Additional Praise for So You Want to Start a Hedge Fund

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Hugh Mitchell
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3 Additional Praise for So You Want to Start a Hedge Fund There are virtually no books on the topic of how to pick individual hedge fund managers, so this is a must read for any asset allocator, whether a professional or a high net worth investor. In fact, all aspiring or current managers would also benefit from reading this book. Ted shares his wisdom from two decades of investing in hedge funds of all types and sizes, with particular insight into investing in early stage managers. Jonathan A.G. Auerbach, Hound Partners There is no one better-equipped than Ted Seides to author a book on starting a hedge fund. From his early training at the Yale Investment Office to his instrumental role at Protégé Partners backing some of the best and brightest investment managers, Ted has forgotten more than most of us will ever know about the challenges of launching a fund. His refreshingly honest insights will resonate with readers of all backgrounds. David Z. Solomon, Managing Director, Goldman Sachs Investment Partners

4 Ted Seides extensive experience in identifying and supporting emerging hedge fund teams provides him with a unique insight into the hedge fund industry and valuable lessons for investors in the asset class. His book provides an interesting view into the challenges and opportunities for astute investors. Paula Volent, Senior Vice President for Investments, Bowdoin College

5 so you want to Start a Hedge Fund

7 so you want to Start a Hedge Fund Lessons for Managers and Allocators Ted Seides

8 Cover image: Grunge background toto8888/istockphoto Cover design: Wiley Copyright 2016 by Ted Seides. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the Web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at booksupport.wiley.com. For more information about Wiley products, visit Library of Congress Cataloging-in-Publication Data: ISBN (Hardcover) ISBN (epdf) ISBN (epub) Printed in the United States of America

9 For Eric, Ryan, and Skylar (in alphabetical order), My three most treasured start-ups.

11 Contents Foreword Acknowledgments Introduction xi xv xix 1 The Lessons 1 Lessons for Managers 2 Lessons for Allocators 4 2 So You Want to Start a Hedge Fund? 7 3 Attracting Capital 11 Signals of Success 12 A Classic Chicken-and-Egg Problem 30 Investment Funds are Sold, Not Bought (Just Don t Tell the Buyers) 43 Leveraging the Buzz 49 vii

12 Contents Riding the Wave 55 Building a Great Business 60 4 Team 65 Your Single Best Investment 66 The Best a Man Can Get 73 The Two-Headed Portfolio Manager Monster 76 Where Do Nice Guys Finish? 83 Turnover: Don t Knock It Till You Try It 86 Pacing Growth 91 5 Investment Strategy 97 Finding True North 97 Best Foot Forward, With Both Feet 100 The Tug of War between Flexibility and Style Drift 106 Stick to Your Knitting 117 Building Blocks of Process Investment Performance 129 A Slave to Monthly Numbers 130 Sustaining Performance 134 Reaching for Return 138 The Role of Luck 144 The Best Month in a Manager s Career 150 viii

13 Contents 7 So You Want to Invest in a Start-Up Hedge Fund? 153 Influencing Outcomes 154 Terms 158 Preparing for Bumps in the Road 164 Heed the Stop Sign 167 Crossing the Velvet Rope 173 Making Decisions Parting Thoughts 183 Author s Disclaimer 189 About the Author 193 Notes 197 Index 205 ix

15 Foreword When I followed one of my mentors, Barton Biggs, in setting up my own investment firm a few years back I felt uniquely prepared to embark on that effort. After all, I had spent nearly a decade at one of the best run hedge funds in the business, a number of years at Morgan Stanley, one of the most important brokers servicing the industry, several years as a securities analyst covering the investment management industry and ten years teaching Ben Graham s Securities Analysis Class at Columbia Business School. Just through osmosis I got to know a number of folks who have built wildly successful investment operations. I even sat (and still sit) on the board of Rich Pzena s eponymous investment firm. What the heck else was there for me to possibly consider? Hang out my shingle, raise a few shekels and get on with it. xi

Additional Praise for So You Want to Start a Hedge Fund

Additional Praise for So You Want to Start a Hedge Fund There are virtually no books on the topic of how to pick individual hedge fund managers, so this is a must read for any asset allocator, whether