Richard, I've also managed mutual funds and, in fact, started and ran a fund that was the third largest in the country when I resigned. It was even bigger than Magellan. I was very proud of that, as I loathe Peter Whatsit and his fund had been in business for 20 years when we passed them by after only two years in existence.
Mutual funds are a tough business. Not running the money. That is the easy part. Marketing, legal and accounting are the headaches. There are firms that help folks with startups and handle the backoffice for them, but, so far, I have yet to see any of these "garage" funds make any money for its managers.
Part of the problem is what you mentioned. NOBODY gets 1.75% for a management fee. Total expenses are often that high, but that includes accounting, directors fees, annual reports, legal, corporate taxes, etc. For example, on my fund, at the peak, the total expenses were .56%, but the mgt. fee was only .27%. However, since it was $10 billion in size, that was still a healthy amount of moolah for a firm that had only earned $4 million the year before I went to work for them.
IMHO, running a mutual fund only makes sense if you can reach critical mass, where a .5% mgt. fee covers your overhead and makes you a good profit. To do that, you need a big organization behind you. Either you have to be part of a firm that already has overhead in place, or you have to tie into some selling organization.
A hedge fund is a much sounder startup possibility. There, a 1% fee and 20% of the profits are standard. You have to get set up with some brokers who can funnel high net worth investors your way, and, of course, you have to send trading commissions their way to do this. That has always been my hangup in the hedge fund area. The guys who have the high net worth connections generally are not able to deliver good prices on the complex trades I do.
So, if you want to get started in this business, I recommend looking at starting a low overhead hedge fund and wining and dining some big hitter brokers. |
