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Practical Planning Tip: How To Start A Hedge Fund

February 08, 2024

Today’s Practical Planning Tip I will discuss how to start a hedge fund.

I don’t run a hedge fund and don’t invest in them, However, I do get asked about them frequently. Also, over the course of my investment career, I’ve had countless hedge funds present to me and there are certain themes that come up over and over.

So, when I was asked last week by a client’s son, “How can I start a hedge fund” I shared the following thoughts, which may also be informative on my view of hedge funds as part of an overall portfolio.

The best way to start a hedge fund is to take the traditional path. Win the genetic lottery by being born to affluent parents who are Ivy League educated, live in an affluent community, and belong to an exclusive club. You should go to private elementary and high school, Ivy League undergraduate college, work at a bulge bracket investment bank for two years where you work 120 hours a week plugging numbers into Excel and making pitch books for your boss. Go back to school and get your MBA or, better yet, JD/MBA at an Ivy league school. Work at a massive hedge fund for a few years until you become a relatively senior person at this fund and develop an even larger rolodex of contacts building on your parents’ connections and your friends from university who have a similar background to you. Wait until the market is skyrocketing and rates are low. Investors will be exuberant since everything is going up. Now is a great time to make the jump to start your own fund. Invite everyone you know and all your parents connections to an "exclusive" presentation at their club to introduce the launch of your new fund that is only open to "friends and family" where you are "targeting" 15%-20% annualized returns that you will never be able to achieve. Your strategy should be something esoteric sounding that most people won't understand, but will make them think that they are gaining “access” to something special. Try not to lose their money the first couple of years which will allow you to raise even more money, mostly from large wealth management firms who are always looking to introduce new products on their platform to get their clients attention. This will allow them to raise more funds to charge an additional layer of fees above the hedge fund managers already high fees. These firms will put your fund on their "focus list" where they promote it to the thousands of advisors at the firm in order to funnel more money to your fund so they can collect even more fees. Speaking of fees, you should charge 2% on the several billion dollars you now have under management and 20% of the profits that you will probably never earn. Your performance will likely be terrible going forward, but you're still collecting hefty fees, so you've already made it big and can afford the house in Greenwich, Vail, the Hamptons, and Miami. In the meantime, your investors are mostly "sophisticated" so they can afford to lose money...unless of course you manage a pension fund for teachers, policemen or firefighters, but that's not your problem. In order to save face, blame the Fed, the political climate, and China and/or Russia for your bad returns. You'll have another 5-7 years before your fund will shut down due to heavy withdrawals. At that point you can close the fund to "spend more time with your family" and to be an "adjunct professor" at your alma mater where you are already a major donor. Pick up “transcendental meditation” and tell everyone how it has changed your life. Get an honorary degree from a university and tell them to pursue their “passion” even though you haven’t. Wait for the next Bull market and start your next fund. By that time there will be a new crop of investors to raise money from and the lucrative cycle will continue. (Lucrative for you, not necessarily your investors). Good luck on this amazing and fulfilling journey!

You can WATCH the full video here.