Eagle Bay Capital: Why I think It's All Worth It
Last week I had the opportunity to sit down and chat with Jesse Solomon from CNN Money about running a startup hedge fund. He wrote a great piece that was recently published about Emerging Managers and some of our struggles early on. I was one of the two managers featured in his story.
As someone who is in the process of growing a hedge fund from the ground-up, I have a front row seat as to just how difficult of a process this can be. The hedge fund managers that we usually read or hear about have already made it. But there is a whole other world out there of guys like myself who aren't quite there yet.
Very few people, believe it or not, bring up my age when they ask me about my business. But it does come up on occasion. I've been in the industry now for 11 years, initially starting as a young intern for Merrill Lynch.
From CNN Money:
J.C. Parets is always hustling. The 32 year-old market technician and founder of Eagle Bay Capital is in the process of raising $10 million to launch his second fund....
While he admits some investors will bring up his relatively young age -- a "32 year-old punk," he jokes -- Parets doesn't see it as a factor.
"I don't care how long you've been on Wall Street, you haven't seen anything I haven't. I traded through 2008," Parets declares, referring to the financial crisis....
***
For more information on Eagle Bay Capital, email info@eaglebaycapital.com
Another surprising fact is how pleasant the experience has been in terms of interacting with other emerging fund managers and the hedge fund community as a whole. I feel like investors are often very misinformed about this. A lot of the vendors that hedge funds need to hire also have their goals aligned with the managers as well as the investors. This goes for the 3rd party administrators, the prime brokers and any other vendors that benefit from a growth in assets under management. It's in all of their best interests to keep investors as happy as possible and help the manager grow the fund in the easiest, most efficient ways, both in terms of operations and performance. I wish I could say the same about other areas of the financial industry, where more often than not, the goals are misaligned.
In addition, other emerging managers have been extremely helpful along the way. When I first started this process, I'd take other fund managers out for drinks and/or lunch. I would often get, "JC, this is everything I did wrong....boom boom boom". Isn't it so great to know how nice people are in what can be an extremely intimidating New York City and Hedge Fund community?
No one said it would be easy, but I firmly believe that it is all worth it. The most efficient way for us to manage money is to align our goals as best we can with investors. The traditional brokerage model is obviously flawed as brokers get paid on a per transaction basis and are, get this, not allowed to share in the upside profits with their investors. So is the incentive to make them the most money or to increase the amount of transactions?
Then you have the fee-only model with again, zero upside incentive for the manager. Is the advisor's incentive to make the most money for investors? Or is the advisor's compensation based solely on assets under management, therefore making raising assets the biggest incentive?
In a 2 & 20 model with a quarterly high-water mark, the manager has two major incentives: #1 don't lose money and #2 make investors the most money possible. Why? Because the bigger the drawdown, the harder it is to get back to the high-water mark in order to take incentive fees. The higher the profits, the more money the manger makes. So the manager walks into work every day scared to death to lose a penny, but with an equivalent incentive to allow profits to run as high as possible.
Now in order to to align the goal of a manager with the investors in this way, there needs to be a management company that runs that fund. This makes everything more difficult, but not impossible. No one said it would be easy. But in my opinion, it's the best way for someone like myself to manage a portfolio. It's not for everybody. A lot of advisors just allocate assets to other fund managers and just focus on raising money. Nothing wrong with that. But investors need to understand the difference.
***
For more information Eagle Bay Capital's managed assets, strategy and liquidity options, please feel free to email: info@eaglebaycapital.com
Check out the CNN article in full:
The Unglamorous Life of Hedge Fund Startups