- My Forums
- Tiger Rant
- LSU Recruiting
- SEC Rant
- Saints Talk
- Pelicans Talk
- More Sports Board
- Fantasy Sports
- Golf Board
- Soccer Board
- O-T Lounge
- Tech Board
- Home/Garden Board
- Outdoor Board
- Health/Fitness Board
- Movie/TV Board
- Book Board
- Music Board
- Political Talk
- Money Talk
- Fark Board
- Gaming Board
- Travel Board
- Food/Drink Board
- Ticket Exchange
- TD Help Board
Customize My Forums- View All Forums
- Show Left Links
- Topic Sort Options
- Trending Topics
- Recent Topics
- Active Topics
Started By
Message
re: Getting Past the Gate: Capital Introduction at Prime Brokerage Firms
Posted on 9/14/14 at 12:29 pm to Doc Fenton
Posted on 9/14/14 at 12:29 pm to Doc Fenton
Actually, I think I will go ahead and at least do a "Section A" for Part II this afternoon, because a big part of my whole premise for starting this thread is that learning how to get to the capital introduction stage will also help one get off the ground in the first place past the seed stage.
Maybe I'm putting the cart before the horse here--I don't know--but in any case, this would be the life cycle stages of development for an aspiring hedge fund.
II. STAGES OF HEDGE FUND DEVELOPMENT
Now I know that securing that initial investment capital will be the hardest part. This is where you need to tap into the following categories of potential investors: "Partners, Friends, Family, and Angels"; "High-Net-Worth Individuals" (HNWI); and "Seeders and Acceleration Capital."
So if you are a person without many connections to rich people with a lot of free money to invest, then it seems that it would be impossible to start up a hedge fund without actually having investing experience at a hedge fund. (Some academics have set up their own hedge funds based on academic theories and their own research, but I seem to remember reading that these don't have that good of a track record.)
So then the next question to ask would be this: Could a person, after just a year or two at a good hedge fund, manage to assemble a team together and make a pitch to investors to get a new hedge fund up and running off the ground? If a person did enough academic research on options pricing strategies for asset classes with peculiarly fat-tailed risk distributions, would it be possible to bypass the need for experience at an actual hedge fund, and perhaps form a small team (one person with marketing skills, and another with actual hedge fund experience, etc.) to help get a new firm off the ground? What would be the minimum amount of people needed to get such a new hedge fund up and running? How many lower associate hires, if any, would be needed?
These are just some thoughts I've been kicking around in my head lately...
Maybe I'm putting the cart before the horse here--I don't know--but in any case, this would be the life cycle stages of development for an aspiring hedge fund.
II. STAGES OF HEDGE FUND DEVELOPMENT
quote:
A. Four Stages of Hedge Fund Development
Stage 1. Launch and Initial Fundraising, represents the very early days of a fund's development, including the prelaunch activities of securing initial investment capital. The types of investors are typically individuals known personally to the manager or seeders which require only a baseline of institutional preparedness.
Stage 2. Getting Beyond Retail, should also take place relatively early in a fund's lifecycle, ideally within the first 180 days. At this stage, managers have established a groove, the fund is functioning well on a day-to-day basis, core personnel and systems are in place and the fund has established clear marketing materials for targeting entry level institutional investors.
Stage 3. The Institutional Threshold, represents a significant hurdle for most funds. At this stage, managers have received several small institutional commitments, perhaps from family offices, consultants and third-party marketers. Now they are ready to break into institutional investors who will require significantly more during the due diligence process.
Stage 4. Major Institutional Fundraising, is only attainable once the manager is able to articulate their "edge," adhere to best practices and demonstrate a significant track record of repeatable performance with minimal volatility. Even when all these conditions are met, getting institutional capital is difficult and takes significant time. In today's environment, institutions can take many months reviewing a small number of funds and ultimately pass on most of them. When they do commit, however, these investors typically bring significant capital to the table.
Now I know that securing that initial investment capital will be the hardest part. This is where you need to tap into the following categories of potential investors: "Partners, Friends, Family, and Angels"; "High-Net-Worth Individuals" (HNWI); and "Seeders and Acceleration Capital."
So if you are a person without many connections to rich people with a lot of free money to invest, then it seems that it would be impossible to start up a hedge fund without actually having investing experience at a hedge fund. (Some academics have set up their own hedge funds based on academic theories and their own research, but I seem to remember reading that these don't have that good of a track record.)
So then the next question to ask would be this: Could a person, after just a year or two at a good hedge fund, manage to assemble a team together and make a pitch to investors to get a new hedge fund up and running off the ground? If a person did enough academic research on options pricing strategies for asset classes with peculiarly fat-tailed risk distributions, would it be possible to bypass the need for experience at an actual hedge fund, and perhaps form a small team (one person with marketing skills, and another with actual hedge fund experience, etc.) to help get a new firm off the ground? What would be the minimum amount of people needed to get such a new hedge fund up and running? How many lower associate hires, if any, would be needed?
These are just some thoughts I've been kicking around in my head lately...
1
Posted on 9/17/14 at 9:54 pm to Doc Fenton
II. STAGES OF HEDGE FUND DEVELOPMENT
A. (cont.)
The range of investors:
(from least "institutional" to most "institutional")
1. Partners, Friends, Families, & Angels
2. HNWIs
3. Seeders & Acceleration Capital
4. Managed Account Platforms, SMAs, First-Loss Capital
5. Funds of Funds
6. Family Offices
7. Consultants & Third Party Marketers
8. Foundations & Endowments
9. Pensions (Public & Corporate)
10. Sovereign Wealth
B. Investor Due Diligence & Preparing to Market
It seems the big idea here in recent years is to realize that investors have become more demanding of hedge funds that are trying to solicit capital, especially in terms of the sophistication of their quantitative analysis of projected performance.
Traditionally, a hedge fund pitch for investment was focused around giving a basic spiel about the 4 P's: people, process, philosophy, & performance. The first 3 are definitely still important, but the gist of recent developments in the industry seem to be that traditional performance analyses no longer cut it, and more advanced forms of performance analytics are now mandatory for attracting savvy sources of capital.
So before, knowing (i) your performance relative to an appropriate equity index, (ii) your gross and net, & (iii) calculating your beta and alpha, pretty much covered your bases. Now, there are more sophisticated benchmarks to measure against, delta-adjusted exposure to measure, advanced regression analysis, relative attribution calculations, etc.
To prepare to market, you have to learn how to put together a pitch book in the standard way, and be ready to answer all the questions that you know potential investors will throw at you.
Above all, you have to be able to make a convincing argument as to why you have alpha, and why anyone should believe that your process for generating alpha (more on that in the next part of this series) is repeatable. You have to assure potential investors that you are measuring risk accurately, that you are adopting best business practices, that you have successfully harmonized a team of truly outstanding partners, and that your hedge fund is not overly reliant on any single person.
Then, you have to also go over all the biggest weaknesses that your particular strategy has. You have to know your competition, and you have to be able to explain what types of investors should NOT be seeking your investment services.
Note that all of the above assumes a year or two of investing performance already in the books, so the game is different trying to get off the ground with seed capital versus trying to make the jump to more institutional forms of capital with the "capital introduction" process. Nonetheless, even before jumping to the next level, these things would probably be helpful to do work on even before investments start on Day 1.
A. (cont.)
The range of investors:
(from least "institutional" to most "institutional")
1. Partners, Friends, Families, & Angels
2. HNWIs
3. Seeders & Acceleration Capital
4. Managed Account Platforms, SMAs, First-Loss Capital
5. Funds of Funds
6. Family Offices
7. Consultants & Third Party Marketers
8. Foundations & Endowments
9. Pensions (Public & Corporate)
10. Sovereign Wealth
B. Investor Due Diligence & Preparing to Market
It seems the big idea here in recent years is to realize that investors have become more demanding of hedge funds that are trying to solicit capital, especially in terms of the sophistication of their quantitative analysis of projected performance.
Traditionally, a hedge fund pitch for investment was focused around giving a basic spiel about the 4 P's: people, process, philosophy, & performance. The first 3 are definitely still important, but the gist of recent developments in the industry seem to be that traditional performance analyses no longer cut it, and more advanced forms of performance analytics are now mandatory for attracting savvy sources of capital.
So before, knowing (i) your performance relative to an appropriate equity index, (ii) your gross and net, & (iii) calculating your beta and alpha, pretty much covered your bases. Now, there are more sophisticated benchmarks to measure against, delta-adjusted exposure to measure, advanced regression analysis, relative attribution calculations, etc.
To prepare to market, you have to learn how to put together a pitch book in the standard way, and be ready to answer all the questions that you know potential investors will throw at you.
Above all, you have to be able to make a convincing argument as to why you have alpha, and why anyone should believe that your process for generating alpha (more on that in the next part of this series) is repeatable. You have to assure potential investors that you are measuring risk accurately, that you are adopting best business practices, that you have successfully harmonized a team of truly outstanding partners, and that your hedge fund is not overly reliant on any single person.
Then, you have to also go over all the biggest weaknesses that your particular strategy has. You have to know your competition, and you have to be able to explain what types of investors should NOT be seeking your investment services.
Note that all of the above assumes a year or two of investing performance already in the books, so the game is different trying to get off the ground with seed capital versus trying to make the jump to more institutional forms of capital with the "capital introduction" process. Nonetheless, even before jumping to the next level, these things would probably be helpful to do work on even before investments start on Day 1.
Page 1 of 1
Popular
Back to top
Follow TigerDroppings for LSU Football News