The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry

CHAPTER 5

Hedge Fund Service Providers and Regulators

 

 

 

 

To become a successful hedge fund manager requires more than just the requisite education and experience. It requires perseverance and luck to survive the crucial first three years and reach a critical mass in terms of assets under management, or AUM as is widely referred to in the industry. The critical mass can be the difference between surviving a bad period of drawdowns and shutting down the fund. Critical mass is a number that keeps increasing with the size of the industry. When I launched my hedge fund in 2004, critical mass was considered to be around $100 million, but now in 2009 it is more like $500 million. To understand the importance of critical mass, we have to look at how a typical hedge fund manager starts out of the gate. A typical hedge fund manager will usually start out with $25 million to $50 million. He will use his own savings—minimum amount is usually $1 million—raise capital from friends and family, as well as from his previous employer. As most hedge fund managers had successful trading careers at banks before they left to start their own hedge funds, they usually get seeded by their banks. The banks will provide the startup capital of anywhere from $50 million to $500 million dollars in exchange for favors like fee concessions, capacity, or prime brokerage business.

BUILDING A BUSINESS

Some hedge fund managers are unable to raise enough capital from their previous employers or through the ...