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How Does One Start A Hedge-Fund?

WheelsRCool

Contributor
Aug 12, 2007
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Hey all, this is something that has really peaked my interest as of late.

I read this article: http://www.businessweek.com/magazine/content/05_40/b3953110.htm

It's all about Cerberus Capital Management and how the guy started it at 32, and built it up by buying broken-down companies and re-building them, and he hires top CEOs to run them.

It says in the article this is a "new" way of doing it or something, anyways, this is an idea I've had for a while though, I never realized it was a hedge-fund though.

But ever since reading about it, I've been fascinated about this company and this guy, he is fast becoming a role-model in certain ways for me.

The thing I'm wondering is, how exactly does one start a hedge-fund? Like do you need experience in trading or anything to do it...?

I am not looking at a hedge-fund as a method for getting rich really, I mean that's a nice side-effect, but just the whole idea of buying companies and re-building them sounds really fascinating to me.

I also really love entrepreneurship and venture capitalism too, but the idea of eventually starting a hedge-fund or private equity firm, whatever they are called (you can see I have a lot to learn still!), that purchases companies to re-build just sounds amazingly awesome.

I Googled it, but all I keep seeing is all this stuff about how to start a hedge-fund to "get rich quick" and blah blah blah but that's not what I'm after, I just really am fascinated with this, and I am especially fascinated since this is an idea I've had for awhile, and then I read that this guy is doing it and it is apparently new...!?

Ever since I read about this company buying Chrysler I've thought it was awesome, however there are skeptics too of the company so who knows.

I am also fascinated by James Simons of Renaissance Technologies, he is a former math professor who started his hedge fund in 1982 at 43 years-old, but I read he uses a lot of computers and sophisticated algorithms for investing, etc...which is really interesting. I am really getting fascinated by these hedge-fund guys!

Any help appreciated on this industry.
 

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kurtyordy

Bronze Contributor
Aug 28, 2007
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I did a bit of research on this awhile back.

From what I remember, there are many regulations. Basically you have to have a track record before you can promote. So the sites I read recommended starting a company with your own money and get it with a track record so you can put out a prospectus for potential investors.

If I think of more I will post more.
 
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WheelsRCool

Contributor
Aug 12, 2007
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Kurt, when you say "start a company and get it with a track record," do you mean start a company that develops a track record of success in its industry...?

Also, JScott thanks for the link.
 

Analyzer

Contributor
Aug 31, 2007
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You should get the book Hedgehogging by Barton Biggs.

I've read it last summer and he gives you a detailed view of how he started his hedge fund.

The hedge fund scene is a extremely competitive world with some of the most intense people in the world working around the clock to make sure they are the best.

The main difficulty is to get the money from investors. You'll need some sort of track record if you're expecting people to invest.

The other thing that kills a lot of hedge funds is redemptions, if you start to lose money a lot of people will pull their money from the fund forcing you to sell your positions at what will tipically be the worst posible time.


From Amazon:

Praise for HedgeHogging

"Barton Biggs writes about markets with greater style, clarity, and insight than any other observer of the Wall Street scene. His new book, Hedgehogging, entertains immensely even as it provides countless valuable lessons regarding hedge funds and the investment world they inhabit."
—David F. Swensen, Chief Investment Officer, Yale University

"Since the glory days of the tech bubble, investing has become a perilous enterprise. Not the least for those running money in the proliferating hedge fund business. In Hedgehogging, Biggs offers a fascinating glimpse behind the scenes at the personalities and egos making decisions about the enormous sums being dumped en masse into these funds. This book is great. It's full of personal anecdotes and critical insights from an insider's insider. You should not even consider giving money to anyone on Wall Street ever again until you've read this book."
—Addison Wiggin, Agora Financial LLC, author of the New York Times bestseller, The Demise of the Dollar and coauthor of Empire of Debt
Rare is the opportunity to chat with a legendary figure and hear the unvarnished truth about what really goes on behind the scenes. Hedgehogging represents just such an opportunity, allowing you to step inside the world of Wall Street with Barton Biggs as he discusses investing in general, hedge funds in particular, and how he has learned to find and profit from the best moneymaking opportunities in an eat-what-you-kill, cutthroat investment world.
 

kurtyordy

Bronze Contributor
Aug 28, 2007
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What I mean is start a corp with your funds called wheelsrcool hedgefund. Begin trading your funds, get a track record so that perspective investers can say "holy crap, he had a 3000% return every year for the past three years. I want him to manage my money." or something like that.
 
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WheelsRCool

Contributor
Aug 12, 2007
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Guys, again thanks for the info!

After doing more research, I think I am not quite thinking of a hedge-fund per se, but a private equity firm, which is very similar, but a bit different.

However, this leads to one other question...I was Googling and checking Amazon for private equity books, but I only see books on investing in hedge funds, investing in private equity, and a few on how to start your own hedge fund...would these ones detailing how to start one's own hedge fund also apply to private equity firms since those are very similar?
 

bpk1

New Contributor
Jan 13, 2008
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That's what I was planning to do once I graduate from college. For people to invest they must be considered accredited. In the state of New York(and I believe across the country), they must make at least $200,000 per year, with a guaranteed salary of at least that the following year, or they must have a net worth of at least 1 Million. There are some exceptions I think, such as inheriances and such. They must be willing to give at least $25,000 initially. Hedge funds are generally underlegislated, which may change in the near future. Most take a percentage of the amount invested as a management fee(1-4%), and then take a percentage of the profits(as much as 55% in some cases). This though usually makes hedge fund managers to take higher risks to make more $$ for themselves. They trade in derivatives, many short stocks, and somtimes in futures and leverage. That's the simple version.
 
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WheelsRCool

Contributor
Aug 12, 2007
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Here's another article in the same vain:

http://www.businessweek.com/magazine/content/07_44/b4056067.htm

It's about Neil Cole (Kenneth Cole's brother) who buys and revives downtrodden brands. Very good article...
Good article; is Iconix then a private equity fund that focuses strictly on buying downtrodden brands, then re-builds them, where one like Cerberus focuses on buying all sorts of companies, or are there other differences between the two..?
 
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WheelsRCool

Contributor
Aug 12, 2007
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What are LBOs...? Also, I have read Cerberus is very secret, and many wonder what exactly is financials are, but I hope it is a good company as they own Chrysler, one of my favorite car companies :)

EDIT: LBOs = Leveraged Buy-Out

Hey, speaking of, if a private equity firm goes IPO, are the companies it still owns "privately" owned...? Would be it be the firms are privately-owned by a publicly-owned firm...?
 
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WheelsRCool

Contributor
Aug 12, 2007
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Taking public companies private, trying to manage them well and then retaking them public isn't really new..........
Yeah, I read it's been around for a long-time, just it gets more media attention now.

But this stuff seems to go up and down anyhow, great times of prosperity, then a bubble or something bursts, there is some downtime, then it starts up again, etc...
 

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WheelsRCool

Contributor
Aug 12, 2007
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So I'm reading the book Hedgehogging and he mentions about people who start hedge funds and fail, who were then "finished" in the hedge-fund industry. My question is, if one starts such a fund and fails, would they never be able to start such a fund again (unless they could provide all the initial cash themselves) because they would have a bad reputation and people wouldn't want to invest with them? They would only be able to start again if they could provide the initial money themselves and then invest successfully, and then start attracting investors?
 

imirza

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Jul 29, 2007
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A lot of hedge funds were started up using the managers capital and friends and family capital. Pershing Square is a good example and so is SAC Capital. Both started of with $5 million or less and are now multi billion dollar funds. If you can't get family and friends to give you money to manage you are unlikely to get money from investors. Investors also care about consistency. If you have incredible returns of 3000% you are unlikely to raise money either simply because of the statistically improbability of you repeating that in the future. Investors like seeing sold 20-30% returns.

The really good hedge funds are run by multiple people. You have one guy who specializes in raising capital and dealing with investors and then you have the manager who runs strategy , trading etc. Hedge Hunters is a good read to learn more about Hedge Funds. [ame="http://www.amazon.com/Hedge-Hunters-Masters-Rewards-Reckoning/dp/1576602451/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1201458778&sr=8-1"]Amazon.com: Hedge Hunters: Hedge Fund Masters on the Rewards, the Risk, and the Reckoning: Books: Katherine Burton[/ame]

You may also want to check this out to get started on setting up a hedge fund http://www.turnkeyhedgefunds.com/
 
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WheelsRCool

Contributor
Aug 12, 2007
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Do you absoltuely have to get money from friends and family...? I ask because I know family is a complete no-no for me (my family is one of those you don't associate with!).

If/When I started, it would be a combo private equity/hedge fund, but that is a while into the future.
 

bpk1

New Contributor
Jan 13, 2008
47
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You don't have to get money from family. It's usually easier to get family and friends to invest in your fund, than it is to get accredited investors who don't know you very well. Family and friends usually will entrust more in you, than strangers would. Also putting in some of your personal funds may help. How far in the future do you want to start the fund?
 

imirza

Contributor
Jul 29, 2007
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WheelsRCool start your fund today. Set up an LLC and start scouting out opportunities.
If this is what you really want to do then start it now. The quicker you start building a track record the better even if you don't currently have money.
 
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WheelsRCool

Contributor
Aug 12, 2007
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Well right now I am working on business as I want to become an entrepreneur, and build at least a small fortune first, then I can contribute some of that to the fund, but also I just love entrepreneurship as well.

I also have read that private equity firms (and to an extent hedge-funds) specialize in re-building companies (which is an idea I really like); I figure it would be good experience to build up a company first to gain the experience of day-to-day management problems and the like in the company, so I would have better knowledge to assign managers and so forth.

I couldn't start the fund now as I have zero investing knowledge at the moment, going to be starting to study it soon.
 

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