I received a nice comment from a reader who continues to want information on the hedge fund space and how to seed your hedge fund. Thus I will put together a series of posts on the topic for my reader's interest.
Indeed there are hundreds if not thousands of prospective hedge fund managers that are looking to get their fund seeded and get some investors. And most if not all will not have the pedigree or connections to get big dollars from a select few investors.
I continue to believe that there are generally two or three paths to starting your hedge fund. The first is having that pedigree and/or being in a lift-out situation with a strong track record and connections to investors in your old fund or even sponsorship from your old manager. The second is starting small and building that track record over time. The third is treating your fund as a startup company and actually going out and raising funds and selling equity in the underlying manager.
I'm not going to talk about the first method since I've addressed that in previous posts. The second and third paths are the interesting ones. They are the ones that are less glamorous. They are the ones that take time. They are the ones that depend on manager persistence.
The economics of a hedge fund really only start to make sense at the $50 mm and above level. At that level you can start to hire ancillary fundraising staff and really start to get a machine going. Under that amount you are bootstrapping and anybody involved in the fund is going to have to do a little bit of everything. Thus, how do you get to that level of assets under management that is scaleable?
Well, if you can't put together a few hundred thousand or even a million bucks then you probably have no business trying to be in the hedge fund business. When people say "the rich get richer" it is sad but true. Even in a true merit-based fundraising system, it would be unlikely to find someone with adequate financial experience and trading experience to be able to run a fund without having the economic ability to put together a million dollars either from friends, family, co-workers, or investors. As I've said before, running a hedge fund is really running a business. All business is based on sales. In the hedge fund business you need to be able to sell yourself and your fund to investors. If you can't sell the promise and hope of great returns then you definitely should not try to run a hedge fund.
