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Money managers under the microscope

What it takes to build a hedge fund

November 24, 2010

Fledgling hedge fund managers should expect sleepless nights, less time with their families, and intense competition for capital, as the industry has grown even more competitive after the financial crisis,  according to Lars Kroijer, a former hedge fund manager who says he doesn’t think he would run a fund again.

Kroijer, who writes about his six years at the helm of the $1 billion London-based hedge fund Holte Capital in the recently published  ”Money Mavericks: Confessions of a Hedge Fund Manager” told Reuters in an interview on Wednesday that new hedge fund managers are fighting an uphill battle to get enough capital to start their businesses, and you couldn’t start a hedge fund today with just three guys as he did in 2002.

New hedge funds, he said have to start with a lot more capital these days, because they need to be able to weather the markets a bit longer and make sure they stay in business long enough to get a real shot to prove to prove that they are good investors.

“I get approached a lot by would-be managers…. and I always tell them the same thing. You need to know that you really love the business of investing and then you need to have enough certainty that you have enough capital to actually invest money. Whether that’s because you have a rich uncle, a seed investor, or yourself — you have to have enough money that you’re actually going to be investing capital and be able to prove a track record. You can’t expect that you will open a fund and people are going to be knocking your door down, trying to give you money.  That doesn’t happen anymore. “

As Kroijer explains in his book, he closed his fund and returned the capital to investors after getting  a large drawdown request from an investor in early 2008 and deciding he didn’t have the energy to rebuild the fund .  In retrospect, he says it was a great trade since he missed the financial crisis.

For now though, Kroijer says he doesn’t miss running a hedge fund, but is living vicariously through his friends.

“I’m not going back in the game. There are some people, when you see them on Sundays, they wish the market was open and all they can talk about is stocks and securities and trades. I’m not like that and maybe that impacted how long I was going to stay in the business. I thought it actually made you a better investor because you are slightly detached from it and you don’t fall in love with your trades. But it had just been an incredible wear and tear on me, on my family and my marriage and I made a lot of money so I didn’t have to do it. I actually thought the opposite would happen. I thought once you made a lot of money you would be doing it for the right reasons – that you’re doing it because you love it. And instead what happened was I made all that money and I thought do you really want to do this, or do you want to try to do something else in your life.”

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