I work with a lot of start-up hedge funds and can tell you that the failure rate is high. There is somewhat of a changing landscape in fees that is causing new funds to have shorter, or totally eliminating, fund lockups. This obviously leads to the inevitable where skittish investors pull their money at the first bad turn.

From my limited experience, the most successful funds are spin-offs of other major funds who start with > 100 mm AUM.

I think people vastly underestimate the effort and costs that goes into launching a legitimate fund. Once you go institutional, potential investors will come in with very extensive and detailed requirements that range anywhere from maximum commissions paid to what kind of technology provider you use for trading and compliance systems. Getting out ahead of these things so that the funding process is smoother for your investors has a substantial upfront cost.

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Posted by Doc Fenton

New York, NY

Member since Feb 2007

52698 posts

Posted on 9/26/14 at 1:48 am to Chris Farley

quote:
Chris Farley

Thank you! This is just the type of stuff I was hoping to hear, although obviously a lot of this thread is self-study and me getting thoughts in my head into concrete form.

If you don't mind answering, I have a few follow-up questions to that:

(1) Can you tell me anything about the failure rate at certain levels of starting capital? For example, is the failure rate above 50% for those who start with $20 million in AUM? Does it drop to a different level for those funds that start out with $50 million AUM? What's typical for startups?

... and here is the biggest question really...

(2) For someone who goes to work for a major hedge fund, how difficult is it to get sponsored to be a general partner of a spin-off?

and finally...

(3) Could you give a rough ballpark estimate for what the substantial upfront cost is for getting out in front of the process for attracting institutional capital? For example, say you manage to get a startup hedge fund off the ground with $15 million in AUM--how much money would it take to start getting your hedge fund ready to take the next step to attract more institutional investors?