NEW YORK (HedgeWorld.com)–Many MBAs would like to start their own hedge fund, but new managers face daunting challenges, judging from a packed seminar organized by the University of Chicago Graduate School of Business Alumni Club of New York, law firm Torys LLP and executive search firm Pinnacle Advisers LLC.
Speakers at the event gave the audience a realistic view of the struggle that awaits people who launch a hedge fund. While it is extremely easy to start a fund, you face two very tough requirements for the fund to succeed, said Dennis Rhee, who started a fund of funds in October 2002 Previous HedgeWorld Story. “You have to raise money and you have to make money. Both are very hard.”
Determine what your competitive advantage is before you jump in, he suggested. If you do it, you will need to accept having to dedicate your life to building the fund and be prepared for a tough couple of years when you might not make any money. “Give yourself one to two years, and assume you’re not going to make money during that time,” Mr. Rhee recommended.
Audience members wanted to know what investors would accept as track record for a new manager. Panelist Jack O’Connor, the president of AI International Corp., a family office with US$500 million in assets and a hedge fund portfolio, replied that nowadays investors don’t necessarily have much time to wait and see how a new fund performs.
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In some ways investors could be more flexible now compared to, say, 10 years ago but only if a manager has strong pedigree. When the hedge fund industry was smaller, “We had the luxury of waiting,” he said, but now a manager with good pedigree can open and close fast.
Still, models or hypothetical track records are not acceptable. “Nobody’s seen a bad hypothetical track record,” remarked Mr. O’Connor.
He noted that while fraud stories get a lot of attention, most of money lost in hedge funds is due not to fraud but to honest people making bad investment decisions. “There always has been and will be good and bad managers. That provides steady employment for people like me who manage fund of funds,” he quipped.