So You Want to Start a Hedge Fund Lessons for Managers and Allocators

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.

Foreword xi

Acknowledgments xv

Introduction xix

1 The Lessons 1

Lessons for Managers 2

Lessons for Allocators 4

2 So You Want to Start a Hedge Fund? 7

3 Attracting Capital 11

Signals of Success 12

A Classic Chicken-and-Egg Problem 30

Investment Funds are Sold, Not Bought (Just Don’t Tell the Buyers) 43

Leveraging the Buzz 49

Riding the Wave 55

Building a Great Business 60

4 Team 65

Your Single Best Investment 66

The Best a Man Can Get 73

The Two-Headed Portfolio Manager Monster 76

Where Do Nice Guys Finish? 83

Turnover: Don’t Knock It Till You Try It 86

Pacing Growth 91

5 Investment Strategy 97

Finding True North 97

Best Foot Forward, With Both Feet 100

The Tug of War between Flexibility and Style Drift 106

Stick to Your Knitting 117

Building Blocks of Process 123

6 Investment Performance 129

A Slave to Monthly Numbers 130

Sustaining Performance 134

Reaching for Return 138

The Role of Luck 144

The Best Month in a Manager’s Career 150

7 So You Want to Invest in a Start-Up Hedge Fund? 153

Influencing Outcomes 154

Terms 158

Preparing for Bumps in the Road 164

Heed the Stop Sign 167

Crossing the Velvet Rope 173

Making Decisions 177

8 Parting Thoughts 183

Author’s Disclaimer 189

About the Author 193

Notes 197

Index 205

TED SEIDES is the former President and co-CIO at Protégé Partners, LLC, a leading alternative investment firm launched in 2002 that invests in small and specialized hedge funds on an arms-length and seed basis. He has authored investment pieces for CFA Institute Conference Proceedings Quarterly, Institutional Investor, Harvard Business School Publishing, FT Alphaville, and the late Peter L. Bernstein's "Economics and Portfolio Strategy" newsletter.