Hedge Funder vs. Tycoon

It often seems as if everybody wants to be a hedge fund guy these days. If you then ask the wannabes what hedge funders do, you invariably get a vague answer along the lines of “they invest in stuff” or worse, a simple blank stare. Now to be honest, it took me a while to get a handle on what they do. (Note that I didn’t use the word “understand.”) As far as I can make out a hedge fund is basically an unregulated mutual fund for sophisticated high net worth individuals and institutions. This is another way of saying that a hedge fund can invest in almost anything that its management believes it can earn a high “alpha” in. (The alpha is a rate of return above and beyond what one might expect from trading in stocks and bonds the way mere mortals do.)

So basically almost anything goes so long as there is potential for the high returns necessary to attract and keep sophisticated investor capital.

Hedge Funder

Hedge Funder

Now here’s why I write about hedge funds today. I get asked a few times a year if The Tycoon Playbook approach can lead to a career as a hedge funder. The answer is yes and no. First off, I need to explain that these are two entirely different ways of doing business and making money. Hedge funders are guys who wear $5000 suits every day of the year, never leave their 45th floor offices in the financial district except to go home, and have frustratingly vague or no operational experience at all. In contrast, tycoons are hands-on guys who have accumulated plenty of operational experience over time. They are not afraid of popping the hood when something is wrong and fixing it themselves, as you see Marcus Lemonis doing in his show. This is a key difference. Hedge funders tend to be long on MBA-style theory and short on actual experience when it comes to running a company not that that stops them from thinking that they know it all. Those who achieve tycoon status end up long on experience and use theory wisely.

So I respond to the question in this manner. Once you have a sufficient pile of cash you can be anything you want: a hedge funder, an angel investor, a venture capitalist, or a private equity dude. That’s the great thing about being wealthy.  However, the real question you need to ask yourself is what do you really want to be in life? Do you want to be a dandy in French cuffs who thinks he knows it all and devotes his life to mere speculation? Or do you want to be the guy who focuses on building real wealth with real businesses?

As the old joke goes, relying on these guys for advice over the long-term is like relying on a bookie to advise an NFL coach on how to play his team. There’s only so much insight that can be gained from spectating.

I know which group I respect more and which one tends to have a net plus effect on our economy rather than a net minus.

If you are just starting out and dream of a career as a hedge funder, your best bet is go for a Top 5 MBA, start collecting expensive cufflinks, and apply for an entry-level position at graduation.

9 Responses to How to Become a Hedge Fund Guy

  • Great article. I agree 100%.

  • “Everyone” wants to be a Hedge Fund guy because that’s the flavor of the month. They watch Bloomberg and CBNC and hear about a guy that made $150 million in one year. That get’s lodged in their minds. Same thing goes for Coding. Everything thinks they’ll be the next Facebook.

    There are a lot of good “nut and blots” companies out there. Massive amounts of wealth just sitting there waiting to be had in those boring industries. I get excited when I hear about guys wanting to start tech companies(that will probably never get funded nor get off the ground) or social media platforms…..that’s less competition for me.

    • Agree with you about how everyone and their mother wants to start a tech company. People don’t give enough credit to manufacturing and distribution companies.

      Notice you comment quite a bit on here, have you been able to utilize the tycoon playbook to purchase your first business, and begin building your empire?

      • Hi JR,

        I’ve shifted the way in which I am doing things. I’m putting together a Private Placement capital raise for $2 million dollars. After I complete the raise, I’m going to use most of it for the down payment for the business purchase, some will be for expense and some for working capital. I’d rather use equity than debt. At least I can suspend the dividend payment if the sales and profits “dip” a little. With debt, the payments cannot be suspended and it ties up cash.

        • Hi Ron,

          Wouldn’t using almost exclusively investor capital and little debt, force you to give up a good chunk of equity and the cash flow? Also, investors can sometimes be demanding. Though, you are right, it’s a big plus if you need to suspend dividend payments. Good luck with everything and keep us posted!

          • JR,

            It’s all about deal structure. You don’t have to “give up” a “big chunk”. You do have to “give up” something, but not the whole farm. Also, don’t look at it as if you’re “giving up” something. You’re gaining more than you’re going to “give up”. Just make the investment look better than the returns they’re getting from the stock market and retail bank investment rates. The investors that you want to target are passive investors and those that are called “latent” investors. “Latent” investors are those that have accredited investors wealth/income but don’t actually call themselves investors. I’m not going after professional investors like VC firm types. Their are millions of latents. Millions of them. I’m not going after those that have an official name like-Angel Investors. Although Latents are angels, they don’t think of themselves as that. Also, I will in fact use debt and equity. As long as you find good businesses that have sufficient cashflow, covering debt/dividends will not be an issue. It’s not end all be all, it’s the beginning. I don’t mind sharing the wealth while building my own. I’m not greedy. :0)

  • Creating a hedge fund is inherently a wealth and networking game. Since hedge funds are restricted to sophisticated high net-worth individuals, you have to sufficiently differentiate yourself from more established players in the industry. It’s also networking game because you have to convince those high net-worth individuals to entrust their piles of cash with you … and if you don’t have a proven track record of high returns, they are liable to laugh in your face.

    Unless you are a child of privilege, it’s not a realistic career goal.

  • Very impress and fun. The picture made me smile for “$5000 suits every day of the year”. Private equity, LBOs are more interesting.

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