Thoughts on Not Starting an Investment Fund
Recently, Jimi and I took a serious look at starting an investment fund – not the VC type, but the type that buys and sells in public financial markets. The idea was to use machine learning and an interesting technique for scouring the internet to determine mood in order to make trades. We were looking at it as a parallel opportunity.
As we dug into this idea, some interesting information about investment funds emerged:
- Investment funds make money no matter the performance of the fund. They draw fixed commissions from the assets they hold. The clients take on all the risk of the swings of the market.
- The only way investment funds lose is when clients pull their money out, which often means death to the fund.
- Investment fund employees have fantastic job security because funds want to preserve the appearance of total stability for their clients. They want to keep IP from leaking. Bad apples are often allowed to stay on-board for these reasons.
- The biggest difficulty is building the fund in the first place. Bringing new assets under management is super hard. You need solid proof of traction and performance to convince investors.
- Once a client is on-board, you merely need to consistently beat index funds.
- Investment funds soak up some of the most talented computer scientists in the world. I’ve seen several talented people leave high-performance computing to go work at investment funds.
- The best investment funds are the silent investment funds. They’ve found some inefficiency in the financial fabric that they’re exploiting. They don’t say a word for fear others will remove the inefficiency. They are printing money; lot’s of money.
- One investment fund where I have a friend employs 300 computer scientists, and they keep silent about what they do.
- One interesting Atlanta fund is here.
- Johnson Cook’s recent post about YPO led me to some interesting data. For the purposes of membership, YPO considers these 3 achievements to be equivalent:
- Sales/Services/Manufacturing corporations must have at least US$12,000,000 in gross annual sales or turnover.
- Financial institutions must have average annual assets of at least US$240,000,000.
- Agency-type businesses must have annual fees or commissions billed of at least US$9,000,000.
After careful consideration of the space I realized two things: 1) To compete you have to be 100% focused. It can’t be a parallel opportunity. The investment market is cutthroat due to the high stakes (read this article entitled, “Barbarians at the Gateways“), 2) I enjoy building products more than making investments in financial markets. The combination of those two caused me to stop the exploration.
It always feels good to shut down an idea before getting too carried away down a rabbit hole.
Have you ever taken a look at building an investment fund? Are you crazy like that?!