[0:00]So you're sick of your 9-to-5 day job, or you just got laid off, or you're a student and the job market is just not looking so great right now. So you think to yourself, what if I started a hedge fund? So I'm just going to jump right into it. When I started my hedge fund about eight years ago in 2012, the biggest misconception that I had as a first-time founder is that all you need is a trading system, a good strategy, as well as lots and lots of money. Well, unfortunately, that is just the tip of the iceberg and I wanted to make this video so that you could just see like what it kind of takes to start up the fund. I'll talk about fundraising in another video, but assuming that you already have some money to spend, here are some of the things that you'll most likely need to do before launching your fund. So, here is a non-exhaustive list of some service providers that you will likely consider for your hedge fund as early as even day one. Now, obviously, this varies based on the country you're in, the country your fund is going to be in, the type of fund that you're starting, the type of strategies you're running, how big your team is, etc. For example, every hedge fund I know of has a third-party fund administrator, but not every fund hires an outsourced chief compliance officer. Maybe you can do CCO duties internally or hire someone internally if you have the budget for that early on. Feel free to make a list if you want to, like a checklist of these items. I'll make sure to put it below in the comments in case that's useful to you and customize it to your own needs as you go along. So, one of the first big steps here is just finding all of these service providers. My biggest advice here, especially as a first-time founder, is don't just go on Google and like look for the top result. Don't just look for the biggest brand names or who your professor recommends or what your textbook recommends. Make sure you shop around. Think of it like dating a little bit. The average marriage in the United States lasts for six years. Now, we have worked with like the same lawyer, for instance, for the past almost a decade now. So make sure you choose wisely, who you work with. We made a lot of stupid mistakes with selecting our early stage service providers. We were desperate, we didn't have a lot of time, and so I just thought, you know what, let's just pick whoever answered my emails first, as long as like after phone call, they seemed like decent people. We decided to go with them. If you want to, I can make another video about how some of our service providers almost killed my hedge fund when we were starting early on. These are all like due to stupid mistakes that were pretty much all my fault. One thing was like we didn't hire a chief compliance officer early enough in our company. Really big mistake there because there's so much compliance work and so much legal work that everyone just kind of overlooks. You're like, oh, we just have a fund. We'll deal with all the compliance stuff later, right? Well, no, that's not what you should be doing. So, what happened was we didn't look at the fine print in these 40 page documents in like a lot of contracts that we had signed that pretty much screwed us over in the end. And if only we had someone with a legal background to take a look at everything and be like, this is good, this is bad, you know? And also, we were too cheap back then, by the way, we couldn't like, we didn't want to pay like 1,000 bucks an hour for a lawyer to look through these. So we were like super stingy and all we should have just done is just hired someone full-time or part-time, an outsourced CCO to work on all this stuff early on. That would have saved us both money and time down the road. What's scary about hedge funds is that you have to make all of these critical decisions at the very beginning. And the system is designed so that once you choose these service providers, it is extremely difficult to switch. It's difficult to break up, to divorce these service providers. Why is that? Well, you can thank people like Bernie Madoff, who got away with a Ponzi scheme by, you guessed it, switching service providers, like auditors and administrators. I think they called it administrator shopping or something, there's a term for it now. But basically in this space, it is highly looked down upon to switch providers once you select them. So again, the lesson learned here is be extremely careful who you select. Treat it as if you are dating. You don't just get married to the first person you see on Google or on Tinder or whatever platform you use these days. Speaking of critical decisions, you want to decide your fund structure because it affects everything from the taxes you pay to the types of investors you attract to your personal liability during a bad year even. There are a lot of resources online about legal structuring, if you Google around, there's like Investopedia. I'm sure Quora has a bunch of lawyers who like answer various questions as well. I'll post below the biggest resource we use. It's like a Bible looking, um, handbook type of thing, it's written by lawyers. It's a very dry read, but that's why it was great because it just provided information, it wasn't entertainment, it's just information, which is exactly what we needed. But what's on the internet is obviously generic advice, meaning that it might not be suitable for you given your particular situation. Uh, for instance, a master feeder structure in the Cayman Islands may not be the best structure for you. Maybe you're a crypto hedge fund, or you're located in different country, or you just have one investor in the fund. Uh, for whatever situation, definitely consult a good lawyer. A good lawyer should listen to your specific situation and tell you why a different structure might save you money down the road or save you a lot of manual labor today. One of the biggest mistakes, actually, that I regret at Domeyard is that, uh, actually it's part of the name, we are Domeyard LP, meaning that we are a limited partnership structure. Now, there's a reason why most startups are Delaware LLCs and not LPs. Running payroll and 401K on a limited partnership structure is an absolute disastrous like nightmare. There are no HR tools out there that are suitable for a limited partnership structure. So it was extremely difficult given just our legal structure to do monthly, daily, you know, HR related functions like hiring, firing employees and things like that.
[6:40]Now, I'm not a lawyer, I'm not a tax person, but if I could redo the fund again, one of the biggest things I would do is actually not go for the limited partnership structure, just based on personal experience of how much time it took in my company to do all of that work every single month. Now, there are a bunch of other things that your lawyer should do for you before you launch, including creating and finalizing hundreds of pages of legal documents like your private placement memorandum, your subscription agreement, your agreement of limited partnership, any incorporation documents and certificates, etc. They can also help with putting together your due diligence questionnaire or DDQ, making sure your pitch deck and website are not breaking any laws, and advise you on compliance matters like MiFID II, GDPR, CRS reporting requirements, FATCA, etc. They can also make sure that your force majeure clauses in any contract that you sign covers COVID as much as it possibly can. For our office lease agreement, our force majeure clause, unfortunately, did not include the rent itself in the statement. And so, unfortunately, even though I have not seen my office in over six months, I have had to pay over like I, I don't, I don't even want to say how much a fortune in rent over these past six months, even though my team is completely remote today. That absolutely sucks. I could have used that money to hire like 10 different people or to reinvest that money into the business, right? But because of a simple line in a legal agreement, we ended up kind of screwing ourselves over and paying the price during the time of a pandemic.
[8:29]Another critical decision to think about is your fee structure. Now, I think of fee structures almost like your business model, you know, if you were like a tech startup, right? Your investors would be like, hey, can you send me your business model, you know, write it up. Give me like charts and like evidence on why this business model works and why you've proven it through data. Most startups think a lot about their business model before they launch. And so why don't hedge fund founders do the same thing? I mean, a lot of first-time founders, they just go for two and 20, right? But, um, unfortunately, two and 20 may not be the best structure for you. Chances are probably isn't actually. Maybe it's too low because your AUM is just too small, so it can't cover your operating expenses, or maybe it's too high. You can't attract any investors in time because you have a limited runway. That's kind of a catch-22, by the way. There are other kinds of solutions to consider like adopting a tiered fee structure, which also has its pros and cons. Or you can do what we did, which is a little unusual. We did 0 and 40, meaning that we had a 0% management fee and a 40% incentive allocation. When I first told our lawyer that, I was like, we're going to do 0 and 40, and I remember our lawyer was kind of like, in my 30 years, I've never seen anyone like do something so crazy. Are you sure you want to do that? And we were just kind of like, we're going to go for it because it made sense given our specific situation, which was unique to us. Now, 0 and 40 also has its pros and cons. So during a good year, we take home a lot of money, which is fantastic, but during a bad year and every hedge fund has its bad years. During a bad year, we take home nothing. So that's not, that's not, not good, you guys. And if all of this confuses you, please let me know in the comments. I'm happy to do high level overviews or detailed breakdowns or kind of whatever you want to see. I'm more than happy to like just be an open book and try to share as much as I legally can within my limits. I'm not a financial advisor, I'm not a lawyer, not a tax person, not, not a CPA, you know, I don't have any of those credentials. So there's certain advice that I'm like not allowed to give. I can't give trading advice either, unfortunately, but I can give advice on like how to launch and like operations and compliance and like considerations, like things like that that people overlook, I am more than happy to be like a totally open book and provide you with like all the mistakes that we made, etcetera, so that you can do better than me and not make those mistakes. In terms of technology, every hedge fund is different. For instance, at Domeyard, we actually built all of our critical technologies from scratch. So like our order management system, data feed handlers, market engine simulators, execution gateways, all of that we built, um, pretty much all by hand. But you don't have to do that. In fact, I don't recommend building everything from scratch today because that's like reinventing the wheel almost. If something is available out there and it's like good enough, yeah, it's kind of, there's a lot of clunky software out there, but if it's good enough to fulfill your basic needs, like why not pay to get that service and launch a lot faster than if you built it from scratch? And of course, I'm happy to talk about buy versus build in another video if you'd like to. It is a fascinating topic to me because back then, you know, we had to make that choice. Everyone has to make that choice of how much do you buy versus how much do you build? Now, building, of course, does have huge advantages in terms of IP. That's like the main thing. So if you're raising venture capital, usually VCs like to see that you've built some sort of like IP related infrastructure internally. In the case of you failing, you can always sell your infrastructure. There's always some intrinsic value in the stuff that you built hopefully.
[13:17]But there are some commonalities shared across the industry. The most common front office requirement is having a good, accurate data source. Whether you're running a crypto fund or a high frequency trading firm, or a long-only fund that trades once per month. You still need an accurate historical data source to be able to model your strategy. And many funds rely on live data to be able to make predictions and trade in real time as well. Funds are increasingly adopting alternative data like textual news feeds. We use stuff like bank holidays and like corporate actions and things like that. Um, there's also niche stuff in alternative data. So like you can look at, I don't know, Elon Musk's tweets, Walmart parking lots to see like the foot traffic that goes in and out, you know, before their earnings calls. You make predictions on that. People make predictions on almost anything these days. You'd be shocked. Shameless plug, I started a data company recently because I was sick of wrangling poor quality data from all of these expensive vendors. Now, the data industry is very siloed today, meaning that you either get like the Yahoo Finance, like the free quality data that's really poor, or you get the gold standard data that's like Bloomberg, but it costs an arm and a leg. So our goal with Data Bento is to decrease that barrier to entry to get the high quality institutional data, but at a retail price. And how we do that is we charge by the gigabyte, and you can actually customize your data sets so that you can buy anything from just one symbol all the way to the entire data set if you need it. It's live and historical, level one through level three, whether you're high frequency trading or whether you're like a retail trader. Our goal is to try to help you scale with your team and grow with your company over time. You can sign up for early access on our website, it's just databento.com. The theme of the name comes from like having a bento box full of different slices of like data sets from different sources and being able to customize it to your own needs.
[16:16]Another commonality is that every fund needs some method of placing trades. Basically some form of execution. Now, some funds like to take control of the execution of their trades by applying for direct market access or DMA. Or if you're a high frequency trading firm, you can actually take it one step further by applying for what's called sponsored access. These are both ways in which a buy-side firm can interact directly with the exchanges order book and bypass the middleman, which is the executing broker. This allows for better speed, accuracy, and control of your trades, which is why if your strategies are latency sensitive, I do recommend looking into at least direct market access. Back when we started our fund, getting direct market access or sponsored access was a privilege that we had to earn, meaning that we had to prove to our broker that we could place, modify, and cancel orders directly with the exchange without crashing and breaking the market. Think of Knight Capital as a great example, a textbook example these days, of kind of what not to do and why they do these kinds of checks. We had to prove our sophistication to our broker by having a minimum account balance and passing a pretty subjective set of risk and compliance checks. I say it was pretty subjective in that I'm pretty sure they kind of look at your resume, they look at your pedigree, and kind of just judge you based on how sophisticated you seem. There isn't like a particular metric that they usually have. Some firms do, they might say, oh, you must have at least 30 million in assets under management. Okay, that's great. But then other funds may not have like an AUM minimum. They may just look at your resume and be like, do we trust this person to not crash the markets working with us as partners?
[18:28]Now, here's a list of some of the other things we had to do before launching. I'm probably forgetting a bunch of stuff, but hopefully this gives you a sense that a hedge fund is so much more than just fundraising and strategy development. When you hear a first-time hedge fund manager say, we're going to launch in just one month, please refer them to this video. Unless you have a ton of money, a big team, and a good team of lawyers already that are just ready to work fast for you. It's really difficult to launch in one month or even in six months. For the record, it took us almost three years to get to launch. Now, that is way too three years, really? Yeah, that's, that's way too long, you guys. Um, by hopefully watching my videos, you will not make my mistakes, and you will launch a lot faster than that. Just so you know, three years is like a lifetime in the hedge fund world, so don't be like me, guys. Don't make my mistakes.
[19:59]Now, the next question you might be thinking of is, is this even worth it? Can I pull this off given my pedigree, or the lack thereof? And my answer to you is always going to be, do the thing that excites you. Do the thing that keeps you waking up and motivated in the mornings to go to work. Whatever that looks like, whatever industry you work in. I've never heard of a founder who said, hey, Christina, you know, I totally regret doing my startup. I totally hated this experience. No founder ever says that, by the way. I do have some founders who come to me and they'll say stuff like, hey, you know, my startup failed in the end, but it was a great experience. It opened new doors for me. I learned more in one year than I have in my entire rest of my career combined. Um, and that's incredible. The number of opportunities it opens up is truly fascinating and amazing to me personally. Now, that doesn't mean that the startup life is right for everybody, and I'm happy to talk about that in another video. There are a lot of angry gatekeepers in the world in general, but especially in the hedge fund universe for whatever reason. These are people who tell you stuff like, wait till you have decades of experience before launching a fund, wait till you retire and have gray hairs before launching. If Ken Griffin, Ray Dalio, and Steve Schwarzman listen to that type of advice, I'm pretty sure they would not be where they are today. To give you an example, Ken Griffin started Citadel from a dorm room. Just let that sink in. Now, of course, all of these people who are successful that you hear about in the news, these are all exceptions to the norm. There's a huge survivorship bias in this industry. So even for me, take my advice with a grain of salt here. Obviously, people like Ken Griffin are kind of like the Usain Bolts of finance. Not everyone was born to be genetically, I don't know, like fast, you know, like Usain Bolt. And that's okay, by the way. I can talk about that later as well, but, um, finance is not a winner take all industry, and, and that's really important to understand, right? Because there's JP Morgan and Morgan Stanley and Goldman Sachs and UBS, they all coexist amongst one another. It's designed so that there isn't one winner that just kind of dominates the entire industry. And that's an amazing thing. And again, I'll talk about it in another video because I don't have a lot of time. So I think that's enough information for one video. If there's topics that you would like me to expand upon, please let me know in the comments. I'm not a professional YouTuber. This is my first video of this sort, might be my last. If you liked what you saw, please subscribe because apparently YouTube says I need 100 subscribers in order to be able to customize my channel, and I do want to like make my channel look all pretty and like interesting for you guys. So, please subscribe if you can, give me a thumbs up so that we can like tweak the algorithm so that this video goes to the top. I really hope that this content was actually helpful, by the way, and not just like, you know, when you Google and you're like, how to start a hedge fund, and chances are like the first couple results are kind of like, oh, it was a difficult experience. And I'm like, well, duh, of course, it was difficult, but like, how do you actually start a fund? Opening up about my hedge fund mistakes is very therapeutic to me, and I hope that by giving genuine advice, real insights into what it's like from someone who's been through this process recently, that you will do better than me in your own endeavors. Whatever that may be, whether you're considering day trading or starting a company in another industry, or you just want some positive real talk, I guess is what it's called. Like I want to be real, but also be encouraging to you and not be like a gatekeeper in this space. So, um, so yeah, I think that's good for this video. So with that, please take care, and I hope to see you next time.
