So You Want to Start a Hedge Fund Lib/E: Lessons for Managers and Allocators

by Ted Seides

Helpful, Accessible Guidance for Budding Hedge Funds "So You Want to Start a Hedge Fund" provides critical lessons and thoughtful insights to those trying to decipher the industry, as well as those seeking to invest in the next generation of high performers. This book foregoes the sensational, headline-grabbing stories about the few billionaire hedge fund managers to reach the top of the field. Instead, it focuses on the much more common travails of start-ups and small investment firms. The successes and failures of a talented group of competitive managers--all highly educated and well trained--show what it takes for managers and allocators to succeed. These accounts include lessons on funding, team development, strategy, performance, and allocation.

The hedge fund industry is concentrated in the largest funds, and the big funds are getting bigger. In time, some of these funds will not survive their founders and large sums will get reallocated to a broader selection of different managers. This practical guide outlines the allocation process for fledgling funds, and demonstrates how allocators can avoid pitfalls in their investments. "So You Want to Start a Hedge Fund "also shows how to: Develop a sound strategy and raise the money you need Gain a real-world perspective about how allocators think and act Structure your team and investment process for success Recognize the patterns of successful start-ups

The industry is approaching a significant crossroads. Aggregate growth is slowing and competition is shifting away from industry-wide growth, at the expense of traditional asset classes, to market share capture within the industry. "So You Want to Start a Hedge Fund" provides guidance for the little funds--the potential future leaders of the industry.

Genres: Finance, Business

Audio CD

First published December 21, 2015

Reviews

[Jack Fernandes · Rating 1 out of 5]

I was disappointed that the book reads like a series of business school case studies punctuated by a laundry list of grandpa’s banal platitudes.

There was no detailed description of investment styles, no insight into the logistics of fund formation, and the advice contained throughout was painfully generic, so much so, that I would venture to say that anyone who is anywhere near striking distance of starting a fund should throw this book in the garbage.

I had high hopes of a former manager shedding actionable insight into the cutthroat, high-stakes, no-limit-poker-seat that is the reality of life for a young and upcoming fund manager.

This book should be retitled: “So you want to hear some generic advice about being prepared, and then read a few useless blurbs about being an allocator at a pension or endowment?”


The entire book can be summed up in one paragraph:

“Lots of enterprising 30-somethings aspire to build their own investment organizations. The lessons from history teach that the ones most likely to succeed are those with a strong pedigree, a track record of success, and, most importantly, a deep passion for both the markets and for competing at a high level. The law of large numbers dictates that only a few of the many talented people who set out launch new funds will succeed, but putting the right steps in place can increase a manager’s probability of success.”

Excerpt From
So You Want to Start a Hedge Fund
Ted Seides
This material may be protected by copyright.

[Jonas · Rating 3 out of 5]

This book primarily focuses on making a hedge fund more appealing to investors. However, I found it lacking in actual investment strategies and key technical aspects such as risk management, liquidity, commissions and so on.

[Hassan AlHassan · Rating 3 out of 5]

I liked the book, it’s light, easy to read, contains mini case studies and some valuable advice.

The book is not a comprehensive guide on building the next multi billion dollar hedge fund.

Some of the key messages that registered with me:
1. Institutional investors are looking at small (less than 100m) and hedge managers with limited experience (less than 1 year) more often in search of alpha (approximately 70-75%)
2. Bootstrapping requires a bet that you’ll preform substantially better than others in a crowded field
3. Seed capital is suboptimal, as it provides working capital but naturally clashes between the managers desire to focus on performance and the seeders desire to focus on assets growth. Seed capital could also be expensive
4. Discounted terms is a legitimate way to attract capital
5. Raising capital is a laborious and specialized task. Piling up all non investment tasks including fundraising onto a single person is not effective, have a dedicated fundraiser and client service person
6. Create a brand, leverage the buzz and strike when the iron is hot. The difference between a successful capital raise and a failed one is usually marketing
7. Diversify your capital base - you don’t want your capital to be at risk of fleeing at the same time
8. People are the core of a successful hedge fund. Initially, costs may prevent hiring the best but always be ready to upgrade as finances allow
9. Create a culture, foster relationships, build a partnership mindset, and have a talent strategy. Don’t leave these things to chance
10. Successful hedge funds require a leader with both business (administrative) and investment acumen
11. Two headed portfolio manager is nearly extinct
12. Allocators to startups are usually betting on the team but most importantly the founder
13. Your investment strategy has to drive your passion, focus on what you know and will always love
14. Three typical investment styles on day 0, fully invest immediately, scale into a fully invested portfolio within a month or two, or select best ideas and scale up slowly. Last option is worse. Remember investing is a relative game, you have to get on an even footing in terms of your in investment portfolio asap
15. Flexibility in investment strategy is important, but is difficult to achieve without losing investors confidence in your discipline and focus. Communication is important to win the ability to flexibility
16. Changing a strategy to adopt to changing times is bad for business but good for performance. Ensure you manage the balance delicately through communication and discourses
17. The process is the most important aspect in designing your investment strategy “telling a compelling story about process is a prerequisite for capital raising and investment success. Following the framework of ‘why - investment philosophy’, ‘what - investment strategy’, ‘what - investment process’, ‘when’, and ‘where - timing of investment opportunity’ creates a sensible outline for a manager to follow
18. High returns that are not sustained are probably worse to aum growth than average returns that grow
19. Stay away from private investments as the math doesn’t add up
20. Luck - the most important ingredient but only if you are prepared for it

What is a hedge fund? A fund dedicated to applying a systematic strategy to exploit inefficiencies in pricing marketable securities through isolating risk factors that are well compensated while hedging out risks that are undesirable or underpriced relative to other instruments.

[Andrew Fujan · Rating 4 out of 5]

So I want to start this review by informing you of who the target audience is that would get the most out of this book. If you are someone that is financially literate and has worked in the hedge fund industry already, then this is a book for you. The book is not a how-to guide into starting a hedge fund, the book is a list of lessons and case studies that help you see where most managers and allocators go wrong, trying to make sure you don't follow in their footsteps. You should already know how a hedge fund works, have had a history running a portfolio, and are now wanting to run your own business. You probably already have connections, now you have to turn those connections into investors.

There are a few important lessons about investing in general, and if you are an investor without a need to be a manager, then take the lessons of an allocator and apply it to your investment strategy. All the lessons allocators need to know about managers, are similar lessons they should know about companies they invest in.

I did personally get valuable lessons out of it even though I wanted more of a guide into the process of creating a hedge fund which is why I ranked it as 4 stars. This would not be a book I would recommend for everyone if you don't already have years on your belt as an investor.

[Rob Scott · Rating 4 out of 5]

Good Book.

[Nzcgzmt · Rating 3 out of 5]

It is a well-written little book about the practical aspects of investing/starting hedge funds. It won't give you the mundane details (best legal practices, working with prime etc), but will serve as a good reminder about the big picture stuff. I found it overall engaging, but certain chapters in the middle are a bit rambling in giving out examples but lacking in rigor/key insights. Nonetheless, I would recommend it to allocators and start-up managers alike.

[Rafael Jose Velasquez · Rating 3 out of 5]

- Invest in a strategy that meshes with your personality, behavioral biases and passions.
- Emerging managers are a way for allocators to get better risk adjusted returns and negotiate better terms not only for themselves but also for future investors.
- Fund level gates are better than investor level gates.
- Separate the decision of whether to invest with a manager and when to invest.
- Certain strategies are going to have returns at better market stages
- Listen to what managers say about their opportunity set, if they ask for money give it to them, if they don’t like it run for the hills.
- Avoid return chasing as it can mean that a strategy’s ‘valuation’ is high.
- Look for hedge funds that emphasize process and always remind yourself of the amount of luck involved in returns.
- Look for funds that have culture that encourages good investment performance.
- Look at managers from their point of view.
- Do your research before manager meetings.
- Invest on what’s going to work best tomorrow, not what did yesterday.
- Be wary of private investments in small funds that are growing, if fund grows quickly position will be small amount of AUM but will require inordinate amount of time.
- Don’t be scared of being very large proportion of manager’s AUM if the underlying positions are liquid.
- Use checklists to create processes.

[Godfrey · Rating 2 out of 5]

"The manager should approach stating their case in the same way a football quarterback plays offense. The goal of each meeting should be to move the ball down the field, with a first meeting leading to a second, a second to a third, a third to a fourth, and eventually to receive an investment at the goal line. Both a Hail Mary pass in a football game and trying to win a mandate in a single meeting hold low probabilities of success and take up precious time that might otherwise be spent moving closer to the end zone." (pg. 27)

"Allocators to early-stage managers should challenge the assumption that size is a reflection of quality and consider that many funds choose not to spend resources on marketing, have not realized the importance of doing so, or have not articulately described the drivers of their success. Allocators should follow their instinct when researching smaller funds and worry less about the wisdom of the crowds." (pg. 48)

"Part of the branding exercises post launch comes from the written communication that a manager shares with investors. The better the written word, the more allocators will gain interest on their own time." (pg. 54)

"Preparation is common sense, but not common practice." (pg. 155)

[Crista Huff · Rating 5 out of 5]

(Feb. 2018) Interesting. Helpful info.

(July 2022) I launched my hedge fund in February 2020, and read the book again in July 2022. The book gave me a lot of good ideas as I'm creating my marketing materials & pitch deck, because it discusses what allocators are looking for when they're considering small hedge funds.