IF SETTING up a hedge fund were easy, more people would do it: bar inheritance or winning the lottery, there are few swifter paths to immense riches. Sadly for aspiring plutocrats, it is getting ever harder to launch a fund. Swaggering financiers once joked that launching with less than $1 billion of outside money to invest was hardly worth their time. Debuts that splashy are now notable only for their scarcity. A new fund typically opens with $50m-100m in assets under management. Even so, and despite buoyant stockmarkets, the number of launches is declining (see chart).

Punier funds make for a less attractive business model. A $50m pile might once have been enough to sustain a small firm. Creaming off 2% of assets and 20% of profits—the standard hedge-fund fee formula—could generate around $2m a year given decent performance. No longer. Declining fees and low industry-wide returns have halved that amount.

Expenses have risen, too. Thanks to the Bernie Madoff swindle, investors want to see sturdier back-offices staffed by compliance types. Gone are the days when two traders with a Bloomberg terminal and some banking contacts could brand themselves as a hedge fund and attract outside money, says Kent Clark of Goldman Sachs Asset Management, the bank’s investment arm. Paying for all this box-ticking requires more like $100m in assets.

The industry’s investor base has also changed, which makes it hard for those firms that do get off the ground to soar. Hedge funds used to get most of their money from rich people; nowadays, institutions such as pension funds are the dominant investors. They are often more risk-averse, preferring to invest bigger sums in fewer, large managers with a longer record. Although over half of hedge funds manage less than $100m, they represent only 1.4% of the industry’s $2 trillion or so in assets, according to Hedge Fund Research, a data provider.

The ranks of potential hedge-fund managers have also thinned. Post-crisis rules banning banks from wagering their own money prompted many of their star traders to leave and set up their own funds. That exodus is pretty much over; many of these new funds have already shut up shop after delivering underwhelming performance. The most favoured potential managers of new hedge funds these days are the key lieutenants at existing large funds, says Dominic Freemantle of Morgan Stanley.

Enough new funds are still launching to raise a question: why would any investor prefer managers at an established firm to set up their own shop? Data are patchy but suggest that start-ups do deliver better results. This may be down to newcomers being smaller and nimbler, or hungrier for the returns that will earn them mega-bucks. And many of the most sought-after funds are closed to new money, points out Ted Seides of Protégé Partners, a hedge-fund investor. Backing their most promising offshoots is the next best thing.

Indeed, a handful of specialist investors are looking to back new hedge funds in the same way that venture capitalists back start-ups. Blackstone, Goldman Sachs and others have pots of money dedicated to “seeding” new managers, entrusting them with $20m-100m of funds to invest in return for a share of revenue, typically 20%. Such seed funds had $5 billion to invest last year, estimates Acceleration Capital Group, an advisory firm. But even they have struggled to deploy money profitably. Many suggest that bright traders make lousy entrepreneurs. “Often they have a long track record but haven’t run their own business before,” says Lisa Fridman of Paamco, a fund investor.

Running a successful hedge fund is still fabulously lucrative, however. The top 25 managers globally last year took home a combined $14 billion in pay and profits, according to Institutional Investor’s Alpha —and that was the worst year since 2008. Nine made over $500m. Even if the going is tougher, aspiring managers will keep trying their luck.