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David Weidner's Writing on the Wall
May 24, 2011, 12:01 a.m. EDT
By David Weidner, MarketWatch
NEW YORK (MarketWatch) "” Are you tired of watching hedge funds ruthlessly beat the returns of your amateurish portfolio?
Do you ever wonder how guys like John Paulson and Steve Cohen so easily produce 15%, 20%, even 30% returns on an annual basis?
Could you use some extra income to buy a second home, an island in the Caribbean, a Degas, Warhol, Van Gogh or other work of art, or do you just want to live and eat well "” like Raj Rajaratnam on the night before his jail term?
Well, don't walk, but run down to your local securities lawyer and tell him or her "” it's better to whisper loudly "” that you're starting a hedge fund. But don't say starting, say "launching." You need to talk the lingo. And tell that attorney that in lieu of payment, they're going to be getting a better deal "” a stake in your BlackTreeGraniteAdvisers Capital LLC (trust me, it's a great name).
Once the domain of elite, sophisticated Wall Street traders, it's never been easier for the average Joe to start making big money in the hedge-fund world.
Congressional investigators are broadening an early-stage stock-trading probe into SAC Capital Advisors, with plans to examine any suspicious trading by the hedge-fund giant in the options market. Jenny Strasburg has details.
Yes, there are new regulatory rules to comply with, including registration with the Securities and Exchange Commission, but the $3 trillion industry is still mostly unregulated. You don't need a license, a pedigree, or a computer. You can work from home.
Once you've set up your hedge fund, you'll need investors. But to attract investors, you'll need a compelling investing strategy to lure in the cash. And here's where we get to the meat of the matter. Today, there are three main strategies in the market:
Don't let the name fool you. We're not talking about old-fashioned analysis, investigation and number-crunching. Think calls to company directors, "expert networks" and high-level executives. That's the kind of research favored by hedge-fund managers these days. Look it how aggressive research paid off for Rajaratnam. He's a billionaire.
Everyone wants a piece of the action including investigators. Cohen's 10-year record at SAC Capital is being evaluated. Roughly 20 trades of options were suspiciously timed, and that's probably all they were unless someone was wearing a wire or the phone was tapped. Read WSJ's report on options-trading probe by the U.S. Senate .
This method, favored by John Paulson & Co. and Magnetar Capital is less known, but arguably more lucrative. It involves a tremendous amount of work and risk, but not for you, the hedge fund manager. For your investors.
You as a hedge-fund manager look for an opportunity. It could be a stock, bond or asset fund that's being launched by say, Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs GS +0.63% You can even launch it yourself.
Then, the work. You'll have to help out. Pitching individual securities, maybe mortgages, just to name one randomly, to be included in the fund.
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David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub.
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