Private asset management company?

[xtwr]

Hi guys, I'm new here, but not entirely new to the concept of financial independence. I'm 30 years old, and have been pursuing independence for the past 3-4 years more or less seriously. I'm still far away, but I'm motivated.

I recently graduated with a PhD in economics, and now work in the finance industry, so trying to understand the markets has been pretty much my job and a passion for the past few years.

However, I'm not very happy in my current job - it is rather stressful and I work long hours. Ultimately, my goal is to become financially independent, managing my own wealth via a private asset management firm. I have a few (quite preliminary) thoughts and questions about this, and I would appreciate your input

1) So many people dream about running their own hedge fund with other people's money invested. Sure, if you are good, this can be the best way to riches quickly. However, it also comes with huge responsibility, and I think I would not be comfortable "placing bets" with other people's money (also, I don't think I'm skilled enough).

What are your thoughts on starting a private asset management company with your own funds only? These days, trading costs and access to data are not too expensive, so one could get started with a relatively modest amount of money (I'm thinking as low as 200k). And I'm not talking about high-frequency or algorithmic trading, but mostly simple stock picking.

2) I don't really care about having a lot of money. What's more important to me is freedom. Let's say you start with 200k and are able to generate profits of roughly 10% per year. Would you consider moving to a country with cheap living costs and low taxes in order to do this?

E.g. let's say that out of 200k, you pocket, on average, 15k a year after taxes, commissions and fees. This would leave you with over 1000 USD per month for living costs, which should be plenty if you live in a cheap country.

Some years you will make more, some years less due to variance. You would balance this out by either adding or subtracting from your wealth to get a relatively steady income level.

To accumulate wealth, you might get a relatively laid back or a part time job, and you use the entire income from that job to add to your investment portfolio. So live off investment profits, and add any extra income to your portfolio (exactly the opposite to what is traditionally done).

I have many other questions as well, but I'd very much like to hear your thoughts on this.

 

[pb4uski]

I'm been tangentially involved in the formation of some investment funds and in almost all cases they have so-called "seed" money from a rich parent company to get the ball rolling but I'm trying to fathom what the advantage of a private asset management company would have over just investing for your personal account.

Playing devils advocate.....On one hand you say that you don't feel comfortable managing OPM but that you would target a 10% annual return. Unless you are a good stock picker or trend picker or have some secret sauce, how do you envision making 10% annually?

Also, while is sound silly to say.... $200k is not a lot to work with. One bad idea and you could be wiped out.

On the plus side, if you could earn 10% annually your taxes would likely be nil rather than $5k.

 

[xtwr]

I'm trying to fathom what the advantage of a private asset management company would have over just investing for your personal account.

I'm not entirely sure either, I would think maybe better tax treatement via deductibles, but this of course depends on the country you are living in.

Playing devils advocate.....On one hand you say that you don't feel comfortable managing OPM but that you would target a 10% annual return. Unless you are a good stock picker or trend picker or have some secret sauce, how do you envision making 10% annually?

Also, while is sound silly to say.... $200k is not a lot to work with. One bad idea and you could be wiped out.

This is the reason why I mentioned my background earlier Sure, getting a return of 10% annually is tough, but for example, just in the past few years, academic research has accumulated tons of evidence of persistent market anomalies that have been and still are exploitable. Some of the largest hedge funds rely on these, and while no one is able to get rich quick off these, beating the market is definitely possible. I would claim that my background gives me a slight advantage in this respect, or at least I would be willing to try. Also, I would not engage in any derivatives trading, for example, so the portfolio would always be very diversified.

On the plus side, if you could earn 10% annually your taxes would likely be nil rather than $5k.

Yes, but I included fees and commissions, data and research costs in the $5k

 

[pb4uski]

What I would suggest is that you back-test your theories and see how they do. If they pan out then do it for your personal account and then expand if all goes well. I would suspect that in many countries with an income tax that investment expenses can be deducted from investment profits but YMMV.

 

[xtwr]

What I would suggest is that you back-test your theories and see how they do.

Yes, I'm on it. Still want more evidence and new/alternative strategies, though. Also, still short of 200k

Now, I'm really curious about where in the world to do this. I have a few criteria in mind:

• Not a third world country, needs to have low corruption and a safe atmosphere in general
• Need to get by speaking English, e.g. need to be able to get a job, if needed (though this should be possible in almost any developed country these days)
• I'd be perfectly fine living somewhere in the countryside (as long as you can get reliable internet access). This can result in considerably lower living costs, and hence, I'm not sure if I should count out any country at all? Where would you go to accomplish this?

Also, I'm wondering why I don't find many other people pursuing the same type of dream. As I mentioned, almost anyone who has the same background as I do would want to start a hedge fund with other people's money. I don't know anyone else interested in investing professionally and who would be happy living a modest life. Am I crazy?

 

[DrRoy]

I do not see the need to form a company to manage your own assets. Why wouldn't you simply just do it from whatever account you have them in? As for a low cost place to live around the world, there are lots of articles on that. Just Google it.

 

[photoguy]

Sure, getting a return of 10% annually is tough, but for example, just in the past few years, academic research has accumulated tons of evidence of persistent market anomalies that have been and still are exploitable.

A persistent anomaly that will consistently get you 10% returns after costs without HFT or algorithmic trading? Do tell (feel free to link to the academic papers). I don't believe such an anomaly exists.

However, in case I'm wrong, I would suggest starting your personal investing fund right now, wherever you are currently living. If you can't do this because of independence rules at your company, you could switch jobs to a different company where the rules are more lax. This would give you the safety net of a job and additional investment capital while you try out your method.

Also, if you are basing your trading approach off a published anomaly believed to be persistent, there's probably already a fund using that method. So an alternative is to just take your 200k and invest with that other fund.

Now, I'm really curious about where in the world to do this. I have a few criteria in mind:

If you recently graduated from a PhD program, and are willing to live like a grad student again, you could live pretty cheaply anywhere in the US. If you don't want to live like a grad student, there are lots of cheap cities and towns in middle america.

Also, I'm wondering why I don't find many other people pursuing the same type of dream. As I mentioned, almost anyone who has the same background as I do would want to start a hedge fund with other people's money.

When you live like a grad student until you're 30, at some point you just want to bring in the big bucks and stop struggling. Also living on 20k a year (10% of 200) is not much money if you want to start a family. It might also make it harder to find a spouse.

But in general, lots of people on this board have the same mindset. There are ton of highly educated professionals who could have pushed their career further in exchange for more money but didn't. Not sure if there are many econ Phd's but there are lots of engineers/scientists here.

 

[REWahoo]

If you recently graduated from a PhD program, and are willing to live like a grad student again, you could live pretty cheaply anywhere in the US. If you don't want to live like a grad student, there are lots of cheap cities and towns in middle america.

I suspect the OP is thinking more broadly than the US. His profile says he lives in Europe.

 

[braumeister]

Monaco is nice.

 

[MichaelB]

Monaco is nice.

Yup. Also many fine options in the Caribbean. Bahamas, Aruba, Cayman Islands.

 

[photoguy]

I suspect the OP is thinking more broadly than the US. His profile says he lives in Europe.

Good point. Perhaps the same is true in Europe or UK?

I would think that tax law on capital gains would be a huge factor and the US is pretty good there (at least for long-term in 15% bracket).

 

[xtwr]

Monaco is nice.

Monaco is probably waaay too expensive, no? Is there a way to live there on $15k a year?

I suspect the OP is thinking more broadly than the US. His profile says he lives in Europe.

Correct. I have previously lived in the US though (as a student), and I really like the western part of the country. However, for some reason I think that starting your own company would be scary in the US due to legal issues (I have this impression that you would be needing a lawyer for everything, and if something goes wrong, you go bust?).

 

[pb4uski]

Yes, find some rich friends or a rich, lonesome widow.

 

[xtwr]

When you live like a grad student until you're 30, at some point you just want to bring in the big bucks and stop struggling. Also living on 20k a year (10% of 200) is not much money if you want to start a family. It might also make it harder to find a spouse.

Good point, especially that last part.

 

[braumeister]

Monaco is probably waaay too expensive, no? Is there a way to live there on $15k a year?

Sorry, that was a facetious comment intended as humor. When you said

I'm not sure if I should count out any country at all

You made me think you haven't really thought your plan through very much.