If you’re thinking of launching a hedge fund, but your bank account isn’t bulging with cash. Can you still break into this exciting industry and start your own hedge fund?
“Start by doing what’s necessary; then do what’s possible; and suddenly you are doing the impossible.”
Introduction
Just as an FYI what I’m about to share is not meant to be a blueprint or a how-to guide. It’s just my personal experience, so your approach and results may vary.
Now with that said, let’s start with the five elements to launch a successful hedge fund. You will need:
- Pedigree
- A track record
- An investment strategy / process
- A team, and of course
- Outside investors
The Problem
If you don’t have all these elements already in place, don’t even think about starting a hedge fund!
At least, that's what everyone will tell you.
The thing is, I didn’t have pedigree, the track record, a team or outside investors.
All I had was two desks, an investment strategy, a process and a single mission. And so that’s how I launched my firm back in 2014.
Early on, we gained some recognition as the first activist investor in Turkey and the first Turkey-based investment team with a global investment fund managing capital for an international investor base.
In our first year, our portfolio companies generated over a billion dollars in shareholder value for investors. Today, we still make the bulk of our returns on the long side of our portfolio, but what ended up happening is that our short targets put us on the map. The main one was our British American Tobacco short, which resulted in the company’s market cap shrinking by 64 billion dollar and the CEO departing.
I should point out that I had no pedigree, no track record, no team, and no outside investors when I started four years ago.
Everything had to be build up from the ground up while people kept telling me it wouldn’t work and it couldn’t be done.
The Secret
So how did I do it? Well, here’s the secret: If you are in the same position I was when I started and you don’t have the five elements already in place, what you do is you scrap the hedge-fund idea.
Yes, the secret is to just deep-six the whole “starting a hedge fund” idea.
Think about it. If you had the capital to allocate to a hedge fund, would you hand over your cash to somebody who popped out of nowhere with no track record?
I know I wouldn’t.
So, to get around this problem, I took myself out of the equation.
What I mean by this is you start with an actual investment opportunity. A listed company you want to invest in and you approach investors with your investment thesis to raise money for an SPV which is essentially a structure that exists to make a single investment.
This changes the dynamic because investors get to analyze an actual investment rather than handing somebody a blank check and hoping for the best.
Which means: It doesn’t matter what school you attended, what investment bank you joined or what big fund you worked at.
All that matters is the strength of the investment opportunity, your thesis and your process.
The key to make this approach work is to answer the three Ws:
- Why this investment?
- Why now?
- And why invest with you?
Depending on your investment strategy, this can be very easy or very difficult. But if what you bring to the table is truly unique, you will end up in a situation where an investor will put up all the money and cover all your expenses to get you up and running.
The Goal
The goal is not to make a big splash. The goal is to build a track record and credibility, which is what attracts talent and investors.
The more traditional path, of course, is to just go out there and start a hedge fund. But without experience and an industry profile, you’ll just end up banging your head against a lot of walls. And sure, some of the most successful hedge funds were started by first-time portfolio managers in their 20s.
- Warren Buffett was 25 when he launched his hedge fund.
- Ray Dalio was 26 when he founded Bridgewater.
- Seth Klarman was 25 when he founded Baupost.
- Ken Griffin was 22 when he founded Citadel.
- Paul Tudor Jones was 26 when he founded Tudor.
- Jim Chanos was 28 when he founded Kynikos.
- And David Einhorn was 28 when he founded Greenlight.
Conclusion
So yes, it can definitely be done. But the truth is the industry has changed a lot in the last 10 years and regulatory changes have made it much harder to start small and scale up.
Fortunately for you, the industry is going through a transition right now which creates significant opportunities for people who bring something truly new and unique to the table. So, if that’s you, I would definitely encourage you to throw your hat into the ring.
Just remember to drop me a line when your hedge fund gets to its first billion.
