Chris Lau - Seeking Alpha

Thursday, August 06, 2009

How to Start a Hedge Fund with $3 Million

Dan Loeb is someone to learn from. Success is great when you're at the top, but sustaining success is defined by what you do when you are at the losing end of the game.

In the video below, Dan Loeb speaks about the interrelationship between investing and hedge fund management. Loeb started his fund in 1995 with $3.3M. Third Point is now managing over $2B.

This is a great video.

Loeb speaks beyond the need to understand security analysis. He talks about the role of philosophy in money management:
  • To whom does the manager look out for first? For self or for investors?
  • The importance of teamwork
  • Honesty and creativity
A key point I fully connect with is at the 48 minute mark: an investor and manager needs an element of creativity, emotion, analytics, and intuition to tie everything together. For new investors who want book suggestions, a list is provided by Loeb recommends at the 50 minute mark.

Source: This video was originally posted on Market Folley

Investment Performance Highlights
In 2007, the firm had a good year and made over $1B.

In July 2008, Loeb allowed his risk discipline fall apart due to long exposures in financials and energy.

Loeb essentially panicked during those crisis months.

By the end of the year, the firm lost about 32-37% and lost a third of its clients (still losing fewer clients than other firms.

This year, Loeb focused back on the basics. He focused on investing in places where the government was intervening. As the story unfolded, the fund moved from a 7% loss to a 7% gain in a 6-week period.

Disclosure: These are important lessons learned. I currently have about 550 followers on kaChing. If I qualify as a Signature Investor later this year, and that each follower invests an average of about $5,500, it is possible for me to also start with $3 Million in assets under management.

Loeb ends the presentation by stating there is andwill be a massive opportunity on investing on the theme of asset re-structuring over the next few years. Note that Seth Klarman spoke on this idea as well - opportunities that exist outside of the mainstream.