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Starting a fund / raising capital
Like many a young analyst or trader, it has long been a dream of mine to run a successful hedge fund. I would like to get some advice on the process. There seems to be some posters here who are credible, and best of all, advice here is free. Thanks in advance for any insights you have to offer.
I have been trading and investing my own funds for about 2.5 years now. The first 1.2 years were done under a family account and won't be useful for raising capital. As of 1/2011, by returns are as follows:
2011: 87.2% return. Max drawdown (based on monthly returns) of 5.0%. Profits of 330k
2012 YTD: 36% return. Max draw down of 4.1%. Profits of 200k.
These returns have been achieved with generally market neutral strategies, although currently I intend to maintain a long bias. Monthly returns show a R squared of 0.04 against monthly returns of the S&P500. Despite low draw downs, high returns are somewhat concentrated around a few great months, which is I know is incrementally negative. StDev of monthly returns is 10.8%.
I have about 5 years of experience working on Wallstreet doing primarily fundamental research of US equities as an associate level generalist. I've worked at two small hedge funds that are not well known, but legit. My age of 28 is on the young side and may work against me.
Investment approach -
Primary doing l/s based on fundamental research. I have been opportunistic and employed some short term "trading" strategies, but these have also been based on fundamental analysis. These short term strategies account for a good chunk of returns, although I am focusing more on the long term portfoilo more nowadays.
Raising Capital?
I hope to start raising capital in 1 to 4 years. I do not intend to raise capital now, partly because I don't think my trackrecord is long enough, but also because I'm very busy right now with research. I am becomming increasingly comfortable with my investment process, and I believe I can continue to achieve 50% + returns with low draw downs. Initially I will be satisfied raising at least 1mm. Although the fees from 1mm will be fairly small, it seems a worthwile start given my belief that I will continue to produce positive risk adjusted returns and attract greater investor interest over time. This is assuming the 1mm is from one client- I'm not interested in the hassle of raising 1mm from various small investors (friends and family). I obviously hope to raise more, but I don't know what is realistic at all. If i can't raise 1mm, I will continue to manage my personal capital.
I'd love to hear what I can realistically hope to raise in one or two years assuming I can maintain these results, and also considering my relevant, but not impressive, professional background. If the answer is zero, what kind of track record will it take to raise a few mil?
Also, some have recommended going the way of a managed account. Ideally I'd like to set up a fund, but I can understand that investors are reluctant to send a few mil to a stranger, despite how trustworthly I look in person. I suppose a separate managed account in addition to your own account will be just as good for building a track record when audited? Some potential conflicts of interests with respect to how to execute trades do immediately come to mind. Some of my shorter term trades will need to be executed quickly, and I'm not sure how it will be possible to have these trades executed at the same time if I'm managing multiple accounts.
You need to start to establish returns your can market, possibly have audited in the future. Helping small funds is something we do well. My advise is to establish a relationship with an Introducing Broker like myself. Open an account for either an investor or a group of investors that will stay with you through the process. This can either be an LLC or an LP.
We can help now with the Introducing Broker relationship by setting you up with platforms and a prime broker. Monthly statements to show investors. Then when the time is right, introduce you to attorneys, administrators high net worth individuals and Fund of Funds. We can help you through the process.
Please contact me directly for more details.
Bob
__________________
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue
Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
www.linkedin.com/pub/robert-morse/6/8a7/617
__________________
Quote from rmorse:
You need to start to establish returns your can market, possibly have audited in the future. Helping small funds is something we do well. My advise is to establish a relationship with an Introducing Broker like myself. Open an account for either an investor or a group of investors that will stay with you through the process. This can either be an LLC or an LP.
We can help now with the Introducing Broker relationship by setting you up with platforms and a prime broker. Monthly statements to show investors. Then when the time is right, introduce you to attorneys, administrators high net worth individuals and Fund of Funds. We can help you through the process.
Please contact me directly for more details.
Bob
Your returns seem very high for a fundamental long/short equity book where volatility should be like 15-20% if you were just long or short 1x.
It implies you are taking on a massive amount of risk via leverage or asset selection. I would think that most investors will think (myself included) that you are going to have an irreparable drawdown if you are running enough equity risk to generate these kinds of returns.
@DT83
What was the initial amount you started trading with to achieve 330K in profit in year?
Quote from hoop121:
Bob,
How much experience does your company have with setting up small energy trading prop firms?
__________________
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue
Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
www.linkedin.com/pub/robert-morse/6/8a7/617
__________________
This is probably a scam. The drawdown is too low, as there is no fundamental strategy that could ever do that.
__________________
HOW MUCH IS ENOUGH?
Bud Fox
Wall Street
Re: Starting a fund / raising capital
Quote from doublet83:
Like many a young analyst or trader, it has long been a dream of mine to run a successful hedge fund. I would like to get some advice on the process. There seems to be some posters here who are credible, and best of all, advice here is free. Thanks in advance for any insights you have to offer.
I have been trading and investing my own funds for about 2.5 years now. The first 1.2 years were done under a family account and won't be useful for raising capital. As of 1/2011, by returns are as follows:
2011: 87.2% return. Max drawdown (based on monthly returns) of 5.0%. Profits of 330k
2012 YTD: 36% return. Max draw down of 4.1%. Profits of 200k.
These returns have been achieved with generally market neutral strategies, although currently I intend to maintain a long bias. Monthly returns show a R squared of 0.04 against monthly returns of the S&P500. Despite low draw downs, high returns are somewhat concentrated around a few great months, which is I know is incrementally negative. StDev of monthly returns is 10.8%.
I have about 5 years of experience working on Wallstreet doing primarily fundamental research of US equities as an associate level generalist. I've worked at two small hedge funds that are not well known, but legit. My age of 28 is on the young side and may work against me.
Investment approach -
Primary doing l/s based on fundamental research. I have been opportunistic and employed some short term "trading" strategies, but these have also been based on fundamental analysis. These short term strategies account for a good chunk of returns, although I am focusing more on the long term portfoilo more nowadays.
Raising Capital?
I hope to start raising capital in 1 to 4 years. I do not intend to raise capital now, partly because I don't think my trackrecord is long enough, but also because I'm very busy right now with research. I am becomming increasingly comfortable with my investment process, and I believe I can continue to achieve 50% + returns with low draw downs. Initially I will be satisfied raising at least 1mm. Although the fees from 1mm will be fairly small, it seems a worthwile start given my belief that I will continue to produce positive risk adjusted returns and attract greater investor interest over time. This is assuming the 1mm is from one client- I'm not interested in the hassle of raising 1mm from various small investors (friends and family). I obviously hope to raise more, but I don't know what is realistic at all. If i can't raise 1mm, I will continue to manage my personal capital.
I'd love to hear what I can realistically hope to raise in one or two years assuming I can maintain these results, and also considering my relevant, but not impressive, professional background. If the answer is zero, what kind of track record will it take to raise a few mil?
Also, some have recommended going the way of a managed account. Ideally I'd like to set up a fund, but I can understand that investors are reluctant to send a few mil to a stranger, despite how trustworthly I look in person. I suppose a separate managed account in addition to your own account will be just as good for building a track record when audited? Some potential conflicts of interests with respect to how to execute trades do immediately come to mind. Some of my shorter term trades will need to be executed quickly, and I'm not sure how it will be possible to have these trades executed at the same time if I'm managing multiple accounts.
Re: Re: Starting a fund / raising capital
Good advice. The paperwork and red tape you have to tackle is mind-numbing. If I ever started another hedge fund I'd pay someone to do this part of the startup.
OP, just FYI, the first thing you need is a Private Placement Memorandum, an Operating Agreement, and a Subscription Agreement. These are the three forms that all hedge funds use.
Research non-accredited investors and make sure you know what you can and can't do with each type of investor.
No advertising. Lots of do's and don'ts. Don't forget you'll need the series 3 and register as an RIA in each state you have an investor in, depending on the requirements of each state. Getting off the ground and staying in compliance is no easy task.
Quote from dazzwater:
Contact a representative from a hedge fund administrator like Citco. They can provide advice on legal, regulatory, accounting, and other administrative concerns in starting up a hedge fund and in the capital seeding process, so that you can just focus on the trading.
OP, what's your max "daily" DD for last year and this year?
Re: Re: Re: Starting a fund / raising capital
Quote from the1:
If I ever started another hedge fund...
Quote from rmorse:
You need to start to establish returns your can market, possibly have audited in the future. Helping small funds is something we do well. My advise is to establish a relationship with an Introducing Broker like myself. Open an account for either an investor or a group of investors that will stay with you through the process. This can either be an LLC or an LP.
We can help now with the Introducing Broker relationship by setting you up with platforms and a prime broker. Monthly statements to show investors. Then when the time is right, introduce you to attorneys, administrators high net worth individuals and Fund of Funds. We can help you through the process.
Please contact me directly for more details.
Bob
Re: Re: Starting a fund / raising capital
Quote from dazzwater:
Contact a representative from a hedge fund administrator like Citco. They can provide advice on legal, regulatory, accounting, and other administrative concerns in starting up a hedge fund and in the capital seeding process, so that you can just focus on the trading.
Quote from newwurldmn:
Your returns seem very high for a fundamental long/short equity book where volatility should be like 15-20% if you were just long or short 1x.
It implies you are taking on a massive amount of risk via leverage or asset selection. I would think that most investors will think (myself included) that you are going to have an irreparable drawdown if you are running enough equity risk to generate these kinds of returns.
Quote from ocean5:
@DT83
What was the initial amount you started trading with to achieve 330K in profit in year?
Quote from bwolinsky:
This is probably a scam. The drawdown is too low, as there is no fundamental strategy that could ever do that.
Quote from doublet83:
Why general impression is this: why utilize any professional services right now when I have no intent of raising money right now? If I can just get my results audited in the future if I intend to raise money then, why go through a process right now that will cost me time and money?
__________________
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue
Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
www.linkedin.com/pub/robert-morse/6/8a7/617
__________________
Quote from rmorse:
None. When you say "energy trading prop" are you talking about a group of futures traders? The majority of our clients are on the equity/option option side of the business. That does not mean we can't help you put something together that works for you. We have an Introducing relationship with Penson Futures and FC Stone. The FC Stone relationship is very new.
Bob
Quote from doublet83:
Naturally I expect some degree of skpeticism surrounding my results. My hope in starting this thread was to gain some real insight in the feasibility of raising capital in a few years, rather than to prove how I have achieved my results or to brag about how great they are. I have achieved my results without taking on high levels of leverage or risk. This is reflected in the drawdown. It will become more evident if I sustain these results over a few more years. Part of the reason my results have been so good is because with a small amount of capital, it is easier to be very 'opportunistic' if you know what you're doing.
By trading my own capital, I am significantly increasing my short term income at materially greater risk. I am giving up the opportunity to work a very coveted carrer track in the investment management business. It is my belief that I can sustain my results and use them to raise capital in the foreseeable future. But maybe I am being too optimistic? I know even 2 or 3 years of track record is a pretty small amount of time, even if the results look great. But surely if I sustain these results for 5 or 7 years, then raising several mil should be no problem? I just want to get some advice from people who have gone through this process about how realistic it is to raise a few mil based on a few years of trackrecord based on similar results. Maybe it was too much to ask for real advice from knowledgeable people on this forum?
Re: Re: Re: Starting a fund / raising capital
Quote from doublet83:
Thanks for the comment. I have no intention of going through the process right now. I don't believe my track record is long enough, and I am still very busy with research and initiating coverage on various names this year.
I'm more curious to know whether or not I can expect to be able to raise 1 to several million in a 1 to 3 years, assuming I can maintain my historical leve of performance. Advice from people who have gone through the process would be greatly appreciated.
Quote from hoop121:
yes, we specialize in electricity financial swaps, primarily the PJM West Hub product.
Quote from hoop121:
???
ummm, how is that relevant to what i posted?
Re: Re: Re: Re: Starting a fund / raising capital
Quote from Lights:
I'll save you alot of time and trouble and tell you.. Don't Bother.
Hundreds of succesful traders have gone this route and nearly everyone has failed, not because they did not perform, but because starting a fund with such small AUM will never amount to anything. Funds now charge 1% + 15-20% performance. Traders find that managing less than few million you're really making a plumber's salary. And when you're small, you'll stay small. No HNW will invest 7 figures in a fund where his assets are >50% of the fund's assets. You'll never grow by investors.. Your friends and family is the ceiling.
Funds should be created the right way which is to work for a reputable buyside firm, do that for 5 years at a minimum of $20 million under management in your book. Once you hit $50m, which is the line in the sand, people will find you.
For you, join a right prop firm. They will be your investor and increase your assets based on performance. After a year, they'll raise you millions in buying power at a much higher payout too. If you really do have what you claim in terms of returns past 2 years, many firms in Chicago and Ny will back you.
The OP is going to do quite nicely trading his own funds if he can continue to put up those kind of returns. Do it long enough and the outside money will find you.
Re: Re: Re: Re: Starting a fund / raising capital
Quote from Lights:
I'll save you alot of time and trouble and tell you.. Don't Bother.
Hundreds of succesful traders have gone this route and nearly everyone has failed, not because they did not perform, but because starting a fund with such small AUM will never amount to anything. Funds now charge 1% + 15-20% performance. Traders find that managing less than few million you're really making a plumber's salary. And when you're small, you'll stay small. No HNW will invest 7 figures in a fund where his assets are >50% of the fund's assets. You'll never grow by investors.. Your friends and family is the ceiling.
Funds should be created the right way which is to work for a reputable buyside firm, do that for 5 years at a minimum of $20 million under management in your book. Once you hit $50m, which is the line in the sand, people will find you.
For you, join a right prop firm. They will be your investor and increase your assets based on performance. After a year, they'll raise you millions in buying power at a much higher payout too. If you really do have what you claim in terms of returns past 2 years, many firms in Chicago and Ny will back you.
Re: Re: Re: Re: Re: Starting a fund / raising capital
Quote from Ghost of Cutten:
You are ignoring the growth in trader capital. If a trader can live off his own capital and performance, then a fund where the fees exceed the operating costs is only going to boost his earnings, assuming running the fund doesn't reduce his CAGR.
Re: Re: Re: Starting a fund / raising capital
Quote from doublet83:
Thanks for the comment. I have no intention of going through the process right now. I don't believe my track record is long enough, and I am still very busy with research and initiating coverage on various names this year.
I'm more curious to know whether or not I can expect to be able to raise 1 to several million in a 1 to 3 years, assuming I can maintain my historical leve of performance. Advice from people who have gone through the process would be greatly appreciated.
Quote from doublet83:
I find you particularly annoying. Your posts display a high level of arrogance and ignorance at the same time. I will acknolwedge that such a combination can be entertaining to watch.
If you make it worth my time I can prove to you that these results are real. We can say, bet 5k on whether these returns are real or not, and transfer these funds to a reputable third party escrow service who will then verify my account statements, and transfer both deposits back to me.
You will most likely not agree to such a thing and continue to pollute my thread and others with your rambling.
I am confused by this:
"But surely if I sustain these results for 5 or 7 years, then raising several mil should be no problem? "
Assume you have 1/2 million of capital now. Let us the lower the performance to "only" 50% a year. If you can sustain this level of return for 5-7 years, you should have
from
0.5*1.5^5 = 3.8 million
to
0.5*1.5^7 = 8.5 million
Then you would already have your "several million". If the concern is scalability, then you should never manage OPM anyway.
I do not mean to sound mean. I have gone through similar thought processes again and again. The number just does not work out.
njrookie
Re: Re: Re: Re: Starting a fund / raising capital
I don't manage a hedge fund any longer. I wanted my life back so I switched from a CPO to a CTA. Everything changes once you take possession of OPM. As a CTA I can link my clients accounts to mine and then invoice them each month, depending on whether it was a profitable month. No, I'm not a Citco client.
Quote from dazzwater:
@the1 care to share the name of your present hedge fund? Are you a Citco client?
Quote from dazzwater:
Anyone can join ET forums which are free of charge. So I guess you've got to take the good with the bad.
Nice comeback though.
__________________
HOW MUCH IS ENOUGH?
Bud Fox
Wall Street
Quote from bwolinsky:
Nice comeback?
The man's lying about having a fundamental strategy that produces those returns.
If you all weren't so gullible, only if he told you which stocks were in that portfolio and what proportion of them were invested in the fund could we see passed those lies.
Now, doublet, which stocks did you invest in to produce your returns?
Would be nice if that were so.
You are ignoring the fact that half goes to taxes,
and business and living expenses
eat a good portion of the rest.
Quote from njrookie1:
I am confused by this:
"But surely if I sustain these results for 5 or 7 years, then raising several mil should be no problem? "
Assume you have 1/2 million of capital now. Let us the lower the performance to "only" 50% a year. If you can sustain this level of return for 5-7 years, you should have
from
0.5*1.5^5 = 3.8 million
to
0.5*1.5^7 = 8.5 million
Then you would already have your "several million". If the concern is scalability, then you should never manage OPM anyway.
I do not mean to sound mean. I have gone through similar thought processes again and again. The number just does not work out.
njrookie
Quote from bwolinsky:
Nice comeback?
The man's lying about having a fundamental strategy that produces those returns.
If you all weren't so gullible, only if he told you which stocks were in that portfolio and what proportion of them were invested in the fund could we see passed those lies.
Now, doublet, which stocks did you invest in to produce your returns?
Re: Re: Re: Re: Re: Starting a fund / raising capital
Quote from the1:
I don't manage a hedge fund any longer. I wanted my life back so I switched from a CPO to a CTA. Everything changes once you take possession of OPM. As a CTA I can link my clients accounts to mine and then invoice them each month, depending on whether it was a profitable month. No, I'm not a Citco client.
Re: Re: Re: Re: Re: Re: Starting a fund / raising capital
Quote from dazzwater:
pardon the ignorance, but what's CPO? CTA?
__________________
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue
Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
www.linkedin.com/pub/robert-morse/6/8a7/617
__________________
Re: Re: Re: Re: Re: Re: Starting a fund / raising capital
A CPO is a Commodity Pool Operator. Think of a mutual fund manager except in the futures markets. A CTA is a Commodity Trading Advisor who can either advise clients on futures positions or trade a client's account using a power of attorney form that gets filed with the broker. I don't give any advice. I trade for clients. As a CTA you never take possession of the money so there is much less paperwork involved. As a CPO you do take possession so the paperwork is seemingly endless and you're always dealing with accountants and attorneys. Running a hedge fund really took the fun out of trading for me. When I switched to the CTA setup trading became fun again except for when the clients get nervous when I take a wallop every once in a while, and I definitely do 
Quote from dazzwater:
pardon the ignorance, but what's CPO? CTA?
Thanks for the replies. Based on some credible comments and messages I've received, I am incrementally less hopeful of being able to raise any institutional money in the near term.
I suppose I may get lucky and find some one to invest a few mil with me despite the fact that I lack any organizational infrastructure, because my returns are very good, and because they happen to find me trustworthy. However, I am increasingly lead to believe that this scenario requires a bit of luck on my part. If any more people with some experience raising capital can add additional insight, it would be greatly appreciated.
Quote from macintash:
Your max daily DD "P to V" is more important then DD based only on monthly returns. Based on your monthly DD I would guess that your P to V DD has been 20%+ which is good, but when it comes to get OPM it might create a chalange. If you are looking some realistic advice here, you need to explain how much your daily DD has been.
Re: Re: Re: Re: Starting a fund / raising capital
Quote from Lights:
I'll save you alot of time and trouble and tell you.. Don't Bother.
Hundreds of succesful traders have gone this route and nearly everyone has failed, not because they did not perform, but because starting a fund with such small AUM will never amount to anything. Funds now charge 1% + 15-20% performance. Traders find that managing less than few million you're really making a plumber's salary. And when you're small, you'll stay small. No HNW will invest 7 figures in a fund where his assets are >50% of the fund's assets. You'll never grow by investors.. Your friends and family is the ceiling.
Funds should be created the right way which is to work for a reputable buyside firm, do that for 5 years at a minimum of $20 million under management in your book. Once you hit $50m, which is the line in the sand, people will find you.
For you, join a right prop firm. They will be your investor and increase your assets based on performance. After a year, they'll raise you millions in buying power at a much higher payout too. If you really do have what you claim in terms of returns past 2 years, many firms in Chicago and Ny will back you.
Quote from njrookie1:
I am confused by this:
"But surely if I sustain these results for 5 or 7 years, then raising several mil should be no problem? "
Assume you have 1/2 million of capital now. Let us the lower the performance to "only" 50% a year. If you can sustain this level of return for 5-7 years, you should have
from
0.5*1.5^5 = 3.8 million
to
0.5*1.5^7 = 8.5 million
Then you would already have your "several million". If the concern is scalability, then you should never manage OPM anyway.
I do not mean to sound mean. I have gone through similar thought processes again and again. The number just does not work out.
njrookie
Re: Re: Re: Re: Re: Re: Re: Starting a fund / raising capital
Quote from the1:
A CPO is a Commodity Pool Operator. Think of a mutual fund manager except in the futures markets. A CTA is a Commodity Trading Advisor who can either advise clients on futures positions or trade a client's account using a power of attorney form that gets filed with the broker. I don't give any advice. I trade for clients. As a CTA you never take possession of the money so there is much less paperwork involved. As a CPO you do take possession so the paperwork is seemingly endless and you're always dealing with accountants and attorneys. Running a hedge fund really took the fun out of trading for me. When I switched to the CTA setup trading became fun again except for when the clients get nervous when I take a wallop every once in a while, and I definitely do
Quote from bwolinsky:
Nice comeback?
The man's lying about having a fundamental strategy that produces those returns.
If you all weren't so gullible, only if he told you which stocks were in that portfolio and what proportion of them were invested in the fund could we see passed those lies.
Now, doublet, which stocks did you invest in to produce your returns?
Quote from doublet83:
Max daily DD during this period has been around 2%
Quote from macintash:
Sorry but your numbers don't add up. If your monthly DD Peak to Valley is 5% and 4%, your daily Peak to Valley can't possibly be 2%. So either you are making things up, or you don't understand what P to V DD means.
Either this is a scam or simply a trollish post. Every other month there is someone who comes out with a system or starting a fund with near 100% returns and wants you to send them money.
Maybe the guy is for real. If thats the case, then post up a 90 day journal with real time entries and maybe a brokerage ticket so we can properly evaluate the performance.
i am certain you never made those kind of returns with those kind of drawdowns! NO WAY!
----------------------------------------------------------------------------------------
2011: 87.2% return. Max drawdown (based on monthly returns) of 5.0%. Profits of 330k
2012 YTD: 36% return. Max draw down of 4.1%. Profits of 200k.
i am lucky to hit 25%+ in a good strong bull market. No way you can get hose returns without taking huge risk and/or "lying"
Geez mate for a pro. guy don't tell me you actually believed his results? RMOSE
----------------------------------------------------------------------------------------
You need to start to establish returns your can market, possibly have audited in the future. Helping small funds is something we do well. My advise is to establish a relationship with an Introducing Broker like myself. Open an account for either an investor or a group of investors that will stay with you through the process. This can either be an LLC or an LP.
We can help now with the Introducing Broker relationship by setting you up with platforms and a prime broker. Monthly statements to show investors. Then when the time is right, introduce you to attorneys, administrators high net worth individuals and Fund of Funds. We can help you through the process.
Please contact me directly for more details.
----------------------------------------------------------------------------------------
B*S*!
Let me know when you blow up!
---------------------------------------------------------------------------------------
I am aggressively targeting a scenario where I can compound closer to a 100% for the next few years, but you never know with this game - the actual returns could be zero or negative. Also my living expenses are about 50k a year right now or a bit higher. Almost all my gains are short term and you didn't factor in taxes. And I have about 0.73mm of capital right now.
------------------------------------------------------------------------------------
I think you are a dreamer kid!
Quote from chipmunk:
Geez mate for a pro. guy don't tell me you actually believed his results? RMOSE
----------------------------------------------------------------------------------------
You need to start to establish returns your can market, possibly have audited in the future. Helping small funds is something we do well. My advise is to establish a relationship with an Introducing Broker like myself. Open an account for either an investor or a group of investors that will stay with you through the process. This can either be an LLC or an LP.
We can help now with the Introducing Broker relationship by setting you up with platforms and a prime broker. Monthly statements to show investors. Then when the time is right, introduce you to attorneys, administrators high net worth individuals and Fund of Funds. We can help you through the process.
Please contact me directly for more details.
----------------------------------------------------------------------------------------
__________________
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue
Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
www.linkedin.com/pub/robert-morse/6/8a7/617
__________________
Since I was responding to someone who extrapolated my historical returns over a period of several years, why should I not do the same with my own set of assumptions?
Predictions mean nothing, and I've said as much myself. My returns could easily be zero or negative over the next several years as I've acknowledged. Yet we will all make predictions anyway because we need a framework to try to understand where our lives our going.
No, I won't let you know if I blow up, because I will be very sad and the last thing on my mind will be to fill you in on it. But if I keep doing well maybe I will show up to gloat.
Quote from chipmunk:
B*S*!
Let me know when you blow up!
---------------------------------------------------------------------------------------
I am aggressively targeting a scenario where I can compound closer to a 100% for the next few years, but you never know with this game - the actual returns could be zero or negative. Also my living expenses are about 50k a year right now or a bit higher. Almost all my gains are short term and you didn't factor in taxes. And I have about 0.73mm of capital right now.
------------------------------------------------------------------------------------
I think you are a dreamer kid!
Quote from doublet83:
I'm not giving you a peak to trough draw down. As I said in my original post, I'm giving you my max DD based on returns calculated on a monthly basis. Also, the down 2% was my worst day.
Based on your thread I assume you believe sharpe is a very important measure of performance.
OP should read thu "Far Hill Group’s Approach to Third-Party Marketing," an interview in the current Bloomberg Hedge Fund Brief. Addresses his questions from the vantage of an experienced, successful fundraiser.
Quote from macintash:
You got it wrong. Sharpe might not be very imprtont measure at all, peak to valley based on "daily" returns is very important. Based on your monthly peak to valley I would GUESS that your daily peak to valley is 20-25% which is good but might be an issue for OPM.
Quote from rmorse:
Then when the time is right, introduce you to high net worth individuals and Fund of Funds.
Quote from Rodney King:
OP should read thu "Far Hill Group’s Approach to Third-Party Marketing," an interview in the current Bloomberg Hedge Fund Brief. Addresses his questions from the vantage of an experienced, successful fundraiser.
--------------------------------------------------------------------------------
Quote from macintash:
You got it wrong. Sharpe might not be very imprtont measure at all, peak to valley based on "daily" returns is very important. Based on your monthly peak to valley I would GUESS that your daily peak to valley is 20-25% which is good but might be an issue for OPM.
--------------------------------------------------------------------------------
On second thought I can only assume you mean peak to trough draw down of 20 to 25% based on daily returns. I don't know how you would deduce this based on my worst monthly DD of 5%. I imagine that in your heart you wish for me to be hiding something, to have only achieved my results through taking on substantial risks. Only through this bias can you conclude illogically as I've presented no information to suggest such a large peak to trough draw down. In fact, my peak to trough draw down is in the order of magnitute of 8 to 10% during this period.
Quote from doublet83:
Thanks for the replies. Based on some credible comments and messages I've received, I am incrementally less hopeful of being able to raise any institutional money in the near term.
I suppose I may get lucky and find some one to invest a few mil with me despite the fact that I lack any organizational infrastructure, because my returns are very good, and because they happen to find me trustworthy. However, I am increasingly lead to believe that this scenario requires a bit of luck on my part. If any more people with some experience raising capital can add additional insight, it would be greatly appreciated.
Quote from doublet83:
this article and other articles from this publication be available on the Bloomberg terminal?
Results YTD have continued to be very strong: currently +58% and 318k. New developments lead me to conclude that I want to move down the path of managing OPM this year, versus prior expectations of doing so several years down the line.
I would like to start researching issues of structure, regulation, etc. Any assistance on how to start would be appreciated..
Quote from doublet83:
Results YTD have continued to be very strong: currently +58% and 318k. New developments lead me to conclude that I want to move down the path of managing OPM this year, versus prior expectations of doing so several years down the line.
I would like to start researching issues of structure, regulation, etc. Any assistance on how to start would be appreciated..
__________________
Robert L. Morse
Business Development
VICTOR SECURITIES
285 Grand Avenue
Englewood, NJ 07631
rmorse@victorsecurities.com
office: 646-545-3860
www.linkedin.com/pub/robert-morse/6/8a7/617
__________________
Quote from rmorse:
Contact me directly. After I have a better understanding of what you want to accomplish, I can make some suggestions including a firm that specializes in the start up docs and regulatory filings.
Bob
__________________
the world is so certain yet i walk on thin ice.
i don't think the OP's performance is beyond the realm of possibility because i've seen such performance for other periods but its highly unlikely it can be sustained for long, given such low DD, there's a certain element of luck here, as to daily DD not sure what good it does when the OP is only interested in mid to long term holding period and could care less on daily gyrations unless it hits his stops, i haven't actually calculated it but someone here deduced a smaller monthly DD converts to a higher daily DD, normally isn't it the reverse?
Quote from shopster:
the OP is trolling and y'all got sucked in.
s
Of the world’s 351 funds with more than $1 billion in assets, 143—or 40 percent—are based in Greater Hedgistan in Greenwich, Connecticut.
New hedge funds are formed when the prospect of superior compensation pulls employees of large investment banks and existing hedge funds away from the mother ship to set up their own trading outfits. But this outward force is balanced by a centripetal force.
The gravity of the larger mass makes it difficult to build successful funds outside the orbit of Greater Hedgistan.
New hedge funds require face-to-face access to specialized services—flacks, fund-raising consultants, lawyers, accountants—as well as to the institutions and individuals that supply capital.
The first law of hedge-fund dynamics is that most people who start hedge funds don’t wander far from familiar turf.
This is partly because traders are loath to give up hard-won co-ops and nursery-school spots, and partly because they are superstitious creatures of habit. Says one fund manager who set up shop three blocks away from his former employer, “Instead of walking out the east door of Grand Central, I now walk out the north door. And I still take the 4:18 home on Fridays.”
The second law of hedge-fund dynamics—also known as the narcissism of small distances—is that hedge-fund managers seek the shortest possible commute that doesn’t involve working at home.
cheers,
s
__________________
the world is so certain yet i walk on thin ice.
With these returns there is no way you are looking into managing others people money. With these returns you have your dream life and you are laughing every day.
So cut the crap, post your statements in a screenshot right here. Cut out your account number but your next post should be your statements, or shut up.
you know that's not gonna happen.
s
__________________
the world is so certain yet i walk on thin ice.
I'm on the side of people who say you should find a service provider, and start building your operational infrastructure. If you're trading securities, the various registration requirements for accepting onshore money is pretty serious. Sooner you get started, sooner you're ready to move on to the next phase. And you'll find cost isn't really that significant when you're trading this much of your own capital.
With these results, absolutely a few million in the next few years is extremely likely. Raising more is also very viable, but most will want 3+ years of audited results. And audited results of personal trading is simply nothing like audited results of the fund/partnership. If you can get to 3-4 years with performance even remotely this good, I'd be shocked if you had less than $20mm.
Fwiw I don't have any reason to doubt your numbers.
I say this having launched my CPO two years ago, with assets finally having some hope of crossing $10mm this year, but still largely dependent on my own trading rather than fund raising.
OP, does max. monthly drawdown of 5% mean your worst month finished in red by 5% or something different? Could you please elaborate.
__________________
Humans are much more prone to influence of words than real facts. Ivan Pavlov.
Quote from njrookie1:
I am confused by this:
"But surely if I sustain these results for 5 or 7 years, then raising several mil should be no problem? "
Assume you have 1/2 million of capital now. Let us the lower the performance to "only" 50% a year. If you can sustain this level of return for 5-7 years, you should have
from
0.5*1.5^5 = 3.8 million
to
0.5*1.5^7 = 8.5 million
Then you would already have your "several million". If the concern is scalability, then you should never manage OPM anyway.
I do not mean to sound mean. I have gone through similar thought processes again and again. The number just does not work out.
njrookie
Quote from traderslair:
With these returns there is no way you are looking into managing others people money. With these returns you have your dream life and you are laughing every day.
So cut the crap, post your statements in a screenshot right here. Cut out your account number but your next post should be your statements, or shut up.
My natural human tendency to defend myself when qattacked despite there being no apparent benefit in doing so is a weakness I will have to work on.
Attached is screen of YTD gains in my main IB account of 271k. Screen shots can be edited too, I know. I expect this to be the next accusation.
Quote from cornixforex:
OP, does max. monthly drawdown of 5% mean your worst month finished in red by 5% or something different? Could you please elaborate.
Quote from doublet83:
Yes thats what it means.
Quote from atticus:
And an entirely worthless DD statistic.
Quote from doublet83:
I know peak to trough draw down is probably more meaningful but is something like that included in audited results?
Quote from doublet83:
My natural human tendency to defend myself when qattacked despite there being no apparent benefit in doing so is a weakness I will have to work on.
Attached is screen of YTD gains in my main IB account of 271k. Screen shots can be edited too, I know. I expect this to be the next accusation.
Quote from doublet83:
Correct me if I'm wrong, but aren't results audited on a monthly basis? So monthly draw down seems meaningful to me. I know peak to trough draw down is probably more meaningful but is something like that included in audited results?
Quote from doublet83:
My natural human tendency to defend myself when qattacked despite there being no apparent benefit in doing so is a weakness I will have to work on.
Attached is screen of YTD gains in my main IB account of 271k. Screen shots can be edited too, I know. I expect this to be the next accusation.
Quote from Busta21:
Maybe I am new to forums but I never understand the entire transparency thing that seems to go on. Why is it anyone else's business (unless they are a potential LP) here on the web to confirm another persons trades? I mean what are you cretins going to do validate him by giving a thumbs up, it makes no difference, this is a waste of time.
Quote from atticus:
Extraordinary claims require extraordinary evidence. I don't buy that his PTT was 4%, maybe double-triple that. I don't question the return, just don't buy the DD.
Nobody comes in here to start a thread stating they're down 84%. So yeah, it's healthy to question motives. I personally don't care either way. Good luck to the OP.
Quote from doublet83:
I believe I've already said to one poster that my peak to trough was around 8% over past year and a half
Quote from doublet83:
I believe I've already said to one poster that my peak to trough was around 8% over past year and a half
Quote from atticus:
OK great, so what's the point? Starting a thread about starting a fund on what is arguably neck and neck with yahoo stock chat.
Quote from doublet83:
What's your point? I'm just correcting something incorrect you stated that understates my draw down.
Quote from Busta21:
Regardless, these seem to be very solid returns, finding capital is going to be hard, I think Roberts offer with Victor Securities is a good bet, just my thoughts. That, or you can try to go wild with options trading to just build your port up yourself to a larger amount. Other than that the bickering going back and forth is just poor business.
Quote from doublet83:
Thanks. I don't really consider my comments here to be part of doing busineses. Just hoping I happen across some useful information in the process.
Quote from atticus:
What was incorrect?
Quote from doublet83:
You said you don't buy my PTT was 4% when I've already said my monthly draw down was 5% and that I thought my PTT was around 8%.
Anyway I completely agree that trying to verify the veracity of my claims is a meaningless process. Would greatly appreciate if we can keep the topic on the process of setting up a structure of managing OPM. As I've stated from the very beginning, that was the whole point of this thread.
If anyone can mention some good and cheap service providers for this process that would be useful. I will probably look to go with a managed account structure.
Quote from atticus:
No, you didn't state it until after I questioned it. As did others. You already use IB so it's not much of a headache. File an LLC and limit clients to 15 or less. Pretty simple stuff. Look up IB's documentation on "friends and family" accounts. You'll have to pay pro rates on quotes.
http://www.interactivebrokers.com/e...sFamilyAccounts
So I guess I must be a Registered Investment Advisor for IB's friends and Family account. So some basic reading up on this says I need to pass the series 6 or 7, or hold some various designations, including CFA.
I am already at level 3 of the CFA but since I haven't studied at all for this year's exam, it looks like getting CFA will happen next year in August at the earliest.
Any other simple alternatives to managing money without being an RIA?
Quote from doublet83:
So I guess I must be a Registered Investment Advisor for IB's friends and Family account. So some basic reading up on this says I need to pass the series 6 or 7, or hold some various designations, including CFA.
I am already at level 3 of the CFA but since I haven't studied at all for this year's exam, it looks like getting CFA will happen next year in August at the earliest.
Any other simple alternatives to managing money without being an RIA?
Quote from doublet83:
So I guess I must be a Registered Investment Advisor for IB's friends and Family account. So some basic reading up on this says I need to pass the series 6 or 7, or hold some various designations, including CFA.
I am already at level 3 of the CFA but since I haven't studied at all for this year's exam, it looks like getting CFA will happen next year in August at the earliest.
Any other simple alternatives to managing money without being an RIA?
Quote from doublet83:
I actually misread. It says you don't need to be a RIA unleses you are managing more than 15 accounts
I wonder, is operating under a managed account structure just as useful for building a track record as operating under a fund structure?
In 5 years, can I present an audited track record saying I managed X about of dollars producing Y returns under various managed accounts? And this would be just as good as if I managed those same amount of dollars and produced the same amount of returns under a fund structure?
Not going to read through this whole journal but take your profits, spend the small amount to set up incubator fund, and let the numbers speak for themselves. If u r achieving these type of returns on an audited basis, investors will throw $$$ at u.
You can still trade your other $$$ in separate account.
Many have recommended IB's friends and family as the easiest way to start up and I am beginning to agree. However, what legal structure should my investment management company be operating under?
Sole proprietarship, LLC, LLP, etc? After some basic reading, sole proprietarship seems simpliest and I don't see what advantages the other structures confer..
Quote from doublet83:
Many have recommended IB's friends and family as the easiest way to start up and I am beginning to agree. However, what legal structure should my investment management company be operating under?
Sole proprietarship, LLC, LLP, etc? After some basic reading, sole proprietarship seems simpliest and I don't see what advantages the other structures confer..
Quote from doublet83:
I actually misread. It says you don't need to be a RIA unleses you are managing more than 15 accounts
Quote from doublet83:
Many have recommended IB's friends and family as the easiest way to start up and I am beginning to agree. However, what legal structure should my investment management company be operating under?
Sole proprietarship, LLC, LLP, etc? After some basic reading, sole proprietarship seems simpliest and I don't see what advantages the other structures confer..
Quote from mastacoli71:
if u want to raise money in the future, u need something audited. friends and family acct won't cut it.
Quote from doublet83:
I actually misread. It says you don't need to be a RIA unleses you are managing more than 15 accounts
Quote from Busta21:
So what statute is allowing the person trading the family and friends account to be paid via a performance fee since the investors are non accredited? How is this structured legally?
Quote from Busta21:
Still wondering if any of you have an answer to this?????
Quote from heech:
The point is to gain exemption from the investment adviser's act. Previously, the SEC allowed such an exemption for anyone with less than 15 clients, and didn't hold themselves out as an investment advisors to the public (thus, friends and family).
But that rule has actually changed very recently... so now, by my reading, you're really only able to offer these services to your extended family:
http://www.lathropgage.com/newsletter-12.html
Not sure if/how IB will be updating their rules.
Quote from Busta21:
I wonder if there is a way to have the people you advise form an LLC of sorts and then form a fee structure based around that. Or you could form an LLC with your investors and delegate % returns based on capital put up. There has to be away around this accredited investor rule. If you ask me that rule is biased toward the 'average' man Barney Frank and his cronies seek to protect.
Quote from doublet83:
I actually misread. It says you don't need to be a RIA unleses you are managing more than 15 accounts
Doesn't necessarily apply to OP, but if anyone is looking to do this with futures, becoming a CTA, which just involves passing Series 3 and creating disclosure docs, seems like the easiest way to go. And, you can hold yourself out there as an advisor and publish returns. The registration/testing costs are like $1500 or thereabouts.
Quick question: does trading your own capital for 5 years, followed by a thorough audit by one of the big accounting firms (PWC, Ernst & Young, etc.) qualify as a track record for raising "hedge fund" capital?
Thanks in advance for all the replies...
__________________
Gil Young Jo
Senior Trader
Director of Sales & Marketing
Next Level Trading Capital LLC
(718) 888-9800
www.listentoyourchart.com
Raising seed money is difficult but once you get off the ground and begin turning profits raising additional capital is very easy. In fact, the money will find you.
Quote from Rodney King:
OP should read thu "Far Hill Group’s Approach to Third-Party Marketing," an interview in the current Bloomberg Hedge Fund Brief. Addresses his questions from the vantage of an experienced, successful fundraiser.
Quote from heech:
The point is to gain exemption from the investment adviser's act. Previously, the SEC allowed such an exemption for anyone with less than 15 clients, and didn't hold themselves out as an investment advisors to the public (thus, friends and family).
But that rule has actually changed very recently... so now, by my reading, you're really only able to offer these services to your extended family:
http://www.lathropgage.com/newsletter-12.html
Not sure if/how IB will be updating their rules.
Quote from heech:
The point is to gain exemption from the investment adviser's act. Previously, the SEC allowed such an exemption for anyone with less than 15 clients, and didn't hold themselves out as an investment advisors to the public (thus, friends and family).
But that rule has actually changed very recently... so now, by my reading, you're really only able to offer these services to your extended family:
Just talked to a person from IB, and he said that under the IB friends and Family account, if you are going to charge fees and be unregistered, they are capping you at 5 managed accounts.
Previous poster mentioned that the exemption of the requirement to be registered was repealed recently under Dodd Frank. Guy from IB seemed to suggest this applied to situations where AUM was from 25 to 250mm. Not sure though.
Really 5 accounts is next to nothing. Even 15 accounts is not that much considering I don't have any rich friends.
Quote from doublet83:
Just talked to a person from IB, and he said that under the IB friends and Family account, if you are going to charge fees and be unregistered, they are capping you at 5 managed accounts.
Previous poster mentioned that the exemption of the requirement to be registered was repealed recently under Dodd Frank. Guy from IB seemed to suggest this applied to situations where AUM was from 25 to 250mm. Not sure though.
Really 5 accounts is next to nothing. Even 15 accounts is not that much considering I don't have any rich friends.
so, how are you guys doing on getting insurance?
e&o/d&o seems to be the killer, so your business structure is ultimately going to be shaped by the level of premiums you can afford.
Quote from clerk:
so, how are you guys doing on getting insurance?
e&o/d&o seems to be the killer, so your business structure is ultimately going to be shaped by the level of premiums you can afford.
For people trading smaller amounts of other people's money usually the laws of the state(s) involved will govern what you can and cannot do. Each state has its own securities laws and regulations in addition to the federal stuff.
e&o/d&o has been killer for me
i wont start trading OPM without appropriate indemnity
and I don't have enough capital-commitments to cover these premiums.
low premium policies ($2-$3k) are written for RIA's managing separate accounts, and won't cover you in a fund structure. Fund management policies seem to start at $10k.
Quote from clerk:
e&o/d&o has been killer for me
i wont start trading OPM without appropriate indemnity
and I don't have enough capital-commitments to cover these premiums.
low premium policies ($2-$3k) are written for RIA's managing separate accounts, and won't cover you in a fund structure. Fund management policies seem to start at $10k.
Quote from clerk:
so, how are you guys doing on getting insurance?
e&o/d&o seems to be the killer, so your business structure is ultimately going to be shaped by the level of premiums you can afford.
How to subscribe the SEC enforcement newsletter? I cannot find how on SEC's website. Thanks.
As far as why these rules exist... I subscribe to the CFTC/SEC enforcement newsletters. The amount of fraud out there is unbelievable.
Quote from emk662:
How to subscribe the SEC enforcement newsletter? I cannot find how on SEC's website. Thanks.
As far as why these rules exist... I subscribe to the CFTC/SEC enforcement newsletters. The amount of fraud out there is unbelievable.
Quote from the1:
Raising seed money is difficult but once you get off the ground and begin turning profits raising additional capital is very easy. In fact, the money will find you.
Quote from gmst:
So, if you want to establish a fund,
1) So, how much absolutely minimium seed money is required. 50k? 500k?2m?
2) What would be a terrific track record on this seed money. 50% annual return with 15% maxDD. or 100% return with 20% maxDD.
3) For how long this terrific track record is needed.
4) How does money find you? You list on barclayshedge IASG etc.?
TIA.
Quote from Stok:
One thing I will say is go look at databases...the easist ones are managed futures/currencies (CTA/CPOs)....even the best do CAGR of 35-40% with almost equal in MaxDD and sharpe's around 1 or less. And these are the guys managing $100's of millions with long established track records.
Sorry to bust bubbles but track record is the least critical thing when it comes to raising capital. Remember, everyone has a great track record otherwise they wouldn't be starting a fund. Having a clearly defined niche strategy that can last into the future is critical--otherwise your just another fund in a world full of choices--and the others have oh so much more to offer than you ever could.
Quote from marketsurfer:
Sorry to bust bubbles but track record is the least critical thing when it comes to raising capital. Remember, everyone has a great track record otherwise they wouldn't be starting a fund. Having a clearly defined niche strategy that can last into the future is critical--otherwise your just another fund in a world full of choices--and the others have oh so much more to offer than you ever could.
Quote from Busta21:
That's a bit subjective. I know plenty of funds that are short-term 24-36 special entities. If you're running a trend following fund you absolutely need a track record. Unless your speak from experience with the niche strat and not needing a P/L, DM me, I would like to chat.
Quote from marketsurfer:
Sorry, I was misunderstood. A track record is needed but it's the least important factor for the reason I listed. Good luck to you!
Quote from Stok:
One thing I will say is go look at databases...the easist ones are managed futures/currencies (CTA/CPOs)....even the best do CAGR of 35-40% with almost equal in MaxDD and sharpe's around 1 or less. And these are the guys managing $100's of millions with long established track records.
__________________
I'm spending a year dead for tax reasons.
Quote from sle:
Yeah, all true, except generating Sharpe of 1 on 100+ million is way harder then generating Sharpe of 4 on 500k. It's relatively easy to generate 100%ish returns with very reasonable risk on a couple hundred thousand (I can think of 5-6 strategies right off the top of my head) and it is way harder to generate 10% on a couple hundred millions.
Quote from Busta21:
Great points. I ask this though? Why would anyone want to really take on that type of capital risk in the markets? There seem to be better options outside capital markets with less risk plus you're not responsible for OPM at that point.
Quote from Busta21:
Unless your speak from experience with the niche strat and not needing a P/L, DM me, I would like to chat.
__________________
I'm spending a year dead for tax reasons.
Quote from sle:
I am not sure what question are you asking.
Why would someone want to run a 100+ million fund and only generate 10% for his investors? Well, that's simple - he's getting paid 2mm in AUM fees and another $2mm in performance fees on each 100mm, pretty good bang for the buck. I doubt anyone can generate this sort of personal profits with similar kind of risk in any other industry. Truth is - I know a lot of funs that only allocate risk on 5-10% of their assets and the rest is in various riskless instruments (e.g. money markets or treasuries).
Why would anyone invest in such a hedge fund? Well, two separate reasons - 10% with Sharpe of is still better then most anything you can get this days in capital markets and it's (supposedly) a nicely de-correlated stream of income.
Personally, I think investing in a multi-billion fund is a horrible deal for the investor (due to the 2/20 model, the fund is truly interested in the 2, not in the 20). Truly small fund is rarely a good deal either because majority of smallish PMs ("retail" size) are essentially hacks or basket cases, as is well illustrated by the majority on this board. The only exception to the small fund rule, in my view, are the small-size quantitative guys (former science/engineering people of various shapes and sorts) that keep applying scientific method to the markets and probably do generate true alpha.
This kind-of leaves the truly interesting funds in a small niche of 10 to 50 million, where the partners are still a critical part of both AUM and alpha generation, yet they are usually truly experienced guys (either former large fund PMs or sell-side exports) that actually have a clue and still have true skin in the game. There are fairly few funds like this, probably because these people usually would rather work for a large(er) fund then get into the nasty details of running their own business.
I am one of these people and I am sure there are others. If you have institutional experience (e.g. running a book at a large bank or another fund) and willing to commit a fair share of your own net worth (50%+), you might be able to raise some money without an audited track record.
Quote from sle:
I am not sure what question are you asking.
Why would someone want to run a 100+ million fund and only generate 10% for his investors? Well, that's simple - he's getting paid 2mm in AUM fees and another $2mm in performance fees on each 100mm, pretty good bang for the buck. I doubt anyone can generate this sort of personal profits with similar kind of risk in any other industry. Truth is - I know a lot of funs that only allocate risk on 5-10% of their assets and the rest is in various riskless instruments (e.g. money markets or treasuries).
Why would anyone invest in such a hedge fund? Well, two separate reasons - 10% with Sharpe of is still better then most anything you can get this days in capital markets and it's (supposedly) a nicely de-correlated stream of income.
Personally, I think investing in a multi-billion fund is a horrible deal for the investor (due to the 2/20 model, the fund is truly interested in the 2, not in the 20). Truly small fund is rarely a good deal either because majority of smallish PMs ("retail" size) are essentially hacks or basket cases, as is well illustrated by the majority on this board. The only exception to the small fund rule, in my view, are the small-size quantitative guys (former science/engineering people of various shapes and sorts) that keep applying scientific method to the markets and probably do generate true alpha.
This kind-of leaves the truly interesting funds in a small niche of 10 to 50 million, where the partners are still a critical part of both AUM and alpha generation, yet they are usually truly experienced guys (either former large fund PMs or sell-side exports) that actually have a clue and still have true skin in the game. There are fairly few funds like this, probably because these people usually would rather work for a large(er) fund then get into the nasty details of running their own business.
I am one of these people and I am sure there are others. If you have institutional experience (e.g. running a book at a large bank or another fund) and willing to commit a fair share of your own net worth (50%+), you might be able to raise some money without an audited track record.
Just to complete the picture. There are also first-loss capital providers and capacity-prioritized seeders that you might want to consider. The first-loss guys will give you leverage (e.g. 1:10 with a 50:50 split), but you are a first-loss recipient (personally, I would just think of it as access to leverage, but on paper it would appear as if you were managing 10x the capital you actually have on-hand). If you have really high-Sharpe but capacity constrained strategy, capacity-prioritized seeders will give you money with 2/20 conditions as a managed account, but will have the priority on fills given the current size breakdown. Both, in my opinion, are crappy deals, but you should know about these options.
__________________
I'm spending a year dead for tax reasons.
Quote from sle:
Yeah, all true, except generating Sharpe of 1 on 100+ million is way harder then generating Sharpe of 4 on 500k. It's relatively easy to generate 100%ish returns with very reasonable risk on a couple hundred thousand (I can think of 5-6 strategies right off the top of my head) and it is way harder to generate 10% on a couple hundred millions.
It all depends on your trading style (frequency, asset class, level of automation), on your own experience and on your eventual goals. First of all, fund raising is a game that you should hire a professional for. There are guys other there that would bring in cash for a split of the AUM fee and (some) a split of the performance fee. The rule of thumb unless you are doing HFT is a year and $25m AUM is the low end of where institutional money would care. Some FoF want 3 years of track record. Some don't want to be more then 5% of the total capital and they only give in chunks of 5mm (so, a 100mm threshold).
Personally, I'd say if you have Sharpe north of 3 on your total strategies and good draw-down properties, there is no reason to go large OPM at all. Take some friends and family cash in managed accounts and displace them with your own money (from the strategy returns) as soon as you can.
Quote from gmst:
1) How much minimum seed capital he should have so that outside money will find him? 50k, 500k, 1m?
2) How many minimum months, years should the trackrecord hold?
3) Also, how will outside money find him, if it is a fund structure and not a CTA. Because as far as I know, you can list even a 100k CTA on sites like IASG, but I don't know if you can list a 100k fund anywhere
Again, talking about 50% return with 15% DD and quantitative strategies?
__________________
I'm spending a year dead for tax reasons.
Quote from sle:
Personally, I'd say if you have Sharpe north of 3 on your total strategies and good draw-down properties, there is no reason to go large OPM at all. Take some friends and family cash in managed accounts and displace them with your own money (from the strategy returns) as soon as you can.
As I mentioned earlier, if your are managing friends and family money and charging fees, IB is capping you to 5 accounts max for non -RIA's. There could also be more restrictive policies depending on which state you are operating from.
I have no idea how cumbersome the process is to become a RIA, besides the tests I know you need to take (if someone can chime in here, it'd be great).
5 accounts is not much to grow from if you're only managing a couple of 10k to 100k accounts each, really this doesn't seem like a great option to me unless I become an RIA.
As to raising institutional money, some other earlier posters suggested this would be likely impossible even with a great track record unless you have some organizational infrastructure with compliance, audit, etc. I imagine this is a generally accurate statement with some exceptions.
I'm starting to build a respectable track record, as I mentioned in my original post. +87% (+330k) in 2011 and +98.2% YTD (+520k). Max DD of around 8 to 10% and max DD on monthly returns of 5.8%. Now managing 1 mil of my own money. I also have 4 years of relevant work experience at a two hedge funds (no where pristigious) before I started doing this full time. Do I have some other options to raise capital besides going family and friends? Maybe I should try talking to some asset raisers? Anyone know of any decent ones?
Quote from gmst:
So, you are saying open a prop. trading futures firm for Sharpe >3. Sharpe < 2 and below, go the OPM route, because the high Sharpe will allow much faster compounding on your own money and OPM won't be needed. Thanks!! Another poster I respect hugely on ET wrote basically the same thing few months ago.
__________________
I'm spending a year dead for tax reasons.
Quote from sle:
Well, to confuse things further, there is no hard threshold on the Sharpe ratio either. It's more of a judgment call - how leveraged are you willing to be with your own cash on this set of strategies? Also, try to think of the infrastructure costs - do you need to be managing 100m to offset the cost of data/hardware/office/IT/blond-secretary or can you do it all on a smaller scale?
Quote from doublet83:
As I mentioned earlier, if your are managing friends and family money and charging fees, IB is capping you to 5 accounts max for non -RIA's. There could also be more restrictive policies depending on which state you are operating from.
I have no idea how cumbersome the process is to become a RIA, besides the tests I know you need to take (if someone can chime in here, it'd be great).
5 accounts is not much to grow from if you're only managing a couple of 10k to 100k accounts each, really this doesn't seem like a great option to me unless I become an RIA.
As to raising institutional money, some other earlier posters suggested this would be likely impossible even with a great track record unless you have some organizational infrastructure with compliance, audit, etc. I imagine this is a generally accurate statement with some exceptions.
I'm starting to build a respectable track record, as I mentioned in my original post. +87% (+330k) in 2011 and +98.2% YTD (+520k). Max DD of around 8 to 10% and max DD on monthly returns of 5.8%. Now managing 1 mil of my own money. I also have 4 years of relevant work experience at a two hedge funds (no where pristigious) before I started doing this full time. Do I have some other options to raise capital besides going family and friends? Maybe I should try talking to some asset raisers? Anyone know of any decent ones?
Quote from Busta21:
I would think raising cap. on those returns would be fairly simple, no? Those are some solid numbers, regardless of sharpe and the rest of that nonsense. I think institutional would care more about sharpe.
Quote from gmst:
Yes, solid numbers indeed. And you are already at 1mm. Just start a CTA and list on Autumngold etc. CTA formation costs are less than 15k with first rate lawyer etc. You can get it done for less than 5k if you are a bit thrifty though.
I am sure within a year of listing on IASG, Barhedge etc. with these numbers, your AUM would grow 5 fold and you can take it from there.
Quote from Busta21:
I would think raising cap. on those returns would be fairly simple, no? Those are some solid numbers, regardless of sharpe and the rest of that nonsense. I think institutional would care more about sharpe.
Of course, it sounds like you've had some experience trying to raise capital, so if you can share your situation and the channels you went through, that would be helpful.
Quote from doublet83:
Of course, it sounds like you've had some experience trying to raise capital, so if you can share your situation and the channels you went through, that would be helpful.
Quote from Busta21:
My situation is somewhat similar. I do not have that amt. of capital you are using but almost the same returns (all options trading). The issue I am running into is the dollar amount I can allocate now which is significantly less than you. From what I've experienced the accredited guys want you to put up a large amount as well so you have skin in. One thing I did do was manage a few of their accounts (and still am) small amounts, but gaining trust, and once all the legal and personal capital is ready they are in. That was a big thing. They want to know they can trust you.
Setting up the fund structure is actually really simple, people just attempt to make it complicated. For about $7K you can find an attorney to put it all together. Then, you can get the back office stuff done for a really small fee. As far as going on these sites to advertise the fund, personally, that seems like such a long shot until you really have some AUM and track record backing you.
How I was able to reach investors? Tough. Fortunately I was in LA in 11' and was able to network quite a bit through friends and really just going off word of mouth. This seems to be the way it works unless you already know people with bankrolls willing to become a partner. As far as institutional. No idea. Didn't even think to take it there yet ( still young and have no significant record). To this day I am still just networking and talking with people I know, pestering really, but it's the only way to show them you really want a shot. (IMO)
Feel free to DM me
Quote from doublet83:
I only do stocks so CTA is not for me, correct? Also those sites..they also seem to be for CTAs. While there are sites for equity investors, I'm not sure these services are for me. I don't know, I just feel like there's so much garbage on these sites that I don't really want to be affiliated with them..
Quote from gmst:
yes if you are stocks only CTA is not for you. Sorry for the confusion.
But if you do stocks only, why not go the usual route of a prop stock trading firm. No investor hassles, at least 1:15 leverage on your capital. You will start making at least 5x what you are making now from day 1. Sounds a like a no-brainer deal to me. Where is the confusion here? Why even worry about raising money for next year or two, if you can just go this way and instead of making say 400k for the year make 2m for the year?
Quote from doublet83:
I have addressed this point before. I don't need any more leverage than I have now. Joining a prop trading firm is of no use to me. What I do is also more akin to portfoilo management than trading.
Quote from gmst:
yes if you are stocks only CTA is not for you. Sorry for the confusion.
But if you do stocks only, why not go the usual route of a prop stock trading firm. No investor hassles, at least 1:15 leverage on your capital. You will start making at least 5x what you are making now from day 1. Sounds a like a no-brainer deal to me. Where is the confusion here? Why even worry about raising money for next year or two, if you can just go this way and instead of making say 400k for the year make 2m for the year?
Quote from doublet83:
If you make it worth my time I can prove to you that these results are real. We can say, bet 5k on whether these returns are real or not, and transfer these funds to a reputable third party escrow service who will then verify my account statements, and transfer both deposits back to me.
You will most likely not agree to such a thing and continue to pollute my thread and others with your rambling.
Quote from Busta21:
Prop? Why would he do that for what the 1:15 intra-day? If that was overnight margin then maybe but that intra-day equities game is a joke.
Quote from tradewiz50:
Spoken like a true gambler.
Quote from Busta21:
Prop? Why would he do that for what the 1:15 intra-day?
Quote from gmst:
not intraday but overnight. Bright and few others will give you overnight leverage. He said he doesn't consider himself as a trader, rather as a portfolio manager (which I assume means that his holding period is days to weeks).
I don't know if he will get 1:15 overnight, even if he gets 1:10 overnight, thats 2-3x times his current PL depending upon what kind of Portfolio margin he is getting now. I don't see whats the confusion here. Its pretty straight logic, right? Unless if I am missing something obvious.
Quote from gmst:
Given your numbers, you are highly underleveraged!
You mentioned 5.8% monthly Max DD with. 500k of PL. If you increase the leverage by 4, you will have 25% Max DD and generate PL of 2m. 25% DD is something that most people can easily digest and live with, this is especially more true when it is your own strategy/account.
Going at this rate in 2 yrs, you will have more than 5M of your own capital - and then you can start your own fund with your own money. SAC got started with 25M, so 5M is nothing to sneeze at. Its a very respectable sum. Newedge will sign you and they will also help you market your fund.
Quote from Busta21:
lol - this thread is garbage. Just read that. Are you serious man? Why in the world are you wasting your time on here? How hard is it really to find someone to back you with that kind of return?
Quote from doublet83:
I did say peak to through draw down was 8 to 10%, I think that's a good sized draw down that I wouldn't necessarily characterize as too low.
In my long term strategy I do not use leverage for the most part. I use leverage opportunistically when I feel like a short term trade is to be made. Even then I do not get anywhere close to the 7x portfoilo margin I already have access to via IB.
Quote from Busta21:
IB gives out 7X leverage? What amount of capital do you need to have in the account to get that rate?
8%-10% draw down on that size of capital is not that big of a deal. I would think the investors need to understand that you are trying to grow that account to start a fund not using it as a model for a future fund. Now that 8-10 percent on $100 Mill is a different story.
Quote from doublet83:
Yeah you get up to 7x with portfoilo margin with a 100k+ account but only if you have a diversified portfoilo. I'm not quite sure how the calculations work but its not a simple 7x.
Well, the draw downs have been 8 to 10% because I've been right (or lucky, probably some have both). I actually spend so much time pondering how about my own returns and my own abilities. How much of it is luck? Am I really good enough a great portfoilo manager that can outperform the market over my lifetime (very few can do this)? When a stock goes my way, how much was due to analysis that was correct versus developments that I didn't foresee?
Anyway, 2 years of great returns doesn't mean you're that great. I still feel I am generally taking on risk and position sizes that are appropriate.
Quote from Busta21:
talking about e&o/d&o:
That seems worth it though, esp. if one is serious about growing and creating a real business out of this.
Quote from Busta21:
Interesting. I'll have to check them out a bit more. Agreed on those thoughts, I've had them as well, plus, when you are trading OPM they get even worse. Are you a technical trader or fundamentals type?
True, but those are some really solid numbers. Why not try and work at a fund or shop it to a small fund in attempts to become a PM at that fund working under someone with more experience in the industry?
Quote from clerk:
This is relative.
Doublet can double his investors money, and his 20% cut puts his insurance hurdle at a mere $50k AUM. For him to spend $10k out of pocket is in effect him investing in his prospective clients. I can see him doing that when he registers because other RIA's would be happy to allocate money to him.
Again, this is relative. $10k is a huge hurdle for me. For me, raising $1M-$2M is hard, and getting returns north of 5% is tough. That puts my insurance hurdle (at 20% carry) at $1M. I can't leave my dayjob just to break even doing this.
Interestingly (just thinking aloud) if I can raise $2M and allocate it to Doublet, and use my sales skills to negotiate a 15/15/70 profit split between adviser/subadviser/client, we both will earn $300,000 each gross if Doublet Double'sIt. Neither of us would flinch at spending $10k on insurance and $10k on RIA disclosure docs. But of course, if Doublet's returns are for real - he probably will have more offers of money to manage than his strategy can handle, and he is going to pick the advisors able to allocate $10M+ to him over me.
If Doublet can take the risks inherent in managing separate accounts (ie clients withdrawing funds during a drawdown), he can get registered as an RIA with excellent disclosure documents for less than $3k. If he sticks to trading stocks (other than penny stocks) in US markets, his insurance expense can be kept below $3k/yr as well.
Quote from doublet83:
Fundamental.
I did used to work at two small hedge funds in the past before I got laid off. I did look for work a year ago but couldn't really find anything decent. My background is not impressive enough to work at a high quality investment firm and I'm not experienced enough for a portfoilo management role at a fund.
I find it pointless now to work at a medium to low quality fund for a huge pay cut. That's basically where I used to work and I didn't think my PM was very smart (eventhough he gradulated from Princeton as Valedictorian - I think you just need a special mental framework to be a good PM).
As to shopping my strategy to a fund..well I really don't think these funds put my value on these types of "track record." I can tell you that last year I had my personal portfoilo management experience on my resume and it was largely ignored, perhaps even seen as a negative as it was incongruent with the rest of my experience.
Quote from doublet83:
I did say peak to through draw down was 8 to 10%, I think that's a good sized draw down that I wouldn't necessarily characterize as too low.
In my long term strategy I do not use leverage for the most part. I use leverage opportunistically when I feel like a short term trade is to be made. Even then I do not get anywhere close to the 7x portfoilo margin I already have access to via IB. However, my % returns are so high because I've aggressively taken advantage of these short term opportunities. It is almost impossible to get these % returns with long term buy and hold.
But if things do pan out as expected, you will make 5-10MM and have a reasonable shot at having your own fund. You may differ this is just my 98 cents. Good Luck
Quote from gmst:
You have an excellent track record. Given the fact that you are taking short term opportunistic trades, over 2 yrs maintaining this kind of track record is very good. You don't have to be correct on direction only, but managing a portfolio your beta exposure to market also has to make sense. Plus your risk management needs to be top class. I just don't see a guy with a 2yr track record like this as luck. Agreed, in future your performance might go down couple of notches. but in any case this is a very good track record - at least in my eyes. But then who am I
I still think you are truly under-leveraged given your performance. Go educate yourself on Kelly, optimal f and others - before deciding arbitrarily to bet 1%-1.5%-2% of your equity on a particular trade. Do some Monte Carlo on your historical performance. Position sizing is an extremely important subject and most of the people don't give enough importance to it. With your track record and the kind of money you have, I would personally be happy to take a 50% DD for the chance to make myself 5-10M in 2yrs.
I know everyone's utility is different, but you can't remain a rabbit and hope to make it big in this world. Use excel and see what using a little bit of higher leverage does to your DD and returns.
Lets say worst case happens, you lose 500k out of your 1M, you will still remain a piker - as you are now
While I'm happy to answer more questions about my individual results, what I'd really like to hear about is the process of raising capital and starting a fund.
One big question I have in my mind..is what are the advantages of a hedge fund versus a managed account structure (busta..I sent you a message).
Given IB seems to cap you at 5 accounts for non-RIA's that charge fees, it seems that the only viable way to raise serious money using managed accounts is to become an RIA. Therefore, how easy is this process of getting registered from a registration process, and on an ongoing basis?
If I manage a hedge fund structure, I suppose do I no longer need to be registered, with the trade-off being that I can only market to accredited investors?
I would really like to understand this part of the process better, and if anyone has some insights, it would be much appreciated.
Quote from doublet83:
While I'm happy to answer more questions about my individual results, what I'd really like to hear about is the process of raising capital and starting a fund.
One big question I have in my mind..is what are the advantages of a hedge fund versus a managed account structure (busta..I sent you a message).
Given IB seems to cap you at 5 accounts for non-RIA's that charge fees, it seems that the only viable way to raise serious money using managed accounts is to become an RIA. Therefore, how easy is this process of getting registered from a registration process, and on an ongoing basis?
If I manage a hedge fund structure, I suppose do I no longer need to be registered, with the trade-off being that I can only market to accredited investors?
I would really like to understand this part of the process better, and if anyone has some insights, it would be much appreciated.
You might consider opening an account at Covestor. Although it probably can't be considered audited performance, you will get a semi-official track record out there and it might be useful for generating leads.
Assuming you can keep up the performance, you could get a decent number of people subscribing to your model. I don't think the payout is that good, but you're mainly doing it to establish a track record anyway.
Quote from Spearhead:
You might consider opening an account at Covestor. Although it probably can't be considered audited performance, you will get a semi-official track record out there and it might be useful for generating leads.
Assuming you can keep up the performance, you could get a decent number of people subscribing to your model. I don't think the payout is that good, but you're mainly doing it to establish a track record anyway.
Quote from doublet83:
..What I will probably do is start managing some friends' money for no fees, and try to build a reputation. Managing OPM was never a rush for me anyway.
Quote from HurricaneUS:
realistically, this is probably your only avenue..well other than graduating at the top of your class of a top business school
your returns do not impress me since it's only 2 years..2 years can definitely be a fluke considering the stock market has been in a strong bull market during that time....but in this atmosphere of hot today and gone tomorrow hedge funds, a 2 year track record would not even raise eyebrows of high net worth individuals. It's all about your salesmanship, resume and who's vouching for you..other than that...work with friends/family money and make them a "shitload of money" and then maybe...just maybe...you will build a reputation
Quote from Busta21:
Oh really? I know a fund in Scottsdale, AZ that runs $100M with no grad degrees, ya herb.
Secondly, those returns, would, in fact, raise eyebrows. You don't know what your talking about. Now be off cretin!
Quote from HurricaneUS:
realistically, this is probably your only avenue..well other than graduating at the top of your class of a top business school
your returns do not impress me since it's only 2 years..2 years can definitely be a fluke considering the stock market has been in a strong bull market during that time....but in this atmosphere of hot today and gone tomorrow hedge funds, a 2 year track record would not even raise eyebrows of high net worth individuals. It's all about your salesmanship, resume and who's vouching for you..other than that...work with friends/family money and make them a "shitload of money" and then maybe...just maybe...you will build a reputation
Quote from HurricaneUS:
I'm sure you are gullible enough to invest money on the basis of a 2 year track record....that is, if you had any money to start with..... I'm so sorry but the gov't welfare checks that you're collecting won't quite be enough.
doublet said:I would never promise or hint to potential clients that they should expect anywhere near these level of returns. Certainly I do not plan my life around being able to return 100% a year.
How many client relationships can you handle? If you could raise $1M each from 100 people, do you have the cardiovascular health to handle servicing 100 clients? Consider the possibility that you can start with 5 $1M, and go supernova on them such that you drop your smallest client when a bigger client comes along.
doublet said:Given IB seems to cap you at 5 accounts for non-RIA's that charge fees, it seems that the only viable way to raise serious money using managed accounts is to become an RIA.
Fill out a form. Take a test. Write a disclosure document. Keep books and records. Buy a Policies & Procedures manual designed for a one-man-shop. I'm in compliance, and my brain is wired for this; I think this is all really easy.
doublet said: Therefore, how easy is this process of getting registered from a registration process, and on an ongoing basis?
If you only manage private funds, you will not need to register. However, you may someday manage in excess of $150M, in which case you will sign up as an Exempt Reporting Advisor. An ERA is not a registrant, and is not subject to some of the rules governing RIA's. Nevertheless an ERA needs have books and records subject to inspection. In effect, an ERA will need to structure their business substantially along the same lines as an RIA will. If you begin an advisory business without implementing the policies and procedures applicable to RIAs, it is much harder to remedy your ways in the future. You will want to consider dressing up like an RIA even if you don't need and want to register.
doublet said:One big question I have in my mind..is what are the advantages of a hedge fund versus a managed account structure (busta..I sent you a message). If I manage a hedge fund structure, I suppose do I no longer need to be registered, with the trade-off being that I can only market to accredited investors?
i'm impressed.. i'm 34 and still all thumbs..
Quote from Busta21:
Oh really? I know a fund in Scottsdale, AZ that runs $100M with no grad degrees, ya herb.
Secondly, those returns, would, in fact, raise eyebrows. You don't know what your talking about. Now be off cretin!
problem is eveyrone knows that its hard to continue those gains as your pot size gets bigger.. people do well on average like 6 or 7 years before they blow up.. at least thats the Random walker take on it..
Quote from newwurldmn:
You talking about that dude who didn't graduate highschool and works out of an attic type office?
Quote from clerk:
Neither the SEC nor state regulators will allow you (or any advisor using you as a sub) to promise or hint that investors should expect anything other than possible loss of principal. Nevertheless, investors have very few tools to assess the abilities of discretionary (non-mechanical) traders. They will run an ordinary-least-squares regression of your returns over market returns. If you trade a narrow basket of specific securities, they will regress your returns over the returns of those exchange-traded products. A longer track-record will better reveal the actual contribution of your market-insight to your returns, and reduce the possibility that your excess returns are a result of good fortune.
But, there is a market for start-up managers. You have a competitive advantage when you enter the marketplace over established managers - your flexibility with fees. And investors willing to allocate a small fraction of their risk assets to start-up managers will potentially benefit from superior fee-adjusted returns. An advisor able to allocate a portion of their clients assets to a diverse stable of start-up managers will benefit, on an expected value basis, from greater performance-fee income. It isn't as if there are that many good money managers out there to choose from, who haven't yet begin to demand exorbitant fixed-fees.
It is totally ridiculous to say that a 2yr record will yield you bupkiss.
How many client relationships can you handle? If you could raise $1M each from 100 people, do you have the cardiovascular health to handle servicing 100 clients? Consider the possibility that you can start with 5 $1M, and go supernova on them such that you drop your smallest client when a bigger client comes along.
Fill out a form. Take a test. Write a disclosure document. Keep books and records. Buy a Policies & Procedures manual designed for a one-man-shop. I'm in compliance, and my brain is wired for this; I think this is all really easy.
Look at the form http://www.sec.gov/about/forms/formadv-part1a.pdf and instructions http://www.sec.gov/about/forms/formadv-instructions.pdf then practice filling it out. Specifically, take a look at the civil/criminal/disciplinary disclosures to see if you will have to disclose something embarrassing. (eg getting busted with a blunt back in college, and now you're a very different 29yr old)
Take a look at the Series 65 syllabus http://www.nasaa.org/wp-content/upl...ecification.pdf and see if the topic you are unfamiliar with would be overwhelming to learn. There are some things they need you to know so you can perform financial planning, even though you only want to perform investment management work.
I can't imagine why you wouldn't want to keep the books and records of the advisory business, as you will need them to be complete and organized for a variety of personal and business reasons. See the Rule 204-2 section of http://www.sec.gov/divisions/investment/advoverview.htm
From what I have read here you are exploring trading OPM in order to make money (for yourself) off the money you make for your clients. You don't have any intention to make money off your clients, i.e. at their expense. You will have no problems disclosing your conflicts of interests (or lack thereof) or adhering to a code of ethics.
If you only manage private funds, you will not need to register. However, you may someday manage in excess of $150M, in which case you will sign up as an Exempt Reporting Advisor. An ERA is not a registrant, and is not subject to some of the rules governing RIA's. Nevertheless an ERA needs have books and records subject to inspection. In effect, an ERA will need to structure their business substantially along the same lines as an RIA will. If you begin an advisory business without implementing the policies and procedures applicable to RIAs, it is much harder to remedy your ways in the future. You will want to consider dressing up like an RIA even if you don't need and want to register.
As the manager of a private fund, you may have 35 non-accredited investors if you keep your investor limit to 100. Alternatively, you can have a fund with up to 499 investors if they are all qualified purchasers. For the purposes of this exemption, they will aggregate funds with similar strategies; since you run one strategy these will be your aggregate limits. If you elect not to register as an investment advisor, you will not be subject to the rule limiting performance-fees to qualified clients.
(JOBS act lifts the 3c7 limit to 999 but I don't think regulations have been promulgated to implement the new law)
Before you disavow investment advisor registration, I urge you to consider whether - in practice - the additional flexibility that comes with not-being-registered has meaningful benefits to you. If you don't follow the custody rule as required of RIA's, premiums for your e&o/d&o insurance + fidelity/crime bond will skyrocket. If you take performance fees from unsophisticated low net worth investors, fewer carriers will underwrite your risk. And if you live in a place like California, state law will bar you from taking performance fees from non-qualified-clients anyway. If you don't have conflicts of interests, criminal/civil/disciplinary/ history to disclose, then you don't have any practical benefit from not having to disclose them. Finally, by not being registered, some institutional investors will shun you, and all private-wealth advisors will shun you. If you are not registered you can't advertise, and you're going to be in a rough spot marketing your fund directly to investors. That is a job unto itself and a very tough job indeed (sales).
This is an oldie but goodie http://www.akingump.com/files/Publi...34ba36c/912.pdf keep in mind that the $ limits have been raised since Dodd-Frank
Let me try summarize my impression of some of the advantages and disadvantages of the managed account vs private fund structure. These are just my impressions, much of which have been gleaned from ET, so I could be wrong. Anyone with knowledge on the subject please chime in.
Managed account structure
-Greater transparency and control makes certain investors much more comfortable investing their money.
-Relatively easy to get started using IB's family and friends system, with IB handling your reporting, fee deductions, tax reporting, etc.
Disadvantages:
-Must become a registered investoment advisor to manage more than a very small number of accounts. However, the difficulty and compliance requirements of becoming an RIA may not be that onerous.
-Since account still remains under the name of the investor, there could be compliance issues that restrict my friends from investing under this structure (most of my friends work in finance and are subject to trading restrictions. not sure if managed account structure bypass these).
Private fund structure
-Do not have to register, but not being registered reduces your marketability with larger clients.
-Can have potentially 35 non-accredited investors if you keep your investor limit to 100.
-Can have up to 499 accredited investors if everyone is accredited.
-Private fund gives the manager ability to increase the level of secrecy surrounding his strategies.
-Owner can potentially take advantage of carried interest's favorable tax treatment (??)
-Fund's trackrecord seems to be more institutionalized and may therefore be more valuable (??)
Disadvantages:
-More complicated start up costs (??) There are turn key fund services that can do this work for 20k (I'm not sure why you don't need some of the legal contract work for a managed account structure).
-Cost of E&O insurance is much higher.
-Reporting is an hassle. I believe a previous poster mentioned the need to file tax reporting documents for every state a LP resides in. Accounting is a hassle and needs to account for whenever someone puts in or takes out money. Not sure what other issues there are on this front.
There is no longer an exemption under federal law for advisors of a few accounts. The exemption only applies when all clients are private funds (with no limit of client#). Yes, IB will facilitate you charging fees to 5 accounts that need not be private funds, but it would be unlawful for you to do so. So with respect to your train of thought, it would be more precise to say "must become a registered advisor to manage accounts that are not private funds". And no, asking clients to drop their cash into a SMLLC does not make it a private fund, because of the statutory definition of a private fund (IAA40-202-29: "that would be an investment company but for ICA40-3c1/3c7")
Managed account structure Disadvantage:
-in the context of IB F&F Must become a registered investment advisor to manage more than a very small number of accounts.
The compliance issue is the same whether it is in a separate account in the investors name, in a separate account under your name as nominee, or is pooled with other investors in an LP/LLC/trust/corp structure. Arguably, it is harder to get compliance to sign off on Private Security Transactions. If they are only allowed to maintain securities accounts with their employer, you may have to use their employer as custodian (and worse, broker as well). If you have six friends working for six Wall St firms… well you can see why you would want to explore executing at IB and using each of their employers as prime brokers for each respective accounts. What a hassle but this has nothing to do with this thread. I have some insight into this: my employer is regulated by FINRA & SEC, and my wife's employer is regulated by FINRA, SEC, and the Federal Reserve.
Managed account structure Disadvantage:
-Since account still remains under the name of the investor, there could be compliance issues that restrict my friends from investing under this structure (most of my friends work in finance and are subject to trading restrictions. not sure if managed account structure bypass these).
Can have up to 499 qualified purchasers if everyone is a qualified purchaser.
Private fund structure Advantage:
-Can have up to 499 accredited investors if everyone is accredited.
You essentially get two choices: let clients get statements from the custodian, or you pay for an audit. However, this is true of both a hedge fund and a separate account. (in this case the separate account will be held in your name as agent for the client)
Private fund structure Advantage:
-Private fund gives the manager ability to increase the level of secrecy surrounding his strategies.
You can do so as well with separate accounts. This is quite popular with fiduciary clients (pension plan administrator, municipal/corporate treasurers, endowment trustees) Ask me about the mechanics if this interests you, but essentially you and your investor enter into a general partnership (you 0% capital interest 20% profit interest, client 100% capital interest 80% profit interest) and your investor maintains the account in his name as agent of the general partnership. A tax return will need to be filed.
Private fund structure Advantage:
-Owner can potentially take advantage of carried interest's favorable tax treatment (??)
I don't believe in this one bit. Audited performance #s are the same to anyone who cares, whether the account audited is your IRA or some LLC/LP. Folks only care about the performance#, the provenance of the auditor, and reporting methodology (GIPS compliance or some other)
Private fund structure Advantage:
-Fund's track record seems to be more institutionalized and may therefore be more valuable (??)
Good guys can do it for closer to $15k these days. You will need to incur the expense of developing advisory contracts, disclosures, and policies/procedures for managing both separate accounts and a single fund, which should run you $3k. In addition, a fund requires specialist work in partnership law, as well as securities laws in the context of issuing securities. That is what pretty much rings up the $15k tab.
Private fund structure Disadvantage:
-More complicated startup costs (??) There are turn key fund services that can do this work for 20k (I'm not sure why you don't need some of the legal contract work for a managed account structure).
It is false that a limited partnership will need to file tax returns in every jurisdiction in which its (the partnership) limited partners live. The partnership will only need to file tax returns in its jurisdiction of domicile, as well as every jurisdiction in which it does business. In practice, for an investment partnership, these will be the state in which the partnership gets its charter, as well as the states in which the managers, administrators, and advisors do business. As an example, let us say you live in New York, and I live in California. You serve as general partner, and I serve as limited partner. The limited partnership will file a federal tax return as well as a New York state tax return, and will send me my schedule K-1. I will use the K-1 you had sent me to prepare both my federal and California personal income taxes. You will use your schedule K-1 to prepare your federal and NYS personal income taxes.
Private fund structure Disadvantage:
-Reporting is an hassle. I believe a previous poster mentioned the need to file tax reporting documents for every state a LP resides in. Accounting is a hassle and needs to account for whenever someone puts in or takes out money. Not sure what other issues there are on this front.
http://www.slideshare.net/Hedge_Fund_Lawyer
Just to add...
Quote from Busta21:
IB gives out 7X leverage? What amount of capital do you need to have in the account to get that rate?
8%-10% draw down on that size of capital is not that big of a deal. I would think the investors need to understand that you are trying to grow that account to start a fund not using it as a model for a future fund. Now that 8-10 percent on $100 Mill is a different story.
who are those guys?
Can you give some those service provider names? I am very interested.
[QUOTE]Quote from clerk:
Good guys can do it for closer to $15k these days. You will need to incur the expense of developing advisory contracts, disclosures, and policies/procedures for managing both separate accounts and a single fund, which should run you $3k. In addition, a fund requires specialist work in partnership law, as well as securities laws in the context of issuing securities. That is what pretty much rings up the $15k tab.
Quote from clerk:
There is no longer an exemption under federal law for advisors of a few accounts. The exemption only applies when all clients are private funds (with no limit of client#). Yes, IB will facilitate you charging fees to 5 accounts that need not be private funds, but it would be unlawful for you to do so. So with respect to your train of thought, it would be more precise to say "must become a registered advisor to manage accounts that are not private funds". And no, asking clients to drop their cash into a SMLLC does not make it a private fund, because of the statutory definition of a private fund (IAA40-202-29: "that would be an investment company but for ICA40-3c1/3c7")
The compliance issue is the same whether it is in a separate account in the investors name, in a separate account under your name as nominee, or is pooled with other investors in an LP/LLC/trust/corp structure. Arguably, it is harder to get compliance to sign off on Private Security Transactions. If they are only allowed to maintain securities accounts with their employer, you may have to use their employer as custodian (and worse, broker as well). If you have six friends working for six Wall St firms… well you can see why you would want to explore executing at IB and using each of their employers as prime brokers for each respective accounts. What a hassle but this has nothing to do with this thread. I have some insight into this: my employer is regulated by FINRA & SEC, and my wife's employer is regulated by FINRA, SEC, and the Federal Reserve.
Can have up to 499 qualified purchasers if everyone is a qualified purchaser.
You essentially get two choices: let clients get statements from the custodian, or you pay for an audit. However, this is true of both a hedge fund and a separate account. (in this case the separate account will be held in your name as agent for the client)
You can do so as well with separate accounts. This is quite popular with fiduciary clients (pension plan administrator, municipal/corporate treasurers, endowment trustees) Ask me about the mechanics if this interests you, but essentially you and your investor enter into a general partnership (you 0% capital interest 20% profit interest, client 100% capital interest 80% profit interest) and your investor maintains the account in his name as agent of the general partnership. A tax return will need to be filed.
However, if substantial amounts of your trading profit will be short term capital gains, then receiving carried interest has no economic benefit to you. Well, I guess it would if the advisory business was owned by your siblings/girlfriends Roth IRA, with you as its mere employee. (IRC/DOL prohibited transaction rules prevent you from capitalizing more than 50.00% of the biz in your, your parents, your children's, or your spouse's retirement account)
I don't believe in this one bit. Audited performance #s are the same to anyone who cares, whether the account audited is your IRA or some LLC/LP. Folks only care about the performance#, the provenance of the auditor, and reporting methodology (GIPS compliance or some other)
Good guys can do it for closer to $15k these days. You will need to incur the expense of developing advisory contracts, disclosures, and policies/procedures for managing both separate accounts and a single fund, which should run you $3k. In addition, a fund requires specialist work in partnership law, as well as securities laws in the context of issuing securities. That is what pretty much rings up the $15k tab.
It is false that a limited partnership will need to file tax returns in every jurisdiction in which its (the partnership) limited partners live. The partnership will only need to file tax returns in its jurisdiction of domicile, as well as every jurisdiction in which it does business. In practice, for an investment partnership, these will be the state in which the partnership gets its charter, as well as the states in which the managers, administrators, and advisors do business. As an example, let us say you live in New York, and I live in California. You serve as general partner, and I serve as limited partner. The limited partnership will file a federal tax return as well as a New York state tax return, and will send me my schedule K-1. I will use the K-1 you had sent me to prepare both my federal and California personal income taxes. You will use your schedule K-1 to prepare your federal and NYS personal income taxes.
Partnership accounting is not something you can do with Quicken. Partnership accounting, and the resultant tax preparation work, is not cheap. You can justify the expense when you have several partners and investment income to cover the expense. It is customary that these audit, accounting, and tax-prep expenses be borne by the fund itself and not the fund manager. Your investors would freak if the expenses allocable to them represented a significant fixed expense. The nice things about separate accounts is what is essentially free bundled accounting work. IB even will calc performance fees at no additional cost, if both you and the investor are comfortable with IB's accounting methodology for performance fees.
Quote from atticus:
$125k IIRC, port-margin account.
And your comments re: newwurldmn are comical. He's one of about a half-dozen guys here who know of wtf they speak.
emk622 for setting up the fund manager, take a look at ria-in-a-box. For drafting the fund offering document, get a referral from Robert Green, who lurks here.
Quote from atticus:
$125k IIRC, port-margin account.
And your comments re: newwurldmn are comical. He's one of about a half-dozen guys here who know of wtf they speak.
Right away I call this B*S*: Geeps that's not doable.
-------------------------------------------------------------------------------------
2011: 87.2% return. Max drawdown (based on monthly returns) of 5.0%. Profits of 330k
2012 YTD: 36% return. Max draw down of 4.1%. Profits of 200k.
i think OP is a dreamer. Why has everyone took his word on his returns? Hope you aren't that gullible?
Quote from Busta21:
Thanks for sharing, but looks shaky, next.
After 33 pages i dont see a purpose in becoming a hedgefund manager if you are successful before getting other peoples money involved. Stay private, be your own boss and make good money without having to deal with whiny clients, right?
Quote from Cmoss:
After 33 pages i dont see a purpose in becoming a hedgefund manager if you are successful before getting other peoples money involved. Stay private, be your own boss and make good money without having to deal with whiny clients, right?
Quote from Cmoss:
After 33 pages i dont see a purpose in becoming a hedgefund manager if you are successful before getting other peoples money involved. Stay private, be your own boss and make good money without having to deal with whiny clients, right?
Great year so far. Made 860k representing 150% return.
I am quite concerned with taxes next year. Federal tax rates going up. Medicare taxes will now be on unearned income as well when previously they were just on earned income and the rate is going up too. New Obamacare tax on investment income. So for a trader based in NYC, it seems like your marginal tax rate will be about 59%. I'm all for taxing the rich, but 59%..Christ.
Federal 39.6%
NY 6.9%
NYC 3.6%
SS 10.4% up to 100k 1.4%
Medicare 3.8%
Obamacare tax 3.8%
59.1%
Am I misunderstanding something here? It seems like my marginal tax rate will be going up 14% because previously I was not subject to SS tax, Medicare tax, and Obamacare, along with the lower federal tax rate.
Quote from doublet83:
Great year so far. Made 860k representing 150% return.
I am quite concerned with taxes next year. Federal tax rates going up. Medicare taxes will now be on unearned income as well when previously they were just on earned income and the rate is going up too. New Obamacare tax on investment income. So for a trader based in NYC, it seems like your marginal tax rate will be about 59%. I'm all for taxing the rich, but 59%..Christ.
Federal 39.6%
NY 6.9%
NYC 3.6%
SS 10.4% up to 100k 1.4%
Medicare 3.8%
Obamacare tax 3.8%
59.1%
Am I misunderstanding something here? It seems like my marginal tax rate will be going up 14% because previously I was not subject to SS tax, Medicare tax, and Obamacare, along with the lower federal tax rate.
Quote from doublet83:
Great year so far. Made 860k representing 150% return.
Quote from 007Arb:
Great returns the past few years. I didn't check to see if I have already posted in this thread but you do know hedge fund returns over the past 20 years or so are around 11% to 12% per annum. And even lower since 2008. That's actually an overstatement because it doesn't account for the funds that have dropped out due to poor performance and hence non reporting.
Quote from Busta21:
Great year so far, congrats! Anyone here familiar with setting up off-shore? There has to be a way to get around these rates.
Quote from doublet83:
Great year so far. Made 860k representing 150% return.
I am quite concerned with taxes next year. Federal tax rates going up. Medicare taxes will now be on unearned income as well when previously they were just on earned income and the rate is going up too. New Obamacare tax on investment income. So for a trader based in NYC, it seems like your marginal tax rate will be about 59%. I'm all for taxing the rich, but 59%..Christ.
Federal 39.6%
NY 6.9%
NYC 3.6%
SS 10.4% up to 100k 1.4%
Medicare 3.8%
Obamacare tax 3.8%
59.1%
Am I misunderstanding something here? It seems like my marginal tax rate will be going up 14% because previously I was not subject to SS tax, Medicare tax, and Obamacare, along with the lower federal tax rate.
For a tax pro, talk to Robert Green (greencompany). Don't think there are as many options going forward (avoiding medicare tax for example) but he knows his stuff.
Also, what is the SS "1.4%"? Is that the average tax rate for your 860K assuming you pay 10.4% on the first 100K? If you're trying to determine your marginal rate, this isn't right. Either calc the average tax rate or the marginal tax rate, but don't mix the two
Does anyone know whether or not you can contribute to a regular and/or a roth ira if you elect professional trader tax status and what the maximum contribution would be?
Quote from sf631:
For a tax pro, talk to Robert Green (greencompany). Don't think there are as many options going forward (avoiding medicare tax for example) but he knows his stuff.
Also, what is the SS "1.4%"? Is that the average tax rate for your 860K assuming you pay 10.4% on the first 100K? If you're trying to determine your marginal rate, this isn't right. Either calc the average tax rate or the marginal tax rate, but don't mix the two
Quote from doublet83:
Great year so far. Made 860k representing 150% return.
I am quite concerned with taxes next year. Federal tax rates going up. Medicare taxes will now be on unearned income as well when previously they were just on earned income and the rate is going up too. New Obamacare tax on investment income. So for a trader based in NYC, it seems like your marginal tax rate will be about 59%. I'm all for taxing the rich, but 59%..Christ.
Federal 39.6%
NY 6.9%
NYC 3.6%
SS 10.4% up to 100k 1.4%
Medicare 3.8%
Obamacare tax 3.8%
59.1%
Am I misunderstanding something here? It seems like my marginal tax rate will be going up 14% because previously I was not subject to SS tax, Medicare tax, and Obamacare, along with the lower federal tax rate.
Can someone confirm that the 3.8% is only on the amount above 200K (or 250K) rather than on the whole amount for anyone who crosses 200K? Assuming so, hoping so. It isn't a huge consolation for someone making 860K, but matters much for those a bit closer to earth in the 200-500 range.
http://www.irs.gov/uac/Newsroom/Net...Income-Tax-FAQs
Quote from sf631:
Can someone confirm that the 3.8% is only on the amount above 200K (or 250K) rather than on the whole amount for anyone who crosses 200K? Assuming so, hoping so. It isn't a huge consolation for someone making 860K, but matters much for those a bit closer to earth in the 200-500 range.
Thanks rallymode. Short answer for anyone not going thru to the link is only on the amount above the AGI threshold (or the amount of net investment income, whichever is less) So, less onerous if you're just over the line into "rich"
I've recently started thinking about OPM as a possibility for the future, so I just read this entire thread (took me 2 hours...). A few interesting points, especially thanks to clerk.
I have one question regarding this:
Quote from clerk:
I don't believe in this one bit. Audited performance #s are the same to anyone who cares, whether the account audited is your IRA or some LLC/LP. Folks only care about the performance#, the provenance of the auditor, and reporting methodology (GIPS compliance or some other)
Quote from braincell:
I've recently started thinking about OPM as a possibility for the future, so I just read this entire thread (took me 2 hours...). A few interesting points, especially thanks to clerk.
I have one question regarding this:
Is this just an opinion or a fact? I'm thinking since I have a decent sized retail account with IB right now, if I ever want to start a fund, will I be able to (legally) use the audited track record from my current retail account at IB as past performance, or not? I'm thinking in 3-4 years time.
Or, do you think, I can legally, but it won't impress potential investors because it was a retail account? In this case, considering I'm currently building a track record, should I open a different kind of account for the purposes of obtaining a track record that is "useful"?
I mean, somebody mentioned what sounded like an opinion that only track records of managed accounts matter at this point before you can manage anything, so I'd like to know where to build this track record since that's not something I can change later.
Thanks.
No one "audits" an IRA account. Or any other individual account, really. A full on audit entails a study of your operations, cash-flow procedures, and generates full year financial statements. This is what larger investors want to see before they invest.
But you can get an accountant's "opinion statement". You basically show the accountant your returns, and what you think the performance is. The accountant does a quick review, and says yes... the logic + math here seems okay. But they're not really reviewing all the cash flows in/out of the account, whether assets are being priced correctly, etc, etc. Probably good enough for someone casual, the guy you meet at the golf course or here on ET... so might be worthwhile getting your first seed money.
There are a lot of great money managers out there. It's extremely hard to convince someone to invest in you on day one, when they have other more established managers out there also beating the index by 500-1000 basis points a year.
Auditing never made sense to me. It's easy to operate multiple accounts and only have the winners audited. Auditing only makes sense after you are invested to prevent chicanery
Quote from marketsurfer:
Auditing never made sense to me. It's easy to operate multiple accounts and only have the winners audited. Auditing only makes sense after you are invested to prevent chicanery
Thanks Busta and heech, for the responses but I'm not sure I'm reading them right.
You're saying that retail or LLC account, it won't be much use unless the AUM in it is 1 million or more, and/or the strategy can be fully disclosed and there is good reasonable explanation of how it will work under higher AUM?
If explaining a strategy to the investor is useful, other than him sitting down and watching me trade, how can he be sure anyone is telling the truth? I'd probably have two funds, one market neutral arbitrage (less automated) and one trending (more automated). Maybe you mean, I should be able to explain how my entry methods, my executions etc, won't move the market too much and how my time-frames are compatible with larger AUM (this means no inta-day trading)? I know that I can fully disclose the strategy and my estimates are that from 200k up to 20M AUM there won't be much difference in execution (performance) having looked at the market structure.
Basically, I'd just like to know if I should start an LLC for the sake of my record, should I do it right now?
In other words: If I will be fully transparent, as I intend to be, does the fact that I'm on a retail account now not matter at all (considering what you said about the un-importance of auditing)?
Having ability to fully articulate your strategy is the most important. Next is making the investor feel safe with your operation.
Only family and friends will invest without redundancy, supervision via 3rd party administrator and infrastructure. Regardless of returns audited or not.
In other words. Track records are way down on the list. Think about it, it's self selection bias, anyone who wants to or thinks they can operate a fund already has a great track record. Otherwise they wouldn't consider this avenue.
So I would agree with Market Surfer on articulation of the strategy. That really is the most important thing. As for how they would know that you were not lying, the P/L track record with explanations of the trades (analysis, execution) would answer that.
Hard to say. I mean, if you are going to go after outside money other than friends, family, I would create an incubator fund for 13'. You could always show the retail account past performance as well but it can't hurt to be professional with an LLC based account showing the exact strategy as it plays out.
Here is a site that might help:
http://www.greencompany.com/HedgeFu...atorFunds.shtml
The track record from the past should matter, at least it has in my dealings.
Right, I get what you're saying, thanks. After all, I was an investor myself in the past few years so I know what I looked for, but perhaps my priorities were different to that of other investors... I'll think about it in the next few months but taking into account everything I know now, I might just be better off staying on my own + friends/family until I grow past 1 or maybe even better, 2MM.
The last thing I want to do is take the fun out of my job, even if it pays (potentialy) so much better. Maybe this changes when I get older and kids start kicking my a$$. *shrug*
Quote from Busta21:
So I would agree with Market Surfer on articulation of the strategy. That really is the most important thing. As for how they would know that you were not lying, the P/L track record with explanations of the trades (analysis, execution) would answer that.
Hard to say. I mean, if you are going to go after outside money other than friends, family, I would create an incubator fund for 13'. You could always show the retail account past performance as well but it can't hurt to be professional with an LLC based account showing the exact strategy as it plays out.
Here is a site that might help:
http://www.greencompany.com/HedgeFu...atorFunds.shtml
The track record from the past should matter, at least it has in my dealings.
Quote from braincell:
Right, I get what you're saying, thanks. After all, I was an investor myself in the past few years so I know what I looked for, but perhaps my priorities were different to that of other investors... I'll think about it in the next few months but taking into account everything I know now, I might just be better off staying on my own + friends/family until I grow past 1 or maybe even better, 2MM.
The last thing I want to do is take the fun out of my job, even if it pays (potentialy) so much better. Maybe this changes when I get older and kids start kicking my a$$. *shrug*
From what I've learned from asking similar questions to lots of different sources of fact/opinion:
* Any account performance track record can be disclosed as relevant (as long as it belongs to you and you're not prohibited from sharing it by employer etc...), but it's a question of how much perceived credibility it has, and is a sliding scale
* Fully functional HF with outside capital is greatest, and bigger is of course better from a credibility POV
* Incubator HF would be next
* Single Member LLC which owns your account is next most "airtight"
* Personal account would be last
* For any of the above, having a very high % of your net worth invested would be important to (1) show alignment of incentives, and (2) to cut off fears that you ran 4 portfolios and cherry-picked the best one as your track record
I think either the SMLLC or Incubator HF is worth the effort for a couple of reasons (in addition to above)
(1) it gives you a much easier way of claiming trader tax status (see GreenCompany for more on that) and
(2) it allows you to cleanly segregate what's in and what's out of your strategy. Have 50 shares of apple stock that you hold on to because you believe in the company, but your strategy is a market neutral arbitrage? Should you consider the daily markings of Apple as part of your markings? Logically no, but it's a slippery slope and you can understand why a potential investor would question how solid your track record is after you make lots of "reasonable" exceptions. Kind of like pro-forma earnings, you can never trust them quite so much.
Also, I think traditionally Incubator HFs (or any HF, for that matter) are set up as Delaware (or offshore) LPs, not LLCs, though I know there are exceptions to this convention.
Just my $0.02
Thanks sf, that's by far the clearest answer I was looking for. You should post more often, the other stuff you wrote before was useful too.
edit: I had a few more questions but I'll probably contact some of the service providers in the future and ask, that's all from me, so thanks for the free tips guys.
The more I go through the process (wrapping up my 3rd year now)... and as I find some success (tripling my AUM in the past 12 months, doubling over the past 3-4 months alone)...
I really see it from both sides. The rewards are so obvious, but the challenges are also huge.
My first piece of advice to up and coming managers is: don't force it. If you talk to 10 prospective investors and none are interested, then you simply aren't ready for that class of investors yet. Don't waste your time trying to pitch to more people until you address whatever your deficiency is.
What I have found is, if a couple from a particular category actually invest... then you will find probably EVERYONE from that category will be equally interested . For example, for years I've been trying to pitch to smaller FoF and family offices (even attending a family office conference). Zero success; some due dil calls, but no serious interest. Total waste of time.
In contrast, just a few months after I finally got one investor from that category... I now have 5-8 invested, and probably another 6-8 in the pipeline. And I'm reasonably confident that I'll get a steady supply of investors in this category if I maintain my performance. Why? They're not lemmings, few know others are investing. It's more just a function of, most investors work with very similar criteria. If you are attractive to a few, then you will probably be attractive to many. (And the inverse is also true.)
So, how do you get started from zero (or any number < $1 mm)? I really don't know. I think that's incredibly difficult. Other than a risk-seeking gambler (who probably exist - but I haven't run into), I really don't know any investors with real money who are looking for managers in that category. Why should they, when they can find excellent managers with established track records?
Quite simply, no one with millions in assets is looking to get 100% returns... they don't need 100% returns to improve their lifestyle. They just need to make sure they don't LOSE their existing assets. If I have $10 million to invest, and I can find a dependable manager who makes me 15% a year (with low probability of draw-down)... that's great. Who wouldn't be happy with $1.5 million a year? Would they really be happier with $3 million or $5 million a year, if those 30-50% returns brought with it the risks of losing their nest egg, and having to *work* again? (And you will hear that again and again from wealthier investors... their financial goals often boil down to a simple concept: how can they never work again.)
I'm not trying to be pessimistic, these are just my thoughts at this point in my career. I'm very fortunate to have started with what I did, and even then I found it rather difficult to *want* to persist to where I am now. Things are looking up right at this moment, but I'd be the first to tell you that I'm always 2-3 months away from closing my business depending on how the market behaves.
Best of luck to anyone pursuing this as a career.
Great comments Heech.
Should we infer that the turning point for you (with the small FoF and family office folks) was in ratcheting down your returns and volatility/drawdowns? If so, did you just do that with your leverage ratio?
One dilemma that I've considered is that, while it may be true that investors would rather have 15% return with 2% drawdowns, I would rather have 45% returns and 6% drawdowns on my capital, largely because it allows compounding of capital and critical mass. Is there any clean (pooled fund) structure that enables different investors to have different leverage? I know this could be done with SMAs, maybe that'd be easiest
Quote from sf631:
Great comments Heech.
Should we infer that the turning point for you (with the small FoF and family office folks) was in ratcheting down your returns and volatility/drawdowns? If so, did you just do that with your leverage ratio?
One dilemma that I've considered is that, while it may be true that investors would rather have 15% return with 2% drawdowns, I would rather have 45% returns and 6% drawdowns on my capital, largely because it allows compounding of capital and critical mass. Is there any clean (pooled fund) structure that enables different investors to have different leverage? I know this could be done with SMAs, maybe that'd be easiest
Oh sorry, neglected your question about different leverage levels in the same fund.
It must be possible, since I know other funds do something similar; many CTAs advertise a 3x type leveraged program. But when I wanted to explore the option, my legal, admin, and audit teams all balked. They made it sound extremely complicated... fee sharing, valuation, high water marks, etc. Ultimately I decided to just create multiple funds, one for each leverage. I launched with an "aggressive" fund, as i wanted max leverage for my own capital too, just like you.
Three years later, still haven't created the institutional fund I envisioned long ago. I think partly because I charge zero management fees. If someone wants lower leverage, they can just put $1mm with me and $1mm in treasuries... voila, half leverage.
Quote from heech:
I'm not trying to be pessimistic, these are just my thoughts at this point in my career. I'm very fortunate to have started with what I did, and even then I found it rather difficult to *want* to persist to where I am now. Things are looking up right at this moment, but I'd be the first to tell you that I'm always 2-3 months away from closing my business depending on how the market behaves.
Best of luck to anyone pursuing this as a career.
__________________
"The Pursuit of Happyness" --- Chris Gardner
Quote from sf631:
Is there any clean (pooled fund) structure that enables different investors to have different leverage? I know this could be done with SMAs, maybe that'd be easiest
Quote from OddTrader:
I'm curious for the statement that "I'm always 2-3 months away from closing my business depending on how the market behaves."
How practical is that?
Is that a norm in the industry (very critical to most investors) or only for yourself?
Why 2-3 months and not 5-6 months (due to serious DD?)?
Do you specifically mention this statement to your prospective clients?
Is that a kind of systemic stop-loss to your clients?
I don't think he's saying 2-3 months to blowing up the account. Just that when you're relatively new and unproven you're on a shorter leash than if you're Paulsen who can apparently lose money for multiple years without consequence. Investors may not stick thru past a 20% DD or whatever.
Don't let me put words in your mouth but that's the way I read it
Quote from sf631:
I don't think he's saying 2-3 months to blowing up the account. Just that when you're relatively new and unproven you're on a shorter leash than if you're Paulsen who can apparently lose money for multiple years without consequence. Investors may not stick thru past a 20% DD or whatever.
Don't let me put words in your mouth but that's the way I read it
I will share some learnings I've had on the tax front.
For someone with substantial income and limited deductions, there isn't a clear cut option. As a disclaimer, I'm no tax professional, so my understanding can be wrong.
Treating myself as unemployed:
No self employment tax. +
Can't deduct expenses - (but not a big deal since I don't have much)
Can't contribute to IRA -
Professional Trader Status
No self employment tax +
Can deduct busineses expenses +
Can't contribute to IRA -
Must quality for trader status and may be subject to greater IRS scruity
Can not deduct certain expenses such as healthcare (?)
LLC - S Corp
Self employment tax and payroll taxes on the amount your self desginated salary -
Can deduct busineses expenses and health insurance+
Can contribute to IRA, I believe 41k annually +
More complicated returns and I believe significant reporting costs -
I've talked to two tax professionals. Generally an unpleaseant experience. I got the feeling that I was being squeezed after they heard my income, and was being overcharged and perhaps sold services I did not need. These accountants are salesmen first, and accountants second. I paid for a 30 minute consultation with Robert Green for $150, and he seemed knowledeable, although I didn't like how he liked to talk a bunch rather than directly answering questions that I wanted answered. The other tax accountant was much worse and pretended to be proficient with trader specific issues and got some things wrong that even I was able to identify.
Given that my strategy is largely focused on medium to long term investing, I decided to focus more on this tax efficient strategy in an attempt to realize more longer term capital gains: If a long position runs up to a point where I can normally inclined to sell, instead, I would consider holding and writing a moderately to deep in the money call. This sort of locks in my gains up until a certain amount as I attempt to hold the long position for long enough to benfit from favorable capital gains tax rate. I would consider this a form of tax arbitrage, as I do not believe the options are priced for this enabled tax efficiency. Certainly an imperfect strategy, and not the same as locking in your gains, but I do complement it with a view on volatility pricing based on bottom-up analysis.
Quote from heech:
Oh sorry, neglected your question about different leverage levels in the same fund.
It must be possible, since I know other funds do something similar; many CTAs advertise a 3x type leveraged program. But when I wanted to explore the option, my legal, admin, and audit teams all balked. They made it sound extremely complicated... fee sharing, valuation, high water marks, etc. Ultimately I decided to just create multiple funds, one for each leverage. I launched with an "aggressive" fund, as i wanted max leverage for my own capital too, just like you.
Three years later, still haven't created the institutional fund I envisioned long ago. I think partly because I charge zero management fees. If someone wants lower leverage, they can just put $1mm with me and $1mm in treasuries... voila, half leverage.
Quote from heech:
In my case, it also helped that I got some positive press this year. I had a couple nice features in magazines this year.
Quote from heech:
That's exactly what I mean.
A significant DD, and you might as well hang up your gloves. You will forever be explaining your DD and how/why your risk management changed. Every investor will be wondering what precludes you from having the same loss (or even doubling it) the first month they invest.
Now that I have 3 years of track record, maybe I'm generous enough to say I can survive 6 bad months. But for much of the past 3 years, always been very clear to me I better deliver just about every month... And 2-3 bad months would be all it takes to erase whatever credibility I hoped for.
Quote from doublet83:
I will share some learnings I've had on the tax front.
For someone with substantial income and limited deductions, there isn't a clear cut option. As a disclaimer, I'm no tax professional, so my understanding can be wrong.
Treating myself as unemployed:
No self employment tax. +
Can't deduct expenses - (but not a big deal since I don't have much)
Can't contribute to IRA -
Professional Trader Status
No self employment tax +
Can deduct busineses expenses +
Can't contribute to IRA -
Must quality for trader status and may be subject to greater IRS scruity
Can not deduct certain expenses such as healthcare (?)
LLC - S Corp
Self employment tax and payroll taxes on the amount your self desginated salary -
Can deduct busineses expenses and health insurance+
Can contribute to IRA, I believe 41k annually +
More complicated returns and I believe significant reporting costs -
I've talked to two tax professionals. Generally an unpleaseant experience. I got the feeling that I was being squeezed after they heard my income, and was being overcharged and perhaps sold services I did not need. These accountants are salesmen first, and accountants second. I paid for a 30 minute consultation with Robert Green for $150, and he seemed knowledeable, although I didn't like how he liked to talk a bunch rather than directly answering questions that I wanted answered. The other tax accountant was much worse and pretended to be proficient with trader specific issues and got some things wrong that even I was able to identify.
Given that my strategy is largely focused on medium to long term investing, I decided to focus more on this tax efficient strategy in an attempt to realize more longer term capital gains: If a long position runs up to a point where I can normally inclined to sell, instead, I would consider holding and writing a moderately to deep in the money call. This sort of locks in my gains up until a certain amount as I attempt to hold the long position for long enough to benfit from favorable capital gains tax rate. I would consider this a form of tax arbitrage, as I do not believe the options are priced for this enabled tax efficiency. Certainly an imperfect strategy, and not the same as locking in your gains, but I do complement it with a view on volatility pricing based on bottom-up analysis.
Quote from Epic:
Green Trader Tax is aimed at a certain niche of traders. Essentially, that niche is guys who trade equities and are not professional managers. They specialize in "trader tax status" because the niche there is rather large with the advent of online trading for the masses.
They aren't as much of a standout if you are a professional or if you trade 1256. If you can, do yourself a favor and take your skills over to futures. Then these tax issues aren't a problem anymore. Bottom line tax reporting. No wash sales. 60/40 treatment. No need to claim trader tax status if you are profitable.
Quote from Epic:
I advertise my program as offering customizable leverage, but I run mine in managed accounts so it isn't a headache at all for me.
If a client wants normal leverage, there is not special requirement. If they want higher leverage, they sign a notional trading agreement and we agree upon a nominal value. If they want lower leverage then they are allowed to do that, but I recommend something like you. Rather than me trading it at a lower leverage, I just set them up in some treasuries and trade the rest normal leverage.
The only requirements are that if they trade notional I don't allow more than 2X leverage. If they trade lower leverage and don't want to use the excess cash elsewhere, I require that they choose a 2/20 fee structure as opposed to my typical 0/30. This is usually small accounts anyway. Guys who barely meet my $200K minimum. They don't have $400K for this program to split in half but still want half the risk of a normal $200K.
Problem is, the break even between my two fee structures is at about 20% ROI. That is where the client pays basically equal fees whether 2/20 or 0/30. At that target return, I don't really care which they choose, but would still slightly prefer the 0/30. Much different on a $200K account @ half leverage. Now the break even between the two fee structures is up around 40% which is a much more difficult target return. So I tell them they have to do the 2/20 structure or it isn't worth my time.
Quote from opt789:
Just to clarify, there is no such thing as "claiming" trader status, it is a simple matter of choosing or not choosing to deduct your expenses. Mark to Market on the other hand is an official election with the IRS. Some firms claim sending a letter of some sort stating you are a full time trader and that is why you are deducting expenses is some sort of official thing - it is not anything official, if you feel like sending a letter go ahead but you are not "claiming" anything.
Quote from Busta21:
Ha! I can relate to this entire paragraph. I introduced a weekly options volatility strategy to a few of my clients but with the caveat of 40% of the P&L. Less capital (Minimum $50,000) but it makes investing/money management with smaller amounts of capital (and anything less than a $100 mill is small) more feasible.
Quote from Epic:
Tough to justify facilitating deposits less than $200K. Just isn't worth the hassle. In fact, most of the time if I'm meeting with someone and $200K is something to think about then I just tell them that the program probably isn't for them. Typically, the people I meet with state that the "low" $200K minimum is enticing. They are willing to "throw $200K at it, just to test the waters".
Quote from Epic:
You are correct. "Trader status" isn't something that needs to be claimed, it is just something that needs to be qualified for. Anyway, the bigger issue is electing mark-to-market. A trader must qualify for trader status in order to elect the M2M option. If a trader makes the M2M election and it is determined later that his actions don't qualify, that is bad news.
IMO, the only time you'd ever want to elect M2M is if wash-sales are a significant problem. Otherwise, the only reason to make that election is if you are planning on losing lots of money. Because the only real advantage to M2M is the ability to carryover large losses in a single year.
For that luxury, a trader gives up huge advantages like 60/40 treatment of 1256 contracts and the built in tax deferred compounding of long term positions. Almost never worth it, but that is just my opinion.
Quote from Busta21:
Ya, I agree with you, im in my mid-twenties though so I'm just checking it off as necessary cost of doing business until I can meet the right clientele. You know though, I think the real route is having to put in $3-$5 mill of your own cap into a fund to actually get heads to turn? Who knows...just taking this one quarter at a time.
I largely agree with Epic's comments.
Just to add a few more thoughts, which I may have also put elsewhere:
- I am generally very flexible with my pool / fund, in terms of accepting investors of any size. This is one of the obvious advantages of a fund structure versus managed accounts... I can't do SMAs for less than $1mm, but I happy to do fund investments of just about any size.
I do this not because it's necessarily good financially... My costs for accepting a new investor + AML background search can be pretty high. But I think it's good marketing. Nothing better than to have a broad pool of existing investors; they can act as references and will definitely spread the word. I have one guy who initially came in with $40k of his own money 2 years ago.... but is now starting next month with a $1mm SMA.
- If you aren't getting investors, then you just aren't "there". Don't worry about marketing or buying databases or cold-calling people... if you've talked to 10 potential targets and none have invested, then calling 100 isn't going to help. This isn't like selling Avon. Focus on the problems in your strategy / fund / product instead.... And sometime the only fix is better performance, lower DD, longer history.
In contrast, once you are "there", I think raising money becomes almost automatic. I would say of all potential investors who find me thru introduction / website / press... 50% will now want to move forward to a deeper conversation after looking over my pitchbook / PPM. Of those who look deeper, probably 50% will now invest... So 25% of leads are converting.
Just 6 months ago, those ratios were probably 20% and 10%... Or about 2% of leads were converting. And how huge of a difference is a 2% vs 25% conversion rate!?
Quote from heech:
I largely agree with Epic's comments.
Just to add a few more thoughts, which I may have also put elsewhere:
- I am generally very flexible with my pool / fund, in terms of accepting investors of any size. This is one of the obvious advantages of a fund structure versus managed accounts... I can't do SMAs for less than $1mm, but I happy to do fund investments of just about any size.
I do this not because it's necessarily good financially... My costs for accepting a new investor + AML background search can be pretty high. But I think it's good marketing. Nothing better than to have a broad pool of existing investors; they can act as references and will definitely spread the word. I have one guy who initially came in with $40k of his own money 2 years ago.... but is now starting next month with a $1mm SMA.
- If you aren't getting investors, then you just aren't "there". Don't worry about marketing or buying databases or cold-calling people... if you've talked to 10 potential targets and none have invested, then calling 100 isn't going to help. This isn't like selling Avon. Focus on the problems in your strategy / fund / product instead.... And sometime the only fix is better performance, lower DD, longer history.
In contrast, once you are "there", I think raising money becomes almost automatic. I would say of all potential investors who find me thru introduction / website / press... 50% will now want to move forward to a deeper conversation after looking over my pitchbook / PPM. Of those who look deeper, probably 50% will now invest... So 25% of leads are converting.
Just 6 months ago, those ratios were probably 20% and 10%... Or about 2% of leads were converting. And how huge of a difference is a 2% vs 25% conversion rate!?
Quote from Busta21:
Can I ask if your initial investors were friends or business associates? I am curious as you mentioned cold calling and do know that people raise capital that way, just I have never even considered that route.
Quote from heech:
- If you aren't getting investors, then you just aren't "there". Don't worry about marketing or buying databases or cold-calling people... if you've talked to 10 potential targets and none have invested, then calling 100 isn't going to help. This isn't like selling Avon. Focus on the problems in your strategy / fund / product instead.... And sometime the only fix is better performance, lower DD, longer history.
In contrast, once you are "there", I think raising money becomes almost automatic. I would say of all potential investors who find me thru introduction / website / press... 50% will now want to move forward to a deeper conversation after looking over my pitchbook / PPM. Of those who look deeper, probably 50% will now invest... So 25% of leads are converting.
Just 6 months ago, those ratios were probably 20% and 10%... Or about 2% of leads were converting. And how huge of a difference is a 2% vs 25% conversion rate!?
__________________
"The Pursuit of Happyness" --- Chris Gardner
Quote from OddTrader:
Thanks for the input. Great progress indeed! What's the main contributor, may I ask?
I will also echo that I have enjoyed and appreciate some of the color I have gotten from this thread.
I am lucky in that I have built enough capital of my own that raising outside money is far from a necessity. It sounds like Heech was in a similar situation when he started.
Re: Starting a fund / raising capital
First get your numbers right. Even bernie madoff knew how to add.
Quote from doublet83:
Like many a young analyst or trader, it has long been a dream of mine to run a successful hedge fund. I would like to get some advice on the process. There seems to be some posters here who are credible, and best of all, advice here is free. Thanks in advance for any insights you have to offer.
I have been trading and investing my own funds for about 2.5 years now. The first 1.2 years were done under a family account and won't be useful for raising capital. As of 1/2011, by returns are as follows:
2011: 87.2% return. Max drawdown (based on monthly returns) of 5.0%. Profits of 330k
2012 YTD: 36% return. Max draw down of 4.1%. Profits of 200k.
These returns have been achieved with generally market neutral strategies, although currently I intend to maintain a long bias. Monthly returns show a R squared of 0.04 against monthly returns of the S&P500. Despite low draw downs, high returns are somewhat concentrated around a few great months, which is I know is incrementally negative. StDev of monthly returns is 10.8%.
I have about 5 years of experience working on Wallstreet doing primarily fundamental research of US equities as an associate level generalist. I've worked at two small hedge funds that are not well known, but legit. My age of 28 is on the young side and may work against me.
Investment approach -
Primary doing l/s based on fundamental research. I have been opportunistic and employed some short term "trading" strategies, but these have also been based on fundamental analysis. These short term strategies account for a good chunk of returns, although I am focusing more on the long term portfoilo more nowadays.
Raising Capital?
I hope to start raising capital in 1 to 4 years. I do not intend to raise capital now, partly because I don't think my trackrecord is long enough, but also because I'm very busy right now with research. I am becomming increasingly comfortable with my investment process, and I believe I can continue to achieve 50% + returns with low draw downs. Initially I will be satisfied raising at least 1mm. Although the fees from 1mm will be fairly small, it seems a worthwile start given my belief that I will continue to produce positive risk adjusted returns and attract greater investor interest over time. This is assuming the 1mm is from one client- I'm not interested in the hassle of raising 1mm from various small investors (friends and family). I obviously hope to raise more, but I don't know what is realistic at all. If i can't raise 1mm, I will continue to manage my personal capital.
I'd love to hear what I can realistically hope to raise in one or two years assuming I can maintain these results, and also considering my relevant, but not impressive, professional background. If the answer is zero, what kind of track record will it take to raise a few mil?
Also, some have recommended going the way of a managed account. Ideally I'd like to set up a fund, but I can understand that investors are reluctant to send a few mil to a stranger, despite how trustworthly I look in person. I suppose a separate managed account in addition to your own account will be just as good for building a track record when audited? Some potential conflicts of interests with respect to how to execute trades do immediately come to mind. Some of my shorter term trades will need to be executed quickly, and I'm not sure how it will be possible to have these trades executed at the same time if I'm managing multiple accounts.
Nice numbers. Where did you end the year? How much was your max monthly DD?
Quote from doublet83:
Great year so far. Made 860k representing 150% return.
I am quite concerned with taxes next year. Federal tax rates going up. Medicare taxes will now be on unearned income as well when previously they were just on earned income and the rate is going up too. New Obamacare tax on investment income. So for a trader based in NYC, it seems like your marginal tax rate will be about 59%. I'm all for taxing the rich, but 59%..Christ.
Federal 39.6%
NY 6.9%
NYC 3.6%
SS 10.4% up to 100k 1.4%
Medicare 3.8%
Obamacare tax 3.8%
59.1%
Am I misunderstanding something here? It seems like my marginal tax rate will be going up 14% because previously I was not subject to SS tax, Medicare tax, and Obamacare, along with the lower federal tax rate.
Max drawdown on a monthly basis was about 5.8%. I believe max drawdown would be in the 7 or 8% range.
Screen shot attached represents my main account, not including a secondary account and IRA accounts.
Quote from doublet83:
Max drawdown on a monthly basis was about 5.8%. I believe max drawdown would be in the 7 or 8% range.
Screen shot attached represents my main account, not including a secondary account and IRA accounts.
Thank you Heech. Last year was very good and I'm proud of my results.
I still intend to raise capital at some point in the future. The core of my strategy is fundamental research. While there are many advantages to being nimble, I cannot really do the type of research I want to without a more meaningful AUM. For instance, I do not have any access to management teams, sell-side or buyside networks, where a lot of essential information is disseminated. Furthermore, I cannot do the depth of research I want to for most names, as I single handedly cover about 200 companies, which forces me to develop a more reactionary approach than I oftentimes would prefer.
I am working on passing my CFA level 3 this year, and then becoming an RIA. Right now I'm very busy with just research, and trying to raise institutional capital is not a priority. Some of the comments on this thread have further persuaded me that raising money would be very difficult for me right now, so I have decided that its not worth my focus at this time.
Quote from doublet83:
Thank you Heech. Last year was very good and I'm proud of my results.
Quote from Soon2Bgreat:
Very nice job.
Curious to hear what your average holding period is for a position given the fundamental nature of your approach? No worries if you don't feel like sharing.
It's all about your career goals and expectations. IMO, if you aspire to be "great", and one of those talking heads on CNBC, no reason to put off what would be inevitable and necessary. Doesn't matter how great your track record is, if no one believes you.
Quote from heech:
It's all about your career goals and expectations. IMO, if you aspire to be "great", and one of those talking heads on CNBC, no reason to put off what would be inevitable and necessary. Doesn't matter how great your track record is, if no one believes you.
Quote from doublet83:
Thank you Heech. Last year was very good and I'm proud of my results.
I still intend to raise capital at some point in the future. The core of my strategy is fundamental research. While there are many advantages to being nimble, I cannot really do the type of research I want to without a more meaningful AUM. For instance, I do not have any access to management teams, sell-side or buyside networks, where a lot of essential information is disseminated. Furthermore, I cannot do the depth of research I want to for most names, as I single handedly cover about 200 companies, which forces me to develop a more reactionary approach than I oftentimes would prefer.
I am working on passing my CFA level 3 this year, and then becoming an RIA. Right now I'm very busy with just research, and trying to raise institutional capital is not a priority. Some of the comments on this thread have further persuaded me that raising money would be very difficult for me right now, so I have decided that its not worth my focus at this time.
Quote from heech:
... no harm in forming some kind of structure and tracking numbers that way more professionally. I'd get the licenses out of the way, get registered, and get normal annual audits. Don't worry about raising money, just be able to answer the question "can I see yor audited financial statements - can I write you a check".
Quote from rwk:
This is the step I am not too sure about. It is my understanding that audits start at about $25k. No? That's a pretty big hump to get over for a trader who doesn't have good funding contacts and a pedigree. The registration is cheaper but not trivial, and once you're registered, you have regulators as a constant irritant.
Quote from doublet83:
I have generally operated under the assumption that I'll be able to get my personal account audited in the future if I decide to raise money then.
Do you think there is additional value in setting up some sort of formal structure now and getting monthly audits in real time?
The latter seems like a big hassle to me, not to mention the additional costs I would incur. I am very curious to hear if you think there is significant value in setting up a formal structure right now.
Quote from heech:
There is definitely "value" in doing things the official way, now. "Audited" private accounts are better than nothing, but they will still be discounted by investors in terms of how convincing they are. For all I know, you had 10 different trading accounts... and you just cherry-picked the one that happened to do well. On the other hand, the more you invested (financially and emotionally) in making this thing "real", the more convinced I will be in the numbers.
This is certainly not a black/white thing, and I don't know how to quantify whether it adds "significant" value to your long term prospects. But again, at the scale you've reached, it just doesn't seem like a lot of money or a lot of work... the only thing you *can't* buy 2-3 years down the road is time. Assuming you continue to do well in a few years and really want to raise money, if you try to include your current numbers in your presentations and tearsheets, every lawyer in the land will make you add a little footnote that says "... results from 2012-20xx were based on prop traded accounts..." (And in some contexts, like NFA-approved disclosures, you have to show prop traded numbers completely separately - in something like an appendix.)
I personally think $50k a year is worth getting rid of that footnote. By way of personal disclosure... I traded my first futures contract EVER in June of 2009, and started work on setting up my commodity pool less than 5 months later (November 2009). So, I'm obviously kind of a hot-head when it comes to this stuff. But I certainly didn't regret my decision at all.
doublet83 - have you thought about an incubator fund to be used until you're ready to go?
also, pm me if you have any questions re the cfa.
Thanks for the color here. Given me some more things to think about.
In addition to the initial set up costs and work needed to set up the structure, it appears that if I trade under a LLC - S corp, my taxes will also be higher, thanks to some self employment taxes and payroll taxes, which I cannot really offset given that I have few business expenses.
I'm not sure what the point of an incubator hedge fund is. I feel like I either trade with all my money in my PA, or I trade with all my money under an LLC.
Quote from doublet83:
Thanks for the color here. Given me some more things to think about.
In addition to the initial set up costs and work needed to set up the structure, it appears that if I trade under a LLC - S corp, my taxes will also be higher, thanks to some self employment taxes and payroll taxes, which I cannot really offset given that I have few business expenses.
I'm not sure what the point of an incubator hedge fund is. I feel like I either trade with all my money in my PA, or I trade with all my money under an LLC.
What about margin interest expense or short borrow fees? Those are trading business expenses that are generally not deductible on an investor's returns. In my understanding you can file trader tax status regardless of whether the funds are in an incubator LP, an S Corp or a personal account, so maybe the incubator topic is independent of the tax topic...
Just one thing to add to Heech's comments on personal account performance. If you use ANY proprietary (or hypothetical) performance capsules you must include ALL proprietary accounts within the last 5 years. So if a manager was trading 5 different accounts and choosing to present only the good one, it should be very evident in the disclosure document.
Forming the entity and trading the entity account is the only real way to generate a stand alone performance capsule. That said, any good due diligence team is going to uncover the fact that it really is just a prop account under an entity title. But that will only be relevant during the early stages when coincidentally clients are really just investing in the manager anyway. The benefit is that nobody will care once you've got >$3-5MM in client AUM, and even though the early entity account was really just a prop account, it will still count toward that 3 year hurdle that many offices seem to have.
{edit} What I was really trying to say was that it is all in how you present yourself. Everyone you meet with is expecting you to be emphasizing the good and skirting the bad. As a start-up manager you must come to grips with one thing. They already know they are taking a big risk with you. You don't need to make them feel like there is no risk. Be straight up with them and make them realize that the risks are well known and accounted for. This will result in most of them taking a smaller position to start, but they will still be taking a position. Then you are set to exceed expectation, after which they will increase their investment.
Quote from doublet83:
Thanks for the color here. Given me some more things to think about.
In addition to the initial set up costs and work needed to set up the structure, it appears that if I trade under a LLC - S corp, my taxes will also be higher, thanks to some self employment taxes and payroll taxes, which I cannot really offset given that I have few business expenses.
I'm not sure what the point of an incubator hedge fund is. I feel like I either trade with all my money in my PA, or I trade with all my money under an LLC.
It should be noted that an "incubator" fund isn't anything special. In reality it is just a product that was invented to sell accounting and legal services to a niche demographic.
The idea behind the incubator fund is that you form the legal entity, but remain exempt from registration because you aren't soliciting new capital, holding yourself out publicly, or charging fees. Because you aren't doing any of this, you don't need the expensive parts, eg annual audits, offering memorandum, partnership agreements, subscription documents, administration, etc. The interesting thing about this product is that you are essentially eliminating anything you would really need a lawyer for. Setting up a an LP/LLC or LLC/LLC is a very simple task. So they are pretty much charging you $3-5K for almost nothing.
The only purpose of this "fund" is to hide the fact that it is really just a prop account. But like I said before, any good DD team is gonna ask what percentage of AUM is internal capital. When you say 100%, the true picture becomes crystal clear. Sure, the incubated performance comes in handing a few years later, but it could really be done DIY style for about $500.
For that matter, if the trader is in commodities, I still don't see why he couldn't simply form a couple LLCs and start as an exempt CTA until the track record was good enough. Not really difficult to switch to a pooled fund later, once the program is more proven.
Epic,
Given your last reply, would you suggest that route? Going DIY to set up a simple LP to get the clock ticking?
FWIW, I have an RIA, and would like to establish a HF in addition to my existing practice. I have been trading my strategy for less than a year in my own accounts, and less than 6 months for clients. I am just starting to have clients who want to invest in the strategy open up side-car accounts to potentially track their performance separately, come back-audit time. I am where many others seem to be. I feel confident that I can pull in a quick 2mil, but after that, it would get increasingly harder, institutional money is not even a dream yet.
It seems to me that a 5mil threshold is my target minimum to launch a full fledged hedge fund.
Thus, I am left wondering whether to establish a prop account disguised as a LP to incubate, get the clock running, and get performance numbers established, while continuing to "sell" the strategy within my RIA into SMAs and hope to covert them to the HF later.
Sorry if I was all over the place.
Quote from moneyguy:
Epic,
Given your last reply, would you suggest that route? Going DIY to set up a simple LP to get the clock ticking?
FWIW, I have an RIA, and would like to establish a HF in addition to my existing practice. I have been trading my strategy for less than a year in my own accounts, and less than 6 months for clients. I am just starting to have clients who want to invest in the strategy open up side-car accounts to potentially track their performance separately, come back-audit time. I am where many others seem to be. I feel confident that I can pull in a quick 2mil, but after that, it would get increasingly harder, institutional money is not even a dream yet.
It seems to me that a 5mil threshold is my target minimum to launch a full fledged hedge fund.
Thus, I am left wondering whether to establish a prop account disguised as a LP to incubate, get the clock running, and get performance numbers established, while continuing to "sell" the strategy within my RIA into SMAs and hope to covert them to the HF later.
Sorry if I was all over the place.
Yea, I would be the first to tell you I'm a bit of an exception. (Doublet83 kinda falls in the same category though, based on what I've seen.) We're trading this prop for our own money regardless, and any operational expenses are just a small percentage of the strategy's overall performance for our own investment.
To think of it as strictly a business for someone starting from (almost) scratch, I think Epic's comments are largely correct. You really do need to get a substantial amount of capital in hand at launch to make a good go at this.
Quote from heech:
Yea, I would be the first to tell you I'm a bit of an exception. (Doublet83 kinda falls in the same category though, based on what I've seen.) We're trading this prop for our own money regardless, and any operational expenses are just a small percentage of the strategy's overall performance for our own investment.
To think of it as strictly a business for someone starting from (almost) scratch, I think Epic's comments are largely correct. You really do need to get a substantial amount of capital in hand at launch to make a good go at this.
Fun fact: if using an RIA as advisor+GP of the LP is that the RIA becomes subject to "custodian" requirements. Surprise annual audits etc... This is a relatively new reg and can be avoided by setting up a separate GP / managin member entity (which will be subject to custody regs, of course)
The cost of maintaining another entity isn't huge but better to know this before the RIA "advisor" entity is tainted. This was recently pointed out to me by a compliance consultant (I'm considering the same SMA plus pooled fund dual structure) so I thought I'd add to the stream of thought in case this weren't common knowledge.
Quote from sf631:
Fun fact: if using an RIA as advisor+GP of the LP is that the RIA becomes subject to "custodian" requirements. Surprise annual audits etc... This is a relatively new reg and can be avoided by setting up a separate GP / managin member entity (which will be subject to custody regs, of course)
The cost of maintaining another entity isn't huge but better to know this before the RIA "advisor" entity is tainted. This was recently pointed out to me by a compliance consultant (I'm considering the same SMA plus pooled fund dual structure) so I thought I'd add to the stream of thought in case this weren't common knowledge.
Thanks for the feedback folks.
A few things:
1. I appreciate and understand what you are saying about the financial ramifications of a small fund. I make pretty good money now with my existing business, and a fund would be operated alongside it, as a potential source of additional income. That was probably obvious at the outset, but I point this out because I think my situation is a bit different than most, who might be trying to launch such a fund as their sole business. At $5mil, I feel like the annual costs comprising 1% of the fund assets is reasonable. And if I am making an extra 100k or so off of the fund while it is in its infancy, I would be fine with that. I am still relatively young, and open to the extra work. Then again, having not run a fund before, I don't know the extent of the BS that you have to deal with.
2. Epic, if I read you correctly, are you saying that aside from the fund minimum concern, one would start this in an LP with one's own funds, and then convert it at a later date once enough OPM is committed?
3. Prior to the last few posts, I hadn't considered my current business to be a liability to this endeavor. What important regulatory exemptions would I lose? I expect to have to register in my home state, where my current RIA is registered, and wasn't too concerned about that. But at this point, there are many things I don't know.
Thanks for the help folks. Glad to have found this forum.
Quote from Epic:
Just one thing to add to Heech's comments on personal account performance. If you use ANY proprietary (or hypothetical) performance capsules you must include ALL proprietary accounts within the last 5 years. So if a manager was trading 5 different accounts and choosing to present only the good one, it should be very evident in the disclosure document.
Forming the entity and trading the entity account is the only real way to generate a stand alone performance capsule. That said, any good due diligence team is going to uncover the fact that it really is just a prop account under an entity title. But that will only be relevant during the early stages when coincidentally clients are really just investing in the manager anyway. The benefit is that nobody will care once you've got >$3-5MM in client AUM, and even though the early entity account was really just a prop account, it will still count toward that 3 year hurdle that many offices seem to have.
{edit} What I was really trying to say was that it is all in how you present yourself. Everyone you meet with is expecting you to be emphasizing the good and skirting the bad. As a start-up manager you must come to grips with one thing. They already know they are taking a big risk with you. You don't need to make them feel like there is no risk. Be straight up with them and make them realize that the risks are well known and accounted for. This will result in most of them taking a smaller position to start, but they will still be taking a position. Then you are set to exceed expectation, after which they will increase their investment.
Quote from moneyguy:
Thanks for the feedback folks.
A few things:
1. I appreciate and understand what you are saying about the financial ramifications of a small fund. I make pretty good money now with my existing business, and a fund would be operated alongside it, as a potential source of additional income. That was probably obvious at the outset, but I point this out because I think my situation is a bit different than most, who might be trying to launch such a fund as their sole business. At $5mil, I feel like the annual costs comprising 1% of the fund assets is reasonable. And if I am making an extra 100k or so off of the fund while it is in its infancy, I would be fine with that. I am still relatively young, and open to the extra work. Then again, having not run a fund before, I don't know the extent of the BS that you have to deal with.
2. Epic, if I read you correctly, are you saying that aside from the fund minimum concern, one would start this in an LP with one's own funds, and then convert it at a later date once enough OPM is committed?
3. Prior to the last few posts, I hadn't considered my current business to be a liability to this endeavor. What important regulatory exemptions would I lose? I expect to have to register in my home state, where my current RIA is registered, and wasn't too concerned about that. But at this point, there are many things I don't know.
Thanks for the help folks. Glad to have found this forum.
Also note that an LP structure (most common for proper HFs) requires at least two partners (ie you can't have an LP with only one partner. You can have your entity become the second partner (so you as an individual are one partner, your LLC is another partner).
Quote from sf631:
Also note that an LP structure (most common for proper HFs) requires at least two partners (ie you can't have an LP with only one partner. You can have your entity become the second partner (so you as an individual are one partner, your LLC is another partner).
Quote from Epic:
Personally, nobody has ever convinced me on a good reason to do an LP instead of an LLC anyway. It used to be that all funds were LPs and now many are LLCs.
Quote from heech:
I'm not a lawyer, but I question whether that's really true. Is it more complicated splitting between "rights" for part-owners in a LLC, versus the more obvious division between general partners and limited partners in a LP?
Quote from Epic:
BTW, there is a downside to the incubator fund. If it fails due to poor performance and you try to start another one, you have to disclose this performance as discretionary because it is not a prop account. [/B]
Quote from et2011et:
Are you talking about CPO pool or equity hedge fund or both?
Quote from et2011et:
Are you talking about CPO pool or equity hedge fund or both?
One question: If anyone knows, if you are licensed as a 65, how then, would you manage a 401k or an IRA and they pull fees off of that? Would the account holder be penalized?
Quote from Epic:
Both. With both the NFA and the SEC it is not required to disclose proprietary trading results. That is the entire point of the incubator fund. It supposedly allows you to classify a prop account as a discretionary account, which would then allow you to use it for performance history without having to abide by the 5 year prop disclosure rule.
Both of them have a rule stating that performance disclosure for prop accounts is not required, BUT if the manager elects to disclose ANY prop history, he must disclose ALL of it for the past 5 years. This is to prevent cherry picking of only the accounts with good performance.
What I'm suggesting is that the incubator can be a bad thing too. If you have a couple years of bad performance, you cannot simply start another one and act like the first one didn't exist. You also cannot start 5 of them and then run with the one that had good performance. This is because they are all considered discretionary accounts now, and by rule, you are required to disclose the performance of ALL discretionary accounts during the last 5 years that were managed by any of the fund's principals. Disclosure for these accounts is no longer optional.
The only way to get around this is if the offered fund itself has at least a 3 year history and at least 75% of the capital in the fund was people not affiliated with fund's principals. But if that is the case, then it is disqualified from being an incubator anyway.
I was also suggesting before that I think the whole "incubator" loophole is not gonna last very long. Examine the definition of proprietary results.
Any pool or account in which 50% or more of the beneficial interest is OWNED OR CONTROLLED BY;
1) the Advisor or any principal
2) an affiliate or family member of the Advisor.
3) any person providing services to the account.
It's just my opinion, but I think that those definitions clearly place the incubator account well within the realms of prop trading. The regulating bodies have been cracking down on fraudulent solicitation lately. They are being pressured to revise their regs to comply with the JOBS ACT, but the argument is that if they are going to allow everyone to advertise publicly, they must be more strict on adherence to the rules.
Quote from bwolinsky:
This is probably a scam. The drawdown is too low, as there is no fundamental strategy that could ever do that.
Quote from QuantWizard:
Indeed. 87% return and 10% volatility = 8.7 in Sharpe ratio, virtually impossible with a fundamental strategy!
Quote from QuantWizard:
Indeed. 87% return and 10% volatility = 8.7 in Sharpe ratio, virtually impossible with a fundamental strategy!
__________________
"The Pursuit of Happyness" --- Chris Gardner
Returns are 86% in 2011, 155% in 2012, with max drawdown of 8 to 10%. Year to date 2013 has been amazing, at +53%. I am particularly pleased with this given this was achieved only about 15% of profits coming from my non scaleable strategy, much less than prior years. Furthermore returns were achieved with less concentrated bets than prior years. I would say that I am quite surprised how well things are going, and that these returns are almost certain to be unsustainable.
I have posted a screenshot from IB's portfolio analyst before. I don't mind defending these numbers, I am quite proud of them. I don't really get a chance to brag about my returns other than to my mom. Bragging here anonymously is one of the few opportunities I get.
Quote from doublet83:
Returns are 86% in 2011, 155% in 2012, with max drawdown of 8 to 10%. Year to date 2013 has been amazing, at +53%. I am particularly pleased with this given this was achieved only about 15% of profits coming from my non scaleable strategy, much less than prior years. Furthermore returns were achieved with less concentrated bets than prior years. I would say that I am quite surprised how well things are going, and that these returns are almost certain to be unsustainable.
I have posted a screenshot from IB's portfolio analyst before. I don't mind defending these numbers, I am quite proud of them. I don't really get a chance to brag about my returns other than to my mom. Bragging here anonymously is one of the few opportunities I get.
Quote from doublet83:
I have posted a screenshot from IB's portfolio analyst
Let me compete with you with my long/short strategy
Feb: 7.38%
March: 10.84%
April: -5.11%
Based on 300K funds
Well, I have to say that April max drawdown is at about 10%.
The first 2 weeks is really bad, since when market go down, long drops heavily, and short is rising, all contributed to a 10% loss.
Long/short is not immune. As see, things sometimes against you though hedged.
I'll bet the OP's numbers are better than most forum members on an unlevered basis.
........IB Statements?
__________________
HOW MUCH IS ENOUGH?
Bud Fox
Wall Street
Quote from Traveler:
I'll bet the OP's numbers are better than most forum members on an unlevered basis.
Quote from Epic:
Setting up a an LP/LLC or LLC/LLC is a very simple task. So they are pretty much charging you $3-5K for almost nothing.
The only purpose of this "fund" is to hide the fact that it is really just a prop account.
Quote from gmst:
I also thought it is a scam but nonetheless the discussion that happened in this thread was quite informative. So, thanks to all the participants and especially to OP to launch such a well-thought out scam
Quote from doublet83:
Max drawdown on a monthly basis was about 5.8%. I believe max drawdown would be in the 7 or 8% range.
Screen shot attached represents my main account, not including a secondary account and IRA accounts.
Quote from doublet83:
Returns are 86% in 2011, 155% in 2012, with max drawdown of 8 to 10%. Year to date 2013 has been amazing, at +53%. I am particularly pleased with this given this was achieved only about 15% of profits coming from my non scaleable strategy, much less than prior years. Furthermore returns were achieved with less concentrated bets than prior years. I would say that I am quite surprised how well things are going, and that these returns are almost certain to be unsustainable.
I have posted a screenshot from IB's portfolio analyst before. I don't mind defending these numbers, I am quite proud of them. I don't really get a chance to brag about my returns other than to my mom. Bragging here anonymously is one of the few opportunities I get.
Here you go.
As I've said before, this is my main IB account, reflects most of my assets and profits, but doesn't reconcile perfectly with the consolidated numbers I'm citing.
Quote from QuantWizard:
Why is NAV decreasing during Dec to Jan even though the return is positive?
another one, pieced together from 2 pages, account number edited out
This thing says I have a sharpe ratio of 4.8, with mean monthly return of 10.15%, and stdev of 7.32%. I've long believed sharpe to be a useless metric for me and typically an overused metric for most strategies, as it assumes returns to be normally distributed and does not account for various unquantifiable risks.
Quote from doublet83:
I have posted a screenshot from IB's portfolio analyst before. I don't mind defending these numbers, I am quite proud of them. I don't really get a chance to brag about my returns other than to my mom. Bragging here anonymously is one of the few opportunities I get.
Quote from doublet83:
Here you go.
As I've said before, this is my main IB account, reflects most of my assets and profits, but doesn't reconcile perfectly with the consolidated numbers I'm citing.
Great job! Just keep it up.
Can you post daily instead of monthly numbers / charts?
njrookie
__________________
_____________________________________
A thousand dollars a day keep the boss away.
_____________________________________
Quote from rwk:
I guess bragging isn't too bad, especially if it is reality-based. A lot of the bragging on ET is usually either a) paper trading or b) the occasional big win surrounded by losses that conveniently get overlooked. The problem with that kind of hollow bragging is that it gives the newbies the impression that everybody is doing that well or that trading is easy. Trading well can be deceptively simple, but it is seldom easy.
This and a few other recent ET threads had me contemplating getting into money management. There a several very good reasons not to do it, but I can't seem to just shake the idea. I don't exactly know why, and I have been pondering that question for several months now.
@doublet83: Your returns are very impressive, especially considering the non-trivial size. But the consistency is eye-popping. Keep it up!
Quote from njrookie1:
Great job! Just keep it up.
Can you post daily instead of monthly numbers / charts?
njrookie
Quote from doublet83:
another one, pieced together from 2 pages, account number edited out
__________________
"The Pursuit of Happyness" --- Chris Gardner
Quote from OddTrader:
The best return 21.82% (Mar 2013)?!!!
26% for Jan 2013, or 55% for Mar 2013???
Quote from OddTrader:
The best return 21.82% (Mar 2013)?!!!
26% for Jan 2013, or 55% for Mar 2013???
Quote from doublet83:
I see what you're doing here. Monthly returns compound.
I expect people to audit my screen shots in an attempt to find logical inconsistencies, although this is a pretty dumb mistake.
Quote from OddTrader:
The best return 21.82% (Mar 2013)?!!!
26% for Jan 2013, or 55% for Mar 2013???
__________________
"The Pursuit of Happyness" --- Chris Gardner
Quote from doublet83:
Here you go.
As I've said before, this is my main IB account, reflects most of my assets and profits, but doesn't reconcile perfectly with the consolidated numbers I'm citing.
134% long, -76% short, roughly speaking in the long term portfolio. Net long exposure would be somewhat lower considering some covered call positions. Do have about another 50% long 50% short a strategy who's role is purely to improve tax efficiency, that I don't consider as part of this number, but should be minimal risk. Will sometimes take additional significant positions in an intraday basis in addition to the long term portfolio.
Again impressive results in any aspect.
njrookie
__________________
_____________________________________
A thousand dollars a day keep the boss away.
_____________________________________
Quote from doublet83:
134% long, -76% short, roughly speaking in the long term portfolio. Net long exposure would be somewhat lower considering some covered call positions. Do have about another 50% long 50% short a strategy who's role is purely to improve tax efficiency, that I don't consider as part of this number, but should be minimal risk. Will sometimes take additional significant positions in an intraday basis in addition to the long term portfolio.
I get close to 7x margin at IB. Yeah its pretty much all large caps.
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