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Many Want to Enter Industry but New Managers Need

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NEW YORK (–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.

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.

Many Questions

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.

You succeed if you can get market information and analyze it better and faster than anybody else, advised Sameer Bhasin, a research analyst at Okumus Capital LLC, New York, a value-oriented hedge fund firm. In his experience, the goal of an equity hedge fund is to know more than the Street knows, so you need to do your own due diligence.

People in the audience asked what a fund of funds manager looks for. Panelist Aviva Pinto, senior vice president at Lazard Asset Management, New York, listed several key questions. The most important thing is what the manager does, she said: “How do they invest? What is their process?”

Other issues a new manager must be prepared to address, according to Ms. Pinto: What kind of value added does this manager provide compared to other managers? Does the market favor this style? What happens when the market changes? What is the fund’s risk tolerance? What are the investment risks and business risks? Can the team handle the back-office operation?

Mr. Rhee described his own experience in developing Treesdale Partners, New York, a bond-focused fund of funds that includes mortgage derivative strategies. “In fixed-income arbitrage, it is very important to have analytics as good as the hedge fund’s,” he said. “We provide the knowledge base to allocate to fixed income,”

One key part of this knowledge base is marking securities, which his group does themselves. “Mis-marking causes a lot of blowups in this space, so we double-check everything,” he explained.

Those MBAs who are not thinking about starting their own hedge fund want to work for one. Several asked about the best way to do this. For them, Mr. O’Connor suggested looking beyond the frequently mentioned job categories.

People tend to think of analyst or portfolio manager jobs, he said, but the industry has many other types of positions, such as back-office personnel, chief financial officer, chief executive or asset allocation person in a family office. “There are lots of different ways people can get into the industry,” he said.

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