If only running a hedge fund was as easy as fielding phone calls from your rich uncle George. Sadly, the decisions that you make as a hedge fund manager can have far-reaching consequences for those who invest in your fund—and even those who don’t.
Hedge funds are often shrouded in mystery and intrigue because of the lack of reporting requirements under which they operate. Hedge funds typically must file a “Form PF” with the Securities and Exchange Commission (SEC), which provides some information about their activities but not an overly detailed picture. To better understand what hedge fund managers do all day, we asked several of them to share their experiences with us:
10% or less of time is spent on the following activities:
- Managing funds for investors (this is typically allocated to outside money managers)
- Fundraising (most of this is done by an automated algorithm, I just need to be available in case it gets a cold call from someone with deep pockets)
- Meeting with portfolio managers to decide which companies are bought or sold at any given time
- Interacting with clients—or “eating shit,” as one hedge fund manager described it
- Checking Twitter, Facebook, Tumblr and Reddit for mentions of my company’s name in order to manipulate online sentiment in our favor. This includes retweeting favorable tweets, responding favorably to posts that mention us in a positive light, and blasting our social media accounts with bogus support for a company or idea we want to destroy.
- Writing articles on Seeking Alpha about companies in which we have a short position, without disclosing the fact that we are shorting those stocks. After receiving many emails from irate investors who were duped by these articles into buying stock in some miserable company, I’ve decided to stop writing them as of today.
- Checking Reddit for mentions of my company’s name followed by the word “short” in order to see how many people are calling us out as frauds. This number is important because it helps me determine whether or not I am doing enough damage control to protect our reputation—I’m up 4% this week so I know I’m doing a good job at it.
Informing investors about performance:
With the help of a bogus researcher who writes glowing reports that selectively ignore our poor investment choices and instead focus on our good luck in timing the market correctly. This tends to keep most people from asking too many questions-especially if we mention Warren Buffett’s name a few times.
Attempting to distract public attention away from their hedge funds by buying stakes in athletic shoe companies and releasing new “limited edition sneakers” by world-famous athletes or celebrities as fast as possible after they’ve been released—it doesn’t matter how crappy they are, as long as they have a catchy name like “The LeBron James Signature Da Vinci Sneaker.” No one cares about the actual product because there are so many people waiting in line to buy them that they can’t afford to take the time to learn more.
Meeting with lawyers and lobbyists who help them convince Congresswoman Debbie Wasserman Schultz (D-FL) to go on national television and claim she doesn’t understand how stock markets work—this is important because once it becomes clear that she has absolutely no idea what’s going on, people will stop asking her questions about hedge funds.
- Calling major cable news networks and telling them I’m a hedge fund manager who will be giving an exclusive on-camera interview about my new book on how to get rich quick without having to work too hard. Then hanging up before they have time to ask me any questions or verify that I am in fact a hedge fund manager.
- Taking out full page ads in The New York Times with “A Modest Proposal” written at the top, then using our influence with politicians and media moguls (see above) to convince everyone this is Pulitzer Prize winning satire written by Jonathan Swift.
- Sitting in my Porsche Cayman S while the car’s computer reads me articles from The Wall Street Journal that we paid millions of dollars to place.
Becoming an Hedge Fund Manager:
If you will have 15 or more investors in your hedge fund, you’ll need to register as an investment advisor with the SEC. (Note: That doesn’t mean you’ll have to register the hedge fund). If you’ll have less than 15 investors, you may still have to register in one or more states. I’d play it safe and register with the SEC. It’s not scary — they’re actually there to help you so long as you are not defrauding investors.
To become an investment adviser, you’ll need to sit for a regulatory exam. The Series 65 is a 3-hour, 140 question exam, of which 130 count towards your final score. It’s not the hardest exam in the world (part of the “scary” conversation above); but, you’ll need to score a 68.5% or better to pass. The Series 65 doesn’t teach you a darn thing about investing. Instead, it’s a “minimum competency” exam designed to test your ethics and understanding of basic securities laws and practices. A study guide and a few hours of quiet reading can make you a pro.
Registering your hedge fund with the SEC:
Hedge funds don’t technically register with the SEC. Instead, you’ll have to register your LP interests offering (corporations have stock; LP’s have interests; LLC’s have memberships; trusts have units of beneficial interest) with the SEC if you are offering the hedge fund to investors other than friends and family. So, you don’t register your fund; you register your offering. Though there is no fee for registering your offering, you will have to get a CIK number from the SEC and file with the SEC and with each state in which you plan to offer or sell interests.