Why Don’t More People Become Hedge Fund Managers?
When it comes to high-earning professions, many tend to think of becoming a Hollywood superstar or a hedge fund manager. However, the path to becoming a successful hedge fund manager is fraught with significant barriers and challenges that often prevent the average person from pursuing this lucrative career. Let’s explore why everyone doesn’t start a hedge fund and the unique barriers that exist.
Start-Up Costs and Financial Barriers
Unlike many other professional fields, becoming a hedge fund manager requires a massive up-front investment of capital and resources. The initial costs can exceed six figures, including registration fees, legal expenses, office space, and hiring a few employees. As the adage goes, “A missed paycheck is a disaster for many.” This means that a large portion of the global population lacks the financial flexibility required to even consider starting a hedge fund, making it virtually impossible for them to enter the field.
Even if you do manage to gather the necessary funds, the capital required to actually start a hedge fund can be astronomically high. Many successful hedge funds require at least $10 million or more from friends and family investors. Imagine the risk and financial strain involved in gathering such a large sum and then hoping that it will sustain the operation until you can start generating returns. The pressure to perform and outperform the market is intense, and the potential for failure is equally high. This is a stark reality that often deters many potential entrepreneurs from entering the hedge fund world.
The Realities of Hedge Fund Management
Once you have the necessary capital, the work is far from done. You need to prove your worth by achieving incredible performance. Setting up a hedge fund with $12 million and trying to grow it to $40 million in just two years, while outperforming the market and other highly successful funds, is an almost insurmountable challenge. In reality, achieving such heroic returns is rare, and even when you do, the barriers to further investment are immense. Regulatory and investor limits often restrict the amount of money that can be raised, meaning that even if you manage to outperform the market, the inflow of new capital will be limited to small, incremental chunks.
Thus, the financial and performance barriers make it nearly impossible for the average person to become a hedge fund manager. The high initial costs, combined with the ongoing need for significant performance and consistent fundraising, create a multifaceted barrier that excludes many from pursuing this profession.
Cargo Cult Thinking and the Nature of Barriers to Entry
The term “cargo cult” can help us understand why so many people fail to break into the hedge fund world. In its simplest form, a cargo cult is a belief system that involves rituals and practices aimed at bringing prosperity or material wealth. Historically, such cults emerged in Pacific Island societies after external influences brought them Western goods and technology. Believers would perform rituals, such as building airplane runways, in the hopes of obtaining the material wealth they saw associated with the outside world.
In the context of hedge funds, the concept of cargo cult thinking can be applied to those who believe that simply setting up a hedge fund, mimicking the superficial behaviors of successful managers, will guarantee success. These individuals may listen to seminars, read books, and follow successful fund managers without truly understanding the complexities of the industry. Like the cargo cults, they engage in these practices with the hope of achieving success without the necessary underlying knowledge and resources.
The barriers to entry in the hedge fund industry are real and significant. They include not only the financial and performance hurdles but also the regulatory and strategic hurdles. These challenges create a complex ecosystem that deters many from entering the profession, much like the cargo cults rely on misguided rituals to achieve an impossible goal.
Conclusion
The barriers to entry in the hedge fund industry are enormous, and this is precisely why it remains so profitable when it works. Despite the allure of high returns and the incentive to pursue such a career, the reality is that few can actually achieve the necessary conditions to succeed. This explains why even with the knowledge that it is a profitable endeavor, many do not embark on the journey to become hedge fund managers. Understanding these barriers, and recognizing the complexity of the industry, can help both aspiring managers and investors better navigate the challenges and opportunities in the world of hedge funds.