Starting a fund is an interesting and worthwhile topic. I believe that this can be a very constructive discussion; a great opportunity for many of us to learn more about the laws, logistics, advantages and limitations of institutional vs. individual money management.

Let's not squander that opportunity by making this all about @katalyn, and whether or not we wish to believe her claims. Let's instead treat it as a hypothetical, and simply build from there. I believe we can all benefit.

I've actually done a bit of research on the HF model so can share a few experiences and observations of my own. And in starting a fund, there are numerous important things to consider.

The first, and perhaps most important comment I will make is this: trading your own account and managing a hedge fund are two completely different things. Most people who are good at one will not be good at the other. This is borne out by thousands of individual examples over many decades of industry experience.

One critical consideration is the scalability of a given trading or investment strategy. A successful scalper or day-trader might be able to profit consistently with 5, 10, or even 50-lot trades, but can he expect the same success rate with 500 or 1000 lot size? At which point does execution begin to suffer, and to what detriment to performance?

Earning 15% annually before fees on $50mm in assets means you need to earn $30,000 per trading day. If you can squeeze out 5 points on ES on average after commissions per trading day (roughly a third of its recent average daily range - something extremely few traders might actually be able to do consistently), that means you'll need to trade 120 lots. If you can earn 5 points only every other day, double your size. If you can earn only 2.5 points every other day, double it again.

The minute you start slinging 100, 200, or 500 lot size, you become a target for HFTs and other scalpers, and it will cost you. Understand that. There's a very good reason the vast majority of funds operate on much longer time frames than the typical day-trader does.

Another important consideration is expenses and the viability of the actual business model. The moment you agree to manage other people's money, you need to devote significant legal and accounting resources to ensure compliance with securities laws, tax legislation, etc. This can become very expensive, very quickly. It is in many instances the biggest barrier to entry. Simply drafting your fund docs can easily cost $50 - $100k and that doesn't cover one bit of the ongoing expense. Any potential investor - especially in the post-Madoff world - will need to know that their money is safe from fraud and mismanagement. In most cases this requires an independent third party auditor and other risk management, accounting, and compliance officers keeping tabs on every position and every trade placed by the fiduciary. Again, this can be quite expensive.

On top of that you'll need tech support, operations support, analytical support, travel and marketing expenses, office space, records storage, equipment, data fees and subscriptions, etc. This, too, will add up quickly.

It's therefore quite likely that you'll need to raise at least $50 million or more just to cover the startup costs and ongoing expenses of managing a hedge fund. A 2-and-20 fee model will bring in base revenues of just $1 million on $50mm AUM, but will your seed investors even be willing to pay that? More and more funds these days are moving to a reduced fee model, so why would any investor pay a no-name startup the full 2 and 20?

Prospective investors willing to pay the full expense load will need to see an established track record on critical asset mass before even considering it. One or two years would be a bare minimum. This isn't field of dreams where "if you build it they will come." That only works for well established industry pros - guys like Alan Howard, Michael Platt, Louis Bacon, Boaz Weinstein et al who already built an impressive track record on the street before striking out on their own.

Indeed, for an individual trader to successfully launch a hedge fund is exceedingly rare. No matter how good you are, you'll never get a chance to manage assets if you can't first attract the assets. Again, probably $50mm or more to start.

So unless you're good friends with a billionaire, you'll probably need to find a professional fund seeder, and the moment you step onto that playing field you'll once again be competing against a lot of guys with wall street pedigrees, whom most investors would consider a far safer bet than the guy day-trading piker-lots out of his parent's basement. Quite frankly, it will be nearly impossible to pull it off going this route. You'd be much better off getting a job at a prop-shop style fund like Millennium, and then maybe after a couple of years breaking off to start your own fund, where you could successfully leverage your institutional experience and investor contacts to tangible benefit.

Still, if you're serious about this, I'd suggest you reach out to the Prime Brokerage departments at U.S. based securities firms. Ask them to send you some materials and start doing some real in-depth planning and research. Spend a year or more drafting a business plan and putting together some initial presentations and marketing materials. Do all of this while continuing to trade your own book and building your individual track record. Then, and only then, will you be ready to make your first follow-up call.

That's when the real work begins.

I have to call BS on this poster, I am sorry...




First, you are saying you make 4K or so per day, and you mention compound interest, yet you don't realize that you could be at millions in less then a year if you were actually compounding profits.

Second, you post from a country where you can live like a king on 4K per month, and you make that in a day. What do you need so much money for???

If you are for real, you don't need a fund at all....

Indeed, for an individual trader to successfully launch a hedge fund is exceedingly rare.

The environment I grew in is very different than most USA people.As such,most can't understand the drive to make as much money as possible.

Going back to the hypothetical of raising money, I say it is much easier than people make it to be. Karen, the supertrader needed only 2 years of real money profitable record and money started pouring in, first from friends, then from others. In no time she was managing a 100+ million portfolio.

but I'd hardly call her a hedge fund success story.

Oh I am sorry, I didn't realize you grew up in Saudi Arabia as part of the royal family. Making 80K dollars per month must be really hard for you now that you are an adult and has to pay for expenses.