GUEST COMMENT: I am a partner in a hedge fund and it is not that great

It has fallen to me to cure people visiting this site of a grave disillusion: becoming a partner in a hedge fund is no panacea for life's ills.

I know this, because I am a partner in a Hedge Fund. I helped set it up and I now spend all day talking to the prime brokers ("PBs"), the administrators and the investors that keep the ship afloat. Here are a several thoughts for you.

Unless you have access to $100m of sticky seed cash, forget it. The prime brokers won't even look at you. The days of starting a fund with $30m and a wing and a prayer are over.

Since the "crisis," banks have massively tightened up their criteria.Even if you have access to $100m you will want to have more than one PB to provide your leverage. Several of my friends had their funds shut down by their sole PB bank pulling their leverage at the most inconvenient moment and effectively shutting the fund. Most PBs give you one month's notice; signing a new PB deal from a standing start in less than three months is impossible; closure is inevitable. In reality you need more like $150m; $100m in your first PB and $50m in one that you are stringing along.

Then we come to investors. These are notoriously tricky creatures. They won't want to be more than 10% (usually 5%) of your total assets under management, but at the same time, they won't want to write you a ticket for "just" $5mm; you are just too small for them.

This will mean that growing your assets is very slow. Remember this is a numbers game, it is the Management Fee (the 2 of the 2&20) that turns the lights on; your seed money won't be paying you 2%, so you need to get your AUM up as quickly as possible.

You also need to bear in mind that 18 months of track record is the big performance metric that HF investors are slaves to and you don't have that.

So now you have the money. Next you have to deal with the lawyers, the administrators, and the regulator. The first two are just money...and lots of it.

Budget on $100k-$150k to get the initial structure set up and all the legal agreements in place. Next you need to get regulated. Bitter experience of FSA applications suggests it takes nine months before you get approval. That's a long time to keep all the plates spinning and all the parties and constituencies interested in your little scheme.

Bear in mind that all this time you are not getting paid.

Worse than this, you are writing cheques left right and centre for everything. A plush office in "Hedge fund Alley" is going to set you back 60 a square foot and require a five year lease. Fitting out a reception, meeting rooms and a dealing room for 10 people will set you back at least 300k.

Your new investors will also want to do due diligence on your middle and back office, your compliance procedures and your processes; this will require a raft of extra bodies in the admin part of your expensive office space clacking away at their computers and adding to your overhead.

You are not going to become rich overnight. The early years will be tough! You have high overheads, low AUM and a raft of new regulation coming in (AIFMD, via

your investors Solvency 2), which is going to make the landscape tougher. You will be putting in long hours to create the performance necessary to get your AUM up to a viable level.

You will not be buying country estates, islands or yachts anytime in the near future. There have been plenty of days I have looked enviously at my ex- colleagues in the banks and longed for my days as a wage slave.

If any of this sounds like self valedictory "pulling up the ladder behind me" stuff I really don't intend it to be so. I just think that someone needs to quash the idea that starting a new hedge fund is a panacea for the woes of being a bank wage slave. The highs of owning your own business are great, but the lows are twice as low....

The Author is a partner in a London based Hedge Fund who wishes to shine some objectivity on his reality.