson #3:
Focus on trading first; never schedule investor meetings during market hours.

Meanwhile my fund administrator convinced me to switch brokers because my trusty online discount brokerages were simply not used in the hedge fund world. This newly recommended brokerage did not have any electronic trading platform (I was told it would be ready within weeks) and the traders executing my orders gave me some of the worst executions I had ever seen.

I switched to yet another recommended brokerage that had online trading software and I became friends with one trader who expertly executed my larger orders. But commissions were high

A popular industry commentator referred to me another broker that was perfect for short selling. This new broker’s online software, cost, and short-selling list blew away the competition so, I dropped my other brokers and focused on this new guy.

Lesson #4:
Do not feel bad about changing brokers if they are ripping you and your clients off. They are not girlfriends; there is always somebody cheaper and better out there.

Every fund manager should price as many brokers as possible that fit the fund’s strategy.

Within a few months with my quality broker, my performance moved back to the range of my previous years, crushing the overall market.

After months of solid performance that consistently beat the market, I still had yet to raise much outside capital.
I realize now that it will take a lot longer than I originally anticipated.

But I have made so much money in the past(I make up a large portion of my fund) and I am confident in my skill as a trader and that is what gives me the faith to go forward. I can probably go on forever even without many outside investors.

Lesson #5:
The larger the ‘nest egg’(own capital) stake the manager has, with the initial startup--the better.

Lesson #6:
Focus on what works for you and do not change to accommodate others.

Lesson #7:
Raising money does not come easily for a startup manager.

My broker came with an offer from a fund of funds, but said he could only transfer the funds to me if the commissions on trades for this new investment were quintuple my normal rate! I felt my heart sink. I anticipated compensating my broker for this capital introduction, but quintuple fees with no hope for a reduction over time over the lifetime of the investment seemed somewhat ridiculous. I said no.

Lesson #8:

With cap intro, there’s always a catch.

My fund is listed on many hedge fund databases, but and have led to the most information requests by far. After a year of listing my fund, I have had over a thousand hits on my fund’s web pages. In fact, many third party marketers have contacted me through these websites. I have a premium listing on that costs the equivalent of a semester of college.

Some third party marketing firms have also contacted me. but wanted 50% of the incentive fee I’d receive on any profits on the investment. Another wanted 30% of the incentive fee. With those kinds of figures, it would take me too long to make it worth my effort even if my returns continued to trample the market. I wanted to pay an upfront finders’ fee to them, but they knew that was not where the big money was. I understood their dilemma; why should they risk their entire reputation on a startup fund with only the chance for a small payoff?

Lesson #9:

This industry is full of frauds and con artists.

Are you seeing the pattern here yet? This industry is tough for the little guy because there are many promises and very little follow through. Not being able to advertise is very difficult and you must rely on contacts and networking for capital introductions.

I chose to focus on what I do best and be content to make some decent money while waiting for more opportunities. I figure there will always be people who want to raise money for me and they will only multiply with time, especially if I keep outperforming the market. I do not want to compromise my trading and investing style and I accept the fact that it might take years for investors to come. Only performance and patience will create the path of success—a journey I am willing to take.

Lesson #10:

Results are much slower in the real world compared to the trading world.

Article Source:

I the blog writer like the lesson #10. We have to choose a path and focus on it. While we may read about somebody who made it big in a year, many may take years to succeed in their ventures and many more may not succeed at all. That is why it called a venture shortened form of adventure.

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