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TOPIC: Hedge Funds

Hedge Funds 8 months 2 days ago #1

  • RobG
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A lot has been said recently about the state of hedge funds, would it make sense to have someone like Stan Druckenmiller on your list
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Hedge Funds 8 months 2 days ago #2

  • tankumo
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Erick, can you also bring in George Soros?

And also, how much do you need to start a hedge fund?

Thanks.
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Hedge Funds 8 months 1 day ago #5

  • ErikTownsend
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@tankumo

That's a really hard question because "hedge fund" means a lot of things to different people. In the mainstream NYC world of money management, they say you need a bare minimum of $1 million seed money to launch your hedge fund. But that's based on the proposition of opening an office in Manhattan, hiring an office staff, and generally having an "infrastructure".

From a more "bare bones" perspective, it costs about $35k to do all the required legal documents to organize a basic, U.S.-domiciled hedge fund. But that number can quickly double or triple if you need a Master-Feeder (offshore) fund structure, offshore resident agents, etc. So an International HF is a lot more expensive to set up than a domestic one.

If you are running a one man shop out of your house and you just want to be legal, and you don't want to budget ANYTHING for overhead, marketing, etc., then I agree with @Loni that $40-50k is the right number. But again, that's just to set it up (doesn't include ongoing upkeep costs), and this is just the legal setup cost, before you worry about all the other costs inherent to launching a business.

From there, you still have to budget for administrator's fees, tax prep, and audit. All this stuff has a HF price tag on it. The tax return that the fund itself has to file is no more complex than a typlical personal return you could have prepared by H&R Block for $49. But it came from a hedge fund accounting firm with "pedigree", so it costs $5k bare minimum.

You MUST have an audit performed each year (mandatory if the fund is organized in U.S - I don't know about other jurisdictions). That's another $10k minimum, much more if you want a "pedigree name" audit firm, which can be important if marketing to institutional clients.

But you're coming at the question from what might be the wrong angle. You are asking start-up costs for the fund itself. The much more important hurdle is the question of AUM (how much money total does the fund manage for all investors?). You can't even open an institutional brokerage account with less than $5 million in most cases (Interactive Brokers is an exception). Generally speaking, $10mm is about as small as a HF can be and still make sense. Of course it's possible to spend $50k setting up a legal structure to manage a total of $100k in assets, but obviously that doesn't make much sense. $10mm of investment capital under management is about the minimum where the HF model just starts to make sense.

But to be considered by institutional investors, HF's need to be several hundred million, bare minimum. The reason is that institutions generally never want to be more than 10% of any one fund, but they also don't want to write a check smaller than $10mm for a single investment because they can't justify the due dilligence time required for a smaller investment. By implication, funds with less than $100mm in AUM cannot be considered.

Hope this helps,
Erik
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Hedge Funds 8 months 10 hours ago #6

  • tankumo
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Thank you gentlemen!

I am in Vancouver, I know there are lots of very rich Chinese investors, they don't know where to park their money, and they always looking for opportunity.

I wish they understand English so they can listen to this podcast.

But I also worried that their money source is not clean, and down the road it will bring problems.
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Hedge Funds 8 months 1 day ago #3

  • Loni
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Hi Tankumo,

Regarding the minimum amount to start a hedge fund:
I think you need to budget a minimum of $40-50K per annum for on going expenses for administrators, auditors, regulatory offices, other regulatory requirements even if you are going to trade yourself on your computer without any physical office costs. Plus there is the initial legal costs, bank, brokerage account openings, KYC stuff - say another $40-50K minimum start up costs (you can amortize the start up costs over 3-4 years).

Hence you need to gather an amount where such expenses can be paid without hurting the performance meaningfully. Plus of course, you need to determine how much you need to make as a minimum...
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Hedge Funds 8 months 1 day ago #4

  • ErikTownsend
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@RobG

Yes, in general one of my strong desires is to feature active hedge fund managers on the show as much as possible. Think of it as the podcast analogue to the Market Wizards books. An interview each week with the kind of guys that Schwager writes about in his books!

Problem is, those guys are busy and generally don't do anything unless something's in it for them. That's why we ask you when you register whether or not you're an accredited investor. We're hoping at some point to be able to reach out to a guy like Kyle Bass and say "Hey, we have two thousand accredited investors in our audience, dude. This is worth your time!". To a hedge fund manager, "accredited investor" is his customer base. Those guys have no reason to spend their time going on a retail podcast - there are no qualified leads listening. Our hope is that if we can show them we really DO have a lot of qualified leads (accredited investors in a position to invest in a hedge fund if they were particularly impressed with the manager in a MacroVoices interview).

So our hope is to some day be bringing you all the rock star HF managers - Kyle Bass, Carl Icahn, Bill Ackman if he hasn't blown himself up by then, etc.

We're still just getting started. At this point we don't have enough accredited investor registrations to want to call attention to the figure, but we're only two months old. Also, forum registrations are a very small % of overall unique downloads (our primary metric for show popularity). If you played some statistical games you could say that we can now project that we have over a thousand accredited investors listening because in reality we have a tenth that many, but only one tenth of the listeners register for the forums, so it all "balances out"... Problem is, the people we're talking about are pretty good at seeing through statistical deceptions, so I'd rather take the high road and just tell them the truth - how many of our registered users are accredited. We don't have enough yet to feel proud of the statistic, but we're still in our infancy.

As to Stan Druckenmiller and George Soros, they are both on our list and have been from day 1. But they are both in a special category we call "out of reach for now". We can't just call Stan Druckenmiller and say hey, we got a new podcast that's two whole months old and we think it's cool so you should drop what you are doing and give us an interview... When we get to the point that we can impress him with statistics about who's in our listener base, we'll make our move then.;

Thanks for the great suggestion, Rob!

Erik
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