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.
I don't know that there is any one regulation that makes this so.
I would venture that the willingness for 2 and 20 has dropped to more like 1 and 10 or less. That would explain the double minimum size as well.
If you want to grow big however, with a decent size investment team, the expenses all adds up quickly.
If you can take 20% of an annual 10% gain on $50m, that's a million a year -- pretty great lifestyle wise for a one person band.
A) You are either Jim Simons or Bernie Madoff.
B) Investors would be tripping over themselves to pay 20% fees.
Average market returns will be closer to 6 or 7%.
Wouldn’t this be true for any startup looking to “grow big”?
“The key finding of the survey is that these managers can be profitable at a small size. One third of managers surveyed said they were profitable with less than USD50 million. We therefore dispute the claim that you need USD200 million or more to break even. We think there is tight evidence that you can do it at a lower AUM number,” asserts Capstick.
Breaking it down by strategy, the survey found that global macro funds need the most assets to break even: USD132 million, followed by event-driven (USD108 million) and multi-strategy funds (USD98 million).
I'm very doubtful that a majority of these smaller funds survive very long but really no great way of knowing. Macro funds until this year have just been sucking. Let's say you're getting 1/15 on 132mm and returned 10% (10 is generous given how a lot of these funds have performed) for the year. That's 1.32mm management fee and 1.98mm in incentive for 3.3mm total. That's really not a lot of money to go around to get startup hedge fund talent.
Generally, you can get your fund going for under a 100k GBP in London, providing you have the required regulatory capital (if you're going down the regulated route, that is). Hiring people, office etc etc gets expensive, but a lot of 'funds' we've helped set up are 1 or 2 man bands, working out of a co-working space with colo'd execution infrastructure in Equinix, based out in Slough.
Edit: Dr. Ernest Chan has written 3 really good books on Quantitative/Algorithmic trading. Essential reads.
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?
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.
* 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.
Have correlations stayed same in pairs trading?
Quant funds are in a good position to put on a large basket of long and short positions (with leverage), and therefore can separate individual stocks from their confounding market factors. Of course, it presumes the fund has a strategy giving them enough conviction to bet on individual stocks / securities.
For instance, the US is highly dependent upon China for manufacturing. So when the US hits a recession, and we spend less money, less money goes to China as well, causing lower growth or a recession on their side.
That's simple correlation example, although there are second and third order effects that are significant as well.
Independently, bubbles have their own flavor on top of that, but usually concentrated to a particular sector (could be a straightforward sector like "tech", or as large as "equities", as was the case due to central bank easing around the world).
Trading sophistication tends to cause faster reactions (e.g. currency goes down, but their stocks go up in the same day, or even same hour). Decades ago, the trading was not as interlinked, so people couldn't make a global decision an implement in multiple markets at the click of a mouse.
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.
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.
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.
- 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)
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.
I think another big issue is that it’s just plain hard to beat the market on a consistent basis.
1 - Higher returns
2 - Lower volatility
Effectively, everything else is a variation on those two (e.g. same returns with lower volatility; or really low volatility, but better than the AGG; or really high returns with really high volatility (highly leveraged funds) ).
The reason this is important is because different investors want different things. If you can beat the AGG at the same or lower volatility after fees, then it doesn't matter how much you charge - people will beat a path to your door.
One interesting example is Renaissance Technologies. Several months ago I was reading through their SEC filings, and if IRC, they charge 4 & 40 ! Yes, FOUR and FORTY - to their own employees! For the record, it's a monster fund, and you can't invest in it unless you work there. Yet people will do anything to get a job there and pay those fees because the fund is so good.
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...
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.
Or the worst because there is little opportunity?
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.
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.
Ignoring the cost of development (which is reasonable given how simple the app was when it launched), Snapchat has incredibly high infrastructure costs. It runs on google cloud (you pay a huge markup for cloud services - it's just often worth it because you can scale up and scale down to match actual need but I assure you snapchat was not scaling down) and is media heavy (read high bandwidth bills).
Snapchat received $2.65 billion in investment pre-ipo!!! $2.65 billion!