IAIC 2021: “Misadventures of a Hedge Fund Manager” by Christina Qi

What is it really like to start a fund? In an intimate talk about hedge funds, Christina Qi opened up vividly upon her roller-coaster journey of starting a hedge fund from her dorm room in 20s and all the mistakes she made along the way. She is now the CEO of Databento.

On being asked by people why did she start her hedge fund, she says the reason to do it around 10 years ago was to bring more scientific methods in finance, bringing tech & finance together. That was the time before quant trading & high frequency trading were in the vocabulary. But she revealed that the real reason of starting a hedge fund was out of a series of failure in college. She wanted to major from Biology but she soon realized that this was probably not the best fit for her. At the end of the year she was supposed to declare a major, and she chose management science not knowing what it was. The goal was just to survive the college. It turned out she was lucky as that major was basically finance which feeds straight into Wall Street. Disappointed with not getting any offer after her internship, she came back to the campus with lot of apprehensions about what to do in life.

Bored Christina started trading on her own in 2012 with her internship money. While it is a lot easier today for kids to start trading in America, the picture was completely different years ago. After trading for about a year in her dorm room, she & her co-founders made about $40,000. That was the moment she realised she can do this may be whole time.  The next moment she was googling how to start a hedge fund as she had no idea about it. She ignored all the statistics including the ones like- 95 per cent of the hedge funds fail.

She then went on to explain some of the life lessons via her own ups & downs stories of running a hedge fund.

Networking & Signing Up for Every Single Start-up Event

Christina narrated her story of getting the first funding in 2014, even after losing the pitch contest. Among 30 start-ups that were invited, they were in bottom five. However, before leaving the event, she went to the organiser & thanked her for inviting. The organiser then suggested her to meet a senior person in the audience who had experience in the industry. She ended up talking with him for 5-6 hours opening up about her concerns and passion for Domeyard (the name of her fund). That guy wrote her a cheque on the spot for $100,000. It turned out he too started his hedge fund in 70s when he was young & just graduated from college. Somebody was his angel investor back then & he wanted to pass it on.

Lessons learned: Normalize rejections, be grateful and stick around, you never know who is in the audience.

How to get the Company Culture Right

After getting the first cheque, Christina & her co-founders decided to start a company. What factors are necessary for starting a hedge fund apart from trading? Well, it is a company culture as she says. She recalled they were a bunch of 20-year old millennial who sat down to write down the principles they wanted to have in their company. They wanted their office to look more like Google rather than Goldman Sachs in the sense of giving free food, allowing casual dress code, unlimited vacation, and stuff like that. Also as they were new in the field, they decided to hire the biggest & famous service providers to kind of compensate for their lack of reputation. Almost all of their principles turned out to be 100 per cent wrong for them. She then broke down the things that went wrong and why:

1). Flat structure – Everyone being called partner

This structure made sense to her because she was hiring someone 3 times her age and she wanted them to feel equal and being valued. But she realized that there is a difference between fairness & equality. Once her office manager (who cleaned the kitchen, organised her table etc.) asked her to give him a raise as he claimed he was a partner too in the company. But fairly he did not deserve that level of salary because senior software engineers or the best quant traders on the team were generating millions of dollars of wealth. It actually became very unfair because it was equal.

2). Hiring big brand service providers

She said it was a bad idea to go with top service providers as they are 4-5 times more expensive than smaller brands and they treated them like the tiniest customer which was factually true. But they were always behind on everything. They had one provider in administrative who were 5-6 months behind on the financial statements at the end of the year which was required to be filed with many regulators & the clients. Since they missed many regulatory deadlines, they were audited six times that year & got in lot of troubles as a result. When they decided not to work with that administrative anymore, they were startled to know they were locked-in for the next two years as per the contract.

Calling it as the worst year of her life, she emphasized everyone to always read the contract and to have a lawyer to look through that as it is worth the money.

3). Perks- unlimited vacation, casual clothing, free food etc.

Despite such perks, people were leaving company like crazy. They were going to companies like Goldman Sachs. She realized people don’t stay because of perks. They stay when their voice is heard, contribution is valued, team is supportive & so on. It’s about the work people do & the mission their company has. She explained how different generations use perks differently. One generation misused their vacation policy. They took off like 20 days in a row & then another 20 days in next month. One might guess it’s the millennial because they seem like lazy who just want to chill and don’t want to work. But actually it was Gen X. The reason is that this generation grew up not having a lot of things. So they tend to take everything they get. They are not used to free food. If they are given free food, they will order & take it home for 5 people. This is exactly what they did with free food policy at Domeyard.

Christina touched upon some technical aspects of a hedge fund working while answering questions during Q&A session:

• Journey from Domeyard to Databento?

The biggest reason of leaving the hedge fund was a lot of mistakes that she made & she kind of started feeling burn out. She felt they wasted a million dollars for data as for high frequency trading, data quality is critical. So it dawned upon her to start as a data vendor that can solve the problems that she faced. Databento charges only on the basis of usage. So now she basically runs a fin-tech business.

• Keeping a diversified pool of Investors

This meant rejecting money from an existing investor. It was hard because sometimes people don’t take it well. They say never put all your eggs in one basket when you are trading. Same goes with accepting investors’ money. Never allow your fund to be concentrated.

• Skills required to start a fund and if she got those from experience or studies

A lot of it was trial & error. One has to go in there, learn, research & try things out. She illustrated this with an incident on her fund launch day. They ran a strategy after so many years of modeling, they were hopeful but nothing happened.  Five minutes before markets closing time, they were down $40,000. However, in last few seconds, it turned out they were up by $70,000 at the end of the day.

• Dealing with sudden redemptions

Always prepare for redemptions no matter what. Domeyard got 1^st redemption in the month of its best performance because that company changed its portfolio focus & they were shutting down a part of their business. Everyone has bad days. The day when she received an industry award in New York for outstanding hedge performance, was also the day with their worst draw down in history.

The session was overall very insightful and full of bizarre incidents of Christina’s hedge fund journey. It clearly established that starting a hedge fund is lot more than having a strategy, broker, computer & money.