by Brian DeChesare Comments (6)

How to Start Your Own Hedge Fund, Part 3: How to Hire Your Team and Build an Organization

Hedge Fund HiringOne of the benefits of working as an investor is that you don’t necessarily need to manage large teams to make money.

Many of the most well-known hedge funds have very, very low headcounts, with far fewer employees than normal companies in the same revenue range.

But you still need to hire some people once you’ve started your own fund, unless you want to be doing everything by yourself forever (not recommended).

That’s arguably the toughest part of the entire process, especially when you’re just starting out and barely have any management fees to attract top talent.

Our multi-part series on starting your own hedge fund continues today as we do a deep dive into the hiring process and how you can hire the right talent with limited or no resources.

If you ever want to start your own company of any kind, you need to read this – developing winning investment strategies is great, but it means nothing if you have the wrong people.

So here’s how you can avoid all that and get started on the right foot with hedge fund hiring:

Starting Out

Q: So let’s say you’ve just raised funds, maybe around $100 million in AUM, and you’re about to start operating. What does your team look like at this stage?

A: At that stage, most likely you’ll only have 1 or 2 other people working with you. Yes, in theory you might earn $1-2 million in management fees, but infrastructure, overhead, and compliance expenses will eat up a good portion of those fees.

By the time you get to $1 billion in AUM, you might have 3-4 people on your investment team, 1-2 support staff, and a huge array of outsourced services that help with tasks like compliance and even trading.

You can outsource almost everything – and I definitely recommend it in the beginning because you’ll gain flexibility and the ability to increase or decrease your spending as needed.

Lots of brokerages actually specialize in smaller funds, and you can treat their traders as if they’re your own traders if you have the right relationship.

Q: OK, so it sounds like there’s the “investment” side, the “administrative & marketing side,” and then the “legal & compliance side.”

And when you first start, it’s to your advantage to outsource everything except for investing.

A: Yeah, pretty much. Sometimes you’ll need more roles and infrastructure – for example, a quant fund probably has more demanding IT needs.

But for many value-oriented funds, you can get by with yourself and 1-2 other people initially, with 1 person on the investment side, 1 person handling administrative and marketing tasks, and everything else outsourced.

Q: Just thinking about the numbers, though, I’m assuming that you would not even take a salary until the fund gets much bigger, right?

A: Yeah, it’s extremely rare for brand-new PMs to take a salary at all. That money is better spent on everything else you need and any hires you need to make.

So you’re pretty much relying on your returns (and money you’ve saved up) to survive until you get much bigger.

As one example, a friend of mine launched a fund that recently reached $100 million in AUM. He and his two partners had worked at a Fixed Income fund, and they spun out to start this one on their own – and in the past 5 years, no one there has taken a salary.

Now, granted, they all had a fair amount of money saved up, but you need to face reality: you simply will NOT be making that much money in your first few years unless you earn outsized returns.

Q: Right, I think a lot of people miss that part and jump in expecting that pure investment prowess will make them successful.

Let’s say that you only have the resources to hire one person when you first start – who should it be?

A: Definitely someone in an administrative or operational role.

You may think that sounds crazy, but you spend an unbelievable amount of time on random tasks like ordering printers, faxing documents, talking to lawyers and accountants, running reports, and even answering investor questions.

Sometimes I would spend 3 days per week on non-investment-related tasks – even with outsourced services.

Marketing also eats up a huge amount of time. “2 hours per day” may not sound like much, but you have to focus when speaking with current and potential investors, and answering these random calls during the day interrupts you from completing other tasks.

Even if you get funded by a hedge fund seeder or some other type of “accelerator,” marketing will still take up at least some of your time, especially as you grow the fund.

As the business owner and investor, your own time is your most valuable asset and every hour you spend on filing reports, figuring out compliance, or explaining your strategies to investors is an hour that’s not being spent on generating alpha.

Q: So, long story short, your main recommendations on hiring would be…

A: Don’t start a hedge fund by yourself – always recruit at least 1 other Partner, and ideally 2, and spin out from an existing firm or group so you know exactly how well you work together and have a track record to point to.

If you can’t do that and you really are starting by yourself, make a marketing / operations person your first hire or you’ll go crazy.

And make sure you have money saved up, because you’re not going to take a salary in those early years.

How to Hire an Army of Interns

Q: Great, thanks for summarizing.

So let’s say you are expanding and now you’re looking to hire interns or new staff. What qualities do you look for?

A: The main difference is that the personnel risk is MUCH higher at small and startup funds.

A large investment bank can afford to make bad hires each year; since they’re so large anyway, it won’t affect much of anything.

By contrast, even the world’s biggest hedge fund, Bridgewater Associates, only has around 1,200 employees but it has close to $150B in AUM.

Sure, not all of those employees are directly responsible for investments, but the “AUM per employee” ratio is still sky-high and exceeds what you would see at any bank.

The same principle applies even at smaller funds: if you’ve raised $50 million and have 1 employee, well, you’re each responsible for $25 million… so you better know what you’re doing.

To be more specific, anyone I hire must be willing to get the task done no matter what.

He/she has to understand investing strategies, how to execute ideas, and how to deal with all the random problems and the administrative burden that you wouldn’t see at a larger fund.

Q: So if someone just contacted you out of the blue, but he/she seemed like a good candidate, what would you say?

A: Most likely, that would be a “no” simply because I don’t know the person at all.

I really do not care whether you have 3 years of bulge bracket banking experience or you have degrees from Harvard or Oxford – if I don’t know you, I’m going to be very skeptical.

Also, ironically, sometimes people with the best pedigrees make the worst employees in a startup environment like this.

So 99% of it comes down to whether or not I know you or am somehow connected to you, what you can bring to the table, and whether or not you are willing to do anything imaginable, from handling tax issues to generating investment strategies to ordering new printers.

I already knew all my initial hires from my previous work at endowments and investment funds.

Tell Me About Yourself…

Q: So I’m guessing that the hiring process was not very formal when you were looking for new team members.

A: No, not at all – but that’s because I had already known and worked with everyone I hired.

Now, of course, as you get bigger, you’ll end up having to interview and hire candidates you don’t know as well and you’ll have to implement a more formal process for that.

I didn’t end up interviewing / hiring too many people outside my own network, but I have interviewed extensively at funds in the past and am familiar with the process there.

It’s pretty much what you describe in the articles on hedge fund recruiting and hedge fund stock pitches here.

The case study is the centerpiece of any hedge fund interview, and there’s a lot of rigor involved regardless of whether it’s a small fund or a large fund – they need to know exactly how you think about investing and whether or not your process is clear, repeatable, and defensible.

Q: OK, so, as you said, we have covered case studies at more established funds quite a lot in the past.

The bottom-line on recruiting at start-up funds is that it’s all about your connection to the interviewee and the candidate’s willingness to get anything imaginable done, without the attitude that something is “beneath” him or her.

A: Yes. And, of course, if I’m hiring an investment analyst, all the traditional criteria that hedge funds are looking for would still apply.

I would probably not give a formal case study to a candidate simply because I don’t have time to review all their work in detail.

So my questions would be more informal and any “case studies” I gave would be more like stock pitches and discussions around specific companies.

To Infinite AUM and Beyond

Q: So as the fund grows, do you hire a predictable number of people?

In other words, can we say that $10B funds are expected to have a certain headcount, whereas $1B funds would have a very different headcount?

A: Not necessarily. One advantage of the hedge fund business model is that you can scale without necessarily hiring a ton of people.

For example, I know someone at a $5 billion quant fund that has only 3 people on its investment team.

If you think about 3 people managing that much money, it’s almost absurd. But depending on your strategy and team, it is possible.

That was a very experienced team that spun out from another fund and was actually seeded by the previous fund, so they certainly had the expertise to pull it off.

Now, if you’re using more of a fundamentals / value-oriented strategy – meaning you spend a lot of time reading filings and combing through research instead of writing algorithms – then you’ll need to hire more aggressively as you grow.

Q: Which goes back to what we talked about earlier in terms of the scalability vs. ease-of-startup trade-off

A: Exactly. An astonishing number of hedge fund founders never think through questions like, “What amount of AUM must I get to in order to support my staffing needs and infrastructure?”

The other issue is that you may need to change your strategies as your AUM increases – something that worked in your personal account is unlikely to work when you have $1 billion under management, and vice versa.

And you need to be prepared to answer questions about that, as well as the ones about your staffing needs, when you go around fund-raising in the first place.

Q: So as you grow, would it be fair to say that you’ll increase headcount more in certain areas than in others?

A: Again, it depends on the fund type and strategy, but generally that’s true.

If you look at most big hedge funds’ websites, they have a 1-to-1 ratio of investment personnel to non-investment personnel (administrative, marketing, compliance, etc.), and some are even more skewed: it might be 2 non-investors for every investor at certain funds.

That makes sense intuitively: as you get bigger, you’ll have more investors to report to and more compliance and reporting requirements, but you won’t necessarily have to come up with more investment ideas… you just have more funds at your disposal now.

You would see this ratio skewed even more toward 2-to-1 at a quant fund, and it would be closer to 1-to-1 at a value-oriented fund.

Q: Awesome. Thanks for your time and explaining all this!

A: My pleasure. Until we meet again…

Coming Up Next

In the last part of our series on starting your own hedge fund, we address perhaps the most important question of all: the exit opportunities.

Yes, you might go into it thinking that you’ll become the next Bridgewater, but what happens if things don’t work out?

Is failure tolerated in the industry?

Where do “failed” (or “former”) hedge fund founders and managers actually end up?

Stay tuned for all that and more.

Complete Series – How to Start Your Own Hedge Fund:

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. Hey Brian,

    Is it possible to break into mezzanine financing after a few years of commercial banking experience? Or would those mid-market/mezzanine funds much prefer people with IB experience?

    Also, is it very modeling-intensive in mezzanine financing?



    1. It’s possible but they tend to take more people from Leveraged Finance or M&A. It is modeling-intensive.


  2. Avatar
    Long time reader

    Great post, very informative as always. From what I’ve seen, at least in my region, very few people have that tendency to not consider any part of the job “beneath them”. I think it all depends on whether the person has an entrepreneurial mindset from the get go or not. An employee would always think, “this ain’t what I signed up for”.

    So in startups, the founder needs to make it clear to the prospective hire exactly what they’re signing up for. I feel this is something that most new organizations fail at, as they tend to focus only on the positives of working at a startup. This results in dissatisfaction to the new hire and sometimes even a high turnover rate.

    P.s. Extremely interested in a similar series on startup PE funds. Hope that comes soon.

    1. Thanks! Yes, that is definitely true. A lot of people in the finance industry do not really walk in with the right mindset for starting a business of any type, including a hedge fund.

      And there’s so much stupid hype over start-ups right now that many of the wrong candidates are being drawn into the field.

      Yup, we hope to feature something on start-up PE funds soon.

  3. Brilliant and informative as always. I presume that the lean structure described here could also apply to private equity funds even more. Recently had a meeting at a venuture capital firm and those guys had only office (acutally several accross europe designed like club apartments) and laptops. Thats it, no brokers, databases, programms, IT systems, big compliance. Occiasionaly when they need particular info they just buy a report. Would love to read more about private equity. GJ, cheers.

    1. Thanks! Yes, the lean structure could apply to anything on the buy-side. We hope to do a series on starting a PE firm soon.

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