How To Start A Hedge Fund

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[Yesterday we sent our Senior Philadelphia Correspondent, Avi Das, to the Hedge Answers Afternoon conference, armed with only a press pass, an inexplicable curiosity about hedge funds and several glasses of Scotch. This is his report.]
The event was billed as being aimed at prospective hedge fund managers who don’t know where to start. The idea of the afternoon was to give these aspiring Stevie Cohen’s a look at what services they’ll reasonably need, how much those things will cost them, and about how long it’ll take them from frustrated minion at Bear to Gordon Gekko.
Interestingly, a quick straw poll early in the event showed that of the crowd of 40-50, only a handful were there with the intention of starting their own funds, two already were running their own funds, and the rest were wither uncomfortable showing their hands or were professionals who worked in the hedge funds services sector.
It all went down at the Ritz Carlton. The afternoon started with a panel discussion starring representatives from a variety of firms intimately involved with the hedge funds services sector, a domestic law firm, a Cayman Islands law firm, an auditing firm, and an administrator firm. Representatives from each gave a brief overview of what each type of firm had to offer to upstart LTCMs as well as short shills on why each firm itself was a great option for budding Soroses.


At the end each representative gave an idea of the base of how much they charged for their services:
Domestic Law Firm: Talk to us first, we help you set up your whole deal, structuring management entities and products, as well as helping figuring out tricky spots before they become problems, like partners feuding over the loot. Cost: 30k + out of pocket expenses
Offshore Law Firm: The Caymans are super! We further help you structure the firm, help with registration, and if need be provide independent directors. Cost: 20 – 27k+ depending on the structure
Auditing Firm: You need us so your investors don’t think you’re trying to pull a Boiler Room on them. We figure out valuations on your securities as well as acting as an independent check on the firm, especially since there’s all sorts of new SEC shit going down. Cost: 36k minimum
Administrative Firm: If you’re a small shop you may not need us, but if you think you want a dual structure of a master-feeder structure and your investors are interested in another set of eyes on you, we’re kind of a big deal. Helps with the organization and operations side for a lot of funds that aren’t D.E. Shaw sized. Cost: 35k minimum (a flat fee plus basis points)
Though all agreed depending on the HF they would charge more or less. With less being assessed to “tiger cubs” who they believed would be serious contenders/winners (citing ex. Goldman or similarly reputable traders) and more being assessed to … unclear, but odds are a lot of people.
After the panel, a short break for snacks and coffee catered by the Ritz’s impressive kitchen (yummy cheesecake) followed by roundtable discussions with distinguished members of the panel. The discussions were freeform and served both as an intimate way to get one’s burning questions answered (are all hedge fund managers BSDs? Do real ballers work in Philly?) and also a neat way for a few undergraduates at Wharton and industry types to network.
My table spoke about law firm costs associated with starting a fund, the increasing commoditization of hedge fund services and how a few firms were actually managing to buck that trend (Sadis & Goldberg, a partner of which was our distinguished panelist), valuations of OTCs, recent fund blowups (Amaranth and ensuing Amaranth vs. the corrupt county of San Diego fight, anyone?), and a long long discussion of new valuation rules.
The table discussions segued into keynote speeches from David Schroll, President of Waterloo Advisors a hedge fund based in the Philadelphia area, and Jonathan Saidel, former Controller of the City of Philadelphia and rumored future mayoral candidate. Both were fairly entertaining and (in the case of Saidel, more inadvertently) educational.

Key takeaways from Schroll’s address:
•If you’re on your own, you need to man up and get it done yourself; no one else is going to do it for you.
•Advice for budding hedge funders: 1. get some pedigree, work for a baller fund/firm first 2. name your fund well, investors love a good name.
•If you’re going to charge 2/20 you better have proprietary research/strategies to justify the fees.
•You can’t have it both ways. Figure if you’d rather target high net worth individuals or institutional investors, they’re looking for different things. Rich people want absolute returns above the market and good track records, while the teacher’s pension fund wants alpha and a repeatable process.
•Five competent people looks like a firm to investors (so long as your furniture isn’t rented).
•Intriguingly, he predicted that within five years we’ll see more funds where the incentive fee was tacked to alpha (2/30% of alpha).
Key takeaways from Saidel’s stump:
•Spend money in Philadelphia County, not New Jersey.
•As a former/potential government type, he was concerned with overregulation harming the business.
•“I can’t imagine why mutual funds exist going forward”
•The evolving nature of pension funds would force them to invest more in hedge funds, with an ideal level of 10-12% invested
•He thinks funds of funds are dumb
•Municipalities ought to choose local providers all things being equal, but in the end “as long as their checks clear I don’t really care.”
The event closed with snacks and an open bar. Much mingling and Macallan ensued.
(This was the first such gathering of its nature run by HedgeAnswers, but for those interested here will also be further iterations of this event in Chicago on July 17th, and San Francisco on August 2nd; for anyone who’s interested, check out the website at www.hedgeanswers.com.)

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