How I Started My Hedge Fund

hey what's up its downtown Josh Brown we are live from the compound I'm here with Michael Banach as usual say hello we have a special guest and McMurtry Dan is the managing partner and founder right of tyro capital which is hedge fund what Dan says teach us today is how to start a hedge fund he started one recently like within the last few years which is pretty rare he's succeeding he's gonna tell us what he's learned throughout that process and I think you'll get a lot out of this whether you're an investor or an investment professional so stick around okay that was pretty high energy I'm gonna take it down like four notches cuz you're pretty chill but but so I want I want you to just start with like you know what made you want to start a hedge fund when did you start it and how far have you come in terms of like employees like I know it's relatively new the why I think you know honestly I didn't know what I didn't know and so I've had to learn a lot about the business I mean I thought that because I could pick stocks I could build a hedge fund and it doesn't mean you can't but that's not what makes that happen so we started in 2015 a couple years after college way too young and we made a lot of mistakes in how we started it nothing catastrophic but we just didn't know what we were talking about and I think going into launching a fund you need to understand that for the first few years at least at least three or four years you're in business building mode you're taking no money home and even if you have a lot of carry in depending on how much capital you start with you should be reinvesting all of that into the business and you need to be building out redundancies upon redundancies or run redundancies because as we're saying before we're going on camera you know hedge fund guys think about hedging the downside but when you're running a business you have to hedge the upside what if you have a good year or you get featured somewhere something and you have 50 or a hundred inbounds and you have to field all those people take it personally if you don't respond you don't follow up so you're so you're saying like what if god forbid things go really well like you're very out front on a stock that turns into a home run right and then Barron's starts putting articles about you and you start blowing up but you haven't built an infrastructure so when you say 5th in bounds you mean the phone starts ringing emails start coming in people that want to invest and you're like well no I'm really just picking stocks I'm not ready for that like what then what was the point of being on business and then as you move into marketing and building all this stuff it's it's just hours in the day and especially if you're a one to three man team you don't have enough time to do you know in serious people are gonna want to meet you a minimum of three times usually a lot more it's there before today before committing to investing with you they're gonna need a lot of documentation about exposures attributions position level stuff I mean they're gonna figure out if you're doing something like you know selling puts to have very smooth returns they don't fall for that anymore so you you really have to be able to have materials and documentation you have to have you know your audits your admin everything needs to foot everything needs to be near thing is you can't go back fill a lot of that if somebody sees that you created all that information after the fact it's a lot less reliable as a as a prospect ever told you you guys don't know what you're doing yes early on we decide yeah what else yeah I mean early early on we had a few people who I mean I think they were a little nicer about it we actually know we've had some people be incredibly rude but we have had a few people say look I die by the stock picking you guys don't have a business though and I was like what does that mean and a couple of people that said that to me were kind enough to say look I'm gonna break this down for you and it kind of helped you a little bit and so we built the track record for three years to get very little assets we needed a track record so we had something to market to potential clients but at the three year point made the decision to bring on a partner and give him equity who had a lot more experience with us than us in running an actual financial business he'd ran a trading desk before he had built another fund up and I think if you're aspiring to be a manager you really need to make friends with the CLO types everybody wants to go to the portfolio managers there's very little relative inbound into the CEO CFO types these funds and you need to understand that operational back-end and it's gonna make clients potential clients a lot more comfortable if they know you you actually have thought about that invested in it and you've considered what's gonna have to be built out if you do make it big if things are good you could have like the most dazzling insights like into TMT stuff like yeah you know here's why I'm long Verizon short Netflix like you could have all these cool ideas but if the investor doesn't feel like you were serious about safeguarding their capital like reporting on how much risk they're taking like they're not gonna give you much so before you get investors before you pick stocks what has to happen how do you even start a hedge fund okay so it's not that complicated it's it's gonna depend on what your starting scenario is if you're starting with five hundred million or a billion you're gonna have a very large institutional setup if you're starting subscale which I don't advise for the record what is that you're starting under like friends and family yeah well but here's the issue so they're even the people that invest in emerging hedge fund managers they typically at the smallest level have to require a five million dollar check size otherwise it's just too much paperwork not worth their time and they say let me sorry these are family offices that back emergen Madison JP Morgan well no so Blackrock has a program program Texas teachers they're institutions that do this but the absolute minimum is five and usually it's twenty or twenty five and they can't be over depending on the mandate twenty five or ten ten or twenty five percent of your assets so it's like a catch-22 right you have to have money to get money so you need to tell you need ten of them at once yeah and they're not going to do that you have to already be able to level so you if you're under fifty it's very hard to raise money because even if you have everything else figured out operations performance all of that you know they can't give you five million which means you're under the minimum and they'll be very nice and they'll follow you but until you hit that fifty level your total addressable market in terms of number of institutions it could give you money is five percent of what it might be as you hit 50 100 250 500 a billion different thresholds open up you know you get to the top and then you're talking to the Cambridge associates and stuff like that we're in a single allocation might be 500 million but you have to understand who is your target audience how you're gonna reach them and then there's regulations around how you can do that you know you can't be going and posting your performance numbers online and some people do that but you're really not supposed to so we're surrounded by people like on financial Twitter that think like I'm gonna start a ten million dollar hedge fund 4 million over it is my grandma's yeah I scraped together like in two hundred fifty thousand dollar checks the other six million yeah and like I'm gonna get the scale because I'm gonna crush it for three years I'm not saying they can't do it but like on a scale of one to ten ten being extremely delusional does that approach in your in your estimation right now yeah I mean I did that and I didn't even have the grandma money and so I've just put it at a nine of us and you still and you were able to do it but like so many people you saw have not yet as you know you got to keep your costs under control you got to be very you know if you set up a simple Delaware limited partnership if you're New York you're gonna have a Delaware limited partnership a Delaware general partner and a New York management company LLC you know when we started we worked out of a you know not even we work we had a Regis which you know everybody forgot about was we were 22 for and you know we didn't have a Bloomberg terminal and if you're gonna go that route which I heavily advise against you know we were young we didn't have it much of a network yet but if you're if you're older and you don't have the network to raise more than that something's wrong because you before launching your fund have not built the social network the pedigree it's not even pedigree it's about social now here they're people who don't have pedigree but everybody knows are smart and they can raise ass and they can get into inter meetings but more importantly once you start launching your ability to raise assets and also to have durability during volatility is really based on what people think of you it's not a quantitative process if they think you're really smart you're gonna bounce back they're gonna stick with you generally speaking and so if you have not shown the social ability prior to launching your fund to build a network where you could raise over ten you are not gonna have knock I'm just gonna develop those only you know what's so funny about that so now I'm a quant I'm gonna scoff at you yeah are you suggesting that anything matters beyond Sharpe ratio Sortino information ratio are you saying soft skills and friendships are meaningful they're everything not on my spreadsheet I don't see it there on my back tested returns society develop those those skills and those networks yeah I mean so for me I had a really rough period we launched in August of 2015 we started to invest up and he was a huge dick and then he had this thought of being nice to people well that was like I don't think I was a huge dick but right when he said hockey we said I was tough because of the you want devaluation period yeah so I mean we came in and it took us two or three months longer to start our fund than we thought so came in with a little bit of stale research because we had been working on op stuff and then we started start to invest up and immediately things start diving and we're like okay well we're gonna buy the dip that keeps working and then market goes down 15% then it goes vertical and so as its going down we're keeping the book hedged it went down and when it went vertical we ended basically losing money on both sides of the book and in it and you know we had another thing I would tell you is when you reach out to people maybe 10% of them are interested in what you're doing maybe but other people they actually talk to you of the people who say they're gonna give you money maybe 10 percent are gonna give you money so we had 10 million that said they were gonna invest when we launched we launched with 3 yeah that sounds about right and and some of the people and this is everything it's really dangerous some of the people who didn't invest were the people that I had the closest personal relationships with and who I'd already made money for so what happened with those relationships at that point I was not happy with that and I was pretty pissed off and bitter yeah it was a little bitter about it and I didn't call anybody in freak out I knew that's about a you know if you're a banking analyst something it going through this by the time you hit 27 28 29 30 you can realize the number of people who stay in this business for any extended period of time is is very low most people leave and also if the world becomes really small everyone knows each other and if somebody says you're a dick you or you have a big problem especially in being a dick is one thing but if anybody ever you know even if it was your first day of being a banker if you ever do anything unethical it is going to be an insurmountable issue for your career I I really don't know how you come over it's very very hard it's a it is such a small world yeah and it's the same people making decisions you after you're right and there and there are areas reference checks everybody asked around and people knowing you and liking is a good thing people knowing you and not liking you is a killer but you had to learn this lesson which was because the hit rate is so low on people who are going to even care to talk to you and people who are going to invest you have to learn that every interaction you have is an opportunity to build a long-term friendship and a long-term relationship that's what this built this business is about and long-term relationships or really would give you career Kevlar because everybody had there's all these crazy things that happen and your stuff nobody can predict it's not necessarily performance related you know you could get I know I know really good managers who've gotten cancer at weird age and and they had to shut down and then they came back five years later and the only reason they could do that is because they were liked and everybody wanted to see this MC succeed but you have to learn that when you have an O in a meeting and somebody especially if somebody's rude if you can kind of you know be a match about or however you want to say that and be respectful you can turn a no and an ugly no into a friendship and a relationship and over time that may not convert to a client but everyone knows everyone as we just discussed but also they might refer you to somebody that really likes your style sometimes I pitch people and I go look we're full up on long short fundamental emerging managers even if that's what they like but my buddy he really likes I know he likes a couple things you've done research on I'm gonna refer you over to him it becomes variable so it's not it's so it sounds like everything you're saying like I think you would agree with this everything that you're saying is so intuitive like it just seems like it's so obvious ya know and I and I also think that in the real world that is how people are behaving generally they're understanding this idea of ingratiating yourself don't burn bridges but then we see people online it's almost like they're deliberately bizarro Superman they they're like lashing out at people at eight o'clock in the morning yeah over a difference in opinion on interest rates like people are so mad about other people's market calls people see someone losing money and they can't wait to where to kill them but nobody acts like that on what I'm doing this 22 years I know like three people who act like that at offline online it seems like everyone what am i where is the disconnect that I'm missing I think I think there's a generational difference a little bit here I think hey you know I don't mean to be disrespectful that how are you 28 okay so a lot of this with the same generation yeah 42 okay so I believe so a lot of people I know who are kind of 3,500 financed there is that culture of kind of trash-talking people and writing people off writing people off is a massive mistake because even the best investors ever have had massive losses one thing Soros talks about it I think Drock talked about Soros was Soros had the conviction and his own ability to just take the loss and go okay the next one I'll go of course you have to be one otherwise I can't play but young people in finance I think are feel that is so competitive now like there's this there's this psychological dynamic where you know I just see I know so many people where they do oh that guy's an idiot and they trash like that guy or they go or they go you know they don't know how to manage money and I was like well what they do know you know you know in some people look at you guys and go well they're like doing quantitative allocation what's special about that I'm like well there are brilliant marketers and they know how to run a business and they're doing right by their clients which is which puts them at at least 80th percentile for you know money management and they definitely not George Soros and I would say but they don't understand what you're doing yeah they're trying to interpret it well I can pick stocks better than Barry can allocate base oh that's definitely true right I'm like you don't understand it's an orthogonal argument what are you talking about this I this works one thing that I think is overlooked oftentimes as people they see like the glamour like they're gonna like buy it Lamborghinis and stuff but hold on to the side for a second how does being a hedge fund manager affect your social life like do you take this work home like what is your weekends look like yeah I don't think I've had like a day I didn't think about work since a year before launch and if you don't enjoy the game it's gonna eat you there's just no way around that it's not a profession it's like a little livestock's who you are and but there's mitigating factors that like if you know I'm a long term guy I'm really interested in understanding you know what's what is going on in video games over the next ten years and so it it doesn't really affect my social life in it when I'm talking to people I'm not like I got this hot stock for you I'm asked them like well tell me about your your your job your business and I'm actually interested because I actually want to hear what's going on and that's another thing I think catch-twenty eyes mess up is they think they know everything and I always want to like my favorite conversations are with like some RV sales guy in like Ohio who's telling me you know how that markets worked over 20 years so that guy knows a lot of stuff and if you if you approach it that way and you you but a lot of how you have to structure your life is around managing psychological risk particularly in markets getting volatility getting volatile or when you're underperforming or when you're over performing I mean the most dangerous time in markets is when you're crushing it because you're gonna start doing less work you start managing risk less you also may start treating people poorly when you're when you're way up or way down and ease any of these vaults ball volatility events I want to I want to get it or I want to get into that this theory that when you see people who are treating others poorly yeah even perfect strangers they've never met yeah like when you see people on online just like doing their best to upset other people and trash them they're probably going through a low point in their own lives if not like a low point financially maybe like in terms of their own insecurity or like and they're like venting and taking it out they're projecting right you would agree with that yeah well like a lot of people a lot of analysts now they went in this industry thinking I'm gonna make all this money and it's gonna be awesome models and bottles or whatever and it's not that there's the way there's way too much supply side layoffs research costs dropping and so they might be in a you know they lose perspective they don't realize they're in the top 1% of the top 1% of human beings and their life is awesome and it's the best time ever to be alive but in their mind they're like I'm working 80 hours a week my boss doesn't let me do what I wanted to do he won't listen to me and then there's this guy who's posting out this thing and I've spent six weeks working on that and my boss was you know addicted me about it and this guy's wrong so I'm gonna actually go I probably say I probably the same way and like I just know personally when I was going through tough times and I you know I wrote a book about struggling on Wall Street I know that I was more caustic and and angry yeah and definitely more of that would leak out online and maybe that Josh Brown will return sometime but I just fire a remarkable how many people have the word hedge fund in their profile or analyst or p.m. yeah and act like they have nothing to lose by burning all these bridges and you say to yourself like how is this person gonna run a business on the street after they've behaved this way for two years I mean that that's the thing is you know if you're at Millennium where they explicitly don't want you to socialize because why don't worry Matic Persie not hiring you well they don't want one charismatic person to be driving all of the traders behavior well now which if I get into that be I you know play number one you know this is an ultimately a social game as is any other business and you know point I may be skipped over earlier was when I had this really rough time starting out I went to a mentor of mine and I was like this really sucks like this is not all I thought I was going to be as terrible you know and I've actually never had a problem with the client but potential clients can be the worst human beings on the plan and you got to be prepared for some really odd and bad behavior as you do that and I wasn't and so I was just you know whining and that's their prerogative though they have the check and you need the assets at the end of the day I'm good to do that yeah I'm a vendor I'm just selling of something and and and I didn't really understand that until it was a lot more like when I was a kid and I waited tables than it was like working at a firm so my mentors advice and I was going through this rough times he said look and this is only I'd given advice this is the advice to give to anybody's doing a start-up or going for anything is look you have a specific outcome in mind you want your you not only want your life to work but you want your life to work in this exact way right now this way this path and he's done very well and invested in a bunch of startups and he was like look I've you know invested all these things they were never in my life has anything that worked gone the way I thought it was going to go and when you go to people especially as a younger guy and you're pitching them something they can tell if you want something thin particularly if you get an introduction to a famous big hedge fund guy they are so used to everyone in their life wanting to use them wanting something from them and it's actually very rare that somebody genuinely wants to build a friendship and I asked a fairly prominent manager there's a much older than me I said hey can I buy you a beer you want to watch the game and just talk about stuff and he was like nobody your age has asked me to get a beer in 20 years and we've become really good friends but my advice my mentor gave us he said look how many people reach out to your how many people are you socializing with that want to just kind of hang out that you don't see any way to get anything out of and I was like well a lot he said I want you to just start taking those meetings don't worry about getting any out of it and do every favor you can and if you see something that's relevant to somebody for dodon to them just start connecting people so he read the book that changed money he read the go Giver clearly I'm not sure but yeah it's like my Bible being exactly what it preaches right and and the other point he made that I now believe very strongly is if you're an actual long-term player being a nice person and being a helpful person in connecting people and doing so favors cost you nothing and being nice cost you nothing it is the dominant long-term strategy and so many people worried about getting ahead they don't realize they're just selling puts on themselves so I started doing that and ever every single good thing that's happened in my life in the last five years has been the result of like a random coffee or happy hour and I made it part of my job he said every day I'm gonna have a coffee or a happy hour or something like that or I'm gonna go meet people or hang out hang out people hear what's going on with them and if there's like an email or a call I can make to help them out in some way I'm gonna do it and and then six months nine months 18 months later yeah but that's why you're so consensus now you talk to too many people yeah it's probably yeah you have to isolate yourself to come up with non-consensus ideas right my hedge funds actually just a 60/40 allocation and financial advisory exactly listen you're awesome because I think you're an example of look I have a hundred friends that started hedge funds in 2005 no problem right now it's harder and you've still found a way to do it and I think it's like universal advice for anyone trying to do anything in finance whether it's advisor FinTech if you're starting something you want your network to be as big as possible and you want people like so people can get in touch with you what's your social security number yeah yeah where do you want people to follow your stuff like at super are you at super Mugatu is that the actual handle yeah add super we got to that Tyra partners comm we're gonna linked all that stuff okay listen thanks for coming up let us know what you guys think are you being nice or are you burning bridges dan would say try to do the former and less of the latter leave us comments feedback make sure you subscribe to the channel and we will be back with you soon [Music] unless somebody likes the last Star Wars movie to just burn the goals

Channel: The Compound

Views: 222,176

Keywords: Stocks, Stock Market, Make Money, Wealth, How To Invest, Investing, Money, Trading, Retirement Investing, Financial Advice, Investment Advisor, Josh Brown, Michael Batnick, ritholtz wealth management, finance, downtown josh brown, financial markets, retirement, saving for retirement, wall street, the compound, financial services, investment management, investment, dan mcmurtrie, tyro partners, hedge fund, supermugatu, hedge fund strategies, hedge fund explained, hedge fund manager

Id: YJNnEUSnPC8

Length: 21min 43sec (1303 seconds)

Published: Thu Feb 20 2020