
Number of hedge fund startups lowest in nearly two decades - petethomas
https://www.bloomberg.com/graphics/2018-shrinking-hedge-fund
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lordnacho
Former hedge fund manager here. It's a good summary, but there's a big piece
missing. Setup costs are higher now, a lot of it due to regulatory changes.
One of my contacts (and former customers) told me with recent European changes
coming in, you need a good few hundred million bucks AUM to make it
worthwhile.

A fair few potential founders would be able to find a few tens of millions
from friends and family, but a lot fewer can find a hundred bucks. If you're
backed by a big name this isn't a problem, hence you still get the occasional
massive launch.

The part about the fees is also pretty important. 2/20 is from tales of yore.
Any significant ticket will ask for a discount as well.

So it's just that much less attractive to launch.

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jason_slack
Do you have any sort of documentation about this (although I am in the USA)?
I'm starting a mini hedge fund now with so much less money (under 6 figures)
and perhaps I'm missing something?

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charlesdm
How can you make money with a mini hedge fund? I've looked into setting up
something, and at the minimum you'd need a few million (and that's even
keeping everything super lean) for it to make sense money wise.

~~~
jason_slack
Well, so far everything I am doing is 99% automated based upon my own tools,
etc.

Edit: Dr. Ernest Chan has written 3 really good books on
Quantitative/Algorithmic trading. Essential reads.

~~~
bizkitgto
What platform are you using for trading/algo?

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jason_slack
A few dideferent platforms. AlphaVantage, Interactive Brokers, other data
platforms too.

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nabla9
One of the major trends in last two decades is increased correlation
(especially during bear markets). No matter how you diversify the portfolio,
it will correlate with others more. There is more correlation between
individual assets and between different asset classes.

Between 1980-1999 the correlation between US and foreign stocks was 0.47 -
0.49. Between 2000-now its 0.88-0-89

Moving between stocks, bonds and alternatives produces declining value
relative to the past. U.S stocks correlate more with international stocks,
bonds correlate more with stocks, raw materials correlate more with the rest.

I think it's natural to expect less value from hedge fund strategies in
general. Maybe private equity investing helps but how much?

~~~
inputcoffee
The majority -- perhaps the vast majority -- of headge funds are long/short
funds.

In the canonical example, if they think that Pepsi will perform well because
of some new health products, then they will go long Pepsi and short Coke. The
idea is that all the other events they haven't looked at: a crash, currency
shifts, people decide sugar is bad for you, NYC soda ban etc will hit both
companies equally hard. The only thing they want to bet on is their single
hypothesis.

They can't always do this cleanly, but to the extent they can, they diminish
some of the risk around the correlation of asset classes.

~~~
opportune
Isn’t that the opposite of a hedge? A put on coke would increase the risk of a
long bet on Pepsi

~~~
singingboyo
If I'm reading this right, they're getting outcomes like this:

* No crash/external event. Coke goes up. Pepsi goes up more due to health products. They're out money on Coke, but make enough on Pepsi to cover it and then some.

* Crash/external event. Both drop. Pepsi drops less because of the health products. They lose some on Pepsi, but because Coke dropped more, they make more off the Coke short than was lost on Pepsi. They still come out ahead.

* If the health products have no effect, then the gain or drop will be similar, giving roughly net-zero cost/gain.

The real risk, as I see it, is that the correlation breaks the other way, and
Pepsi drops while Coke goes up. That's the price you pay trying to make a bet
on something - the fund is safe from external events, but you can't hedge
against being dead wrong and still make a profit.

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dollar
[http://fortune.com/2017/01/20/public-companies-ipo-
financial...](http://fortune.com/2017/01/20/public-companies-ipo-financial-
markets/)

Former hedge fund manager here. This never gets mentioned, but there are fewer
publicly traded companies than there were in the late 1980s. There’s more
money and fewer opportunities for a hedge fund to differentiate, so it’s
harder to get outsized returns without excessive risk. Meanwhile, the finance
industry has convinced people it’s “impossible” to beat the index in the long
run.

~~~
Analemma_
> Meanwhile, the finance industry has convinced people it’s “impossible” to
> beat the index in the long run.

Did the finance industry do that? All I see when I look at the finance
industry is people desperately trying to convince me that I _can_ beat the
index if I give them lots of money. I think what convinced people it’s
impossible to beat the index in the long run is the continuous failure of
active funds to do that.

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anonu
Thank you ETFs. On the other hand, in finance and investing, what is old is
new. I don't doubt that hedge funds will have a resurgence or that active
money management will find footholds in different vehicles. For example
actively managed ETFs.

~~~
wetpaws
'Actively managed etf' is an oxymoron.

~~~
freddie_mercury
No it isn't.

The SEC approved it with this exact language

> Applicants request an order that would allow Funds to operate as actively-
> managed exchange traded funds (“ETFs”)

It happened back in 2017 in Investment Company Act Release No. 32810.

Not sure how you missed that.

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mathattack
Interesting points on volatility and the rate environment. I wonder how much
is other big picture issues.

\- The buyers are getting more savvy and don’t want to pay high fees for
whatbthe can do in house.

\- More high risk money is going to private securities.

\- For some strategies (derivatives) there are less people to trade with.
(Fewer suckers in the game)

\- Fewer smart people are going into finance. (I’m not sure this has gone on
long enough to impact hedge fund startups)

~~~
whatok
Low vol and rate environment is the primary cause which kinda drives your
first two points. Investors aren't allocating as much to alts and what they
are is shifting more to PE. PE did well over the last crisis because of long
lockups and mark to model vs mark to market. Any hedge fund that invests in
public securities doesn't have that luxury to tread water.

As far as your first point goes, I don't think investors are getting more
savvy but they are under pressure due to bad performance and high fees
associated with some of the funds they invested in. Generic long/short equity
funds are more or less able to replicate in-house and some are trying out ETFs
to sub for other strategies but none of these have the same return profile as
the actual strategies.

~~~
mathattack
My impression is a lot of LPs are asking “why am I paying 2/20 or 1.5/15 to
get returns that are either 40% correlated to a passive fund, or don’t beat
the market?”

I think another big issue is that it’s just plain hard to beat the market on a
consistent basis.

~~~
whatok
Yes, agreed but am wary of comparing any proper hedge fund's returns over a
short time frame vs the market. They are supposed to be absolute return
vehicles. By nature of (supposed) uncorrelated returns, a lot of funds are not
going to beat the market if it just goes up and to the right but definitely
should be outperforming in other markets.

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tim333
>Hedge Funds Trounced Markets Over the Long Term

Looks very iffy to me. Googling survivorship bias "The flagship investable
HFRX Global Hedge Fund Index, for example, has undershot the non-investable
HFRI Fund Weighted Composite Index every year since 2003, by an average of 560
basis points."
[https://www.ft.com/content/16e4fb60-46ad-11e0-967a-00144feab...](https://www.ft.com/content/16e4fb60-46ad-11e0-967a-00144feab49a)

knocking that off the 10x 20 year return shown for the HFRI would reduce that
to a 3.6x return

How it works is a fund company launches the super fund and the wow fund. Then
the super fund goes up 20%, the wow down 20%, then as a holder of the wow fund
you get a letter "the wow has been discontinued and merged with the super
fund" Then the company claims all its funds are up 20%. An awful lot of them
pull that kind of thing and you have to correct for it to get useful stats.

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inputcoffee
So... does that mean this is the best time to start a fund because there is
little competition?

Or the worst because there is little opportunity?

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scotty79
I would hope that Buffet bet is solely responsible for this trend but people
are not that smart to accept actual proof that something that they believed in
for so many years does nothing beneficial or even does harm.

~~~
tim333
I imagine Buffett has played a part both with his bet and arguing against them
as a wise investment.

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schnevets
I always figured hedge funds thrived in more volatile situations. The years of
consistent-yet "boring" growth that we have seen since the recession is not a
fertile environment for alternative strategies.

~~~
mathattack
Some play volatility. It’s also a game of betting against the trend. When the
trend goes in one direction for long enough, you get burned taking the other
side.

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MrEfficiency
How and why does this happen?

I dont quite understand what would encourage someone to take outside
investment money unless its necessary to build production.

Maybe I'm so small time, I just dont understand, but Snapchat survived without
taking investment from my understanding.

~~~
freddie_mercury
I think maybe you don't know what a hedge fund is? Because your question
doesn't really make any sense?

Anyway, the answer is: hedge funds want to take money for 2 reasons:

1\. The bigger the hedge fund, the more famous the manager is. They get to
meet Presidents, talk on CNN, get invited to Davos, and other famous people
perks. You get to say you "won". 2\. The hedge fund charges fees based on the
assets under management; the more money you take in, the more money you
personally make.

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MrEfficiency
thank you!

