Registered: Apr 2011
12-22-11 10:12 PM
Quote from heech:
Haha, good pitch.
Truth is, I know I don't need to improve my Sharpe; I'm already doing well enough that higher performance is *really* not an issue for future fund raising. It's just a question of longevity, scalability, etc... other stuff that just takes time to solve.
But I mean, really *prove* that you can do what you did the last 6 months for years and years to come... then people (including me) will throw money at you.
I'll throw in my 2 cents here because I truly respect Heech and his experience, but I followed the other route.
I worked hard and developed a couple strats over more than a decade, always trading with personal funds. During that time, people close to me began to seek investment advice which I gladly handed out for free. I was right most of the time, so I gained the respect of certain people. They started asking me to manage their accounts, but I always said I wasn't ready yet.
When I was certain that I had the refinements made to my best strat, I funded another account with personal $ for the sole purpose of trading that strat, and started trading it live. I did that for 18 months to get the track record together, and by that time I was trading the account at a $400K level. I finalized the formation of the CTA and let those prospective clients know that I was now setup to be able to manage accounts. It took about one month to raise a couple million, and I've been very careful to this point not to hold myself out to the public, but instead let people who know seek me out.
Now the problem isn't achieving better returns, but that the returns so far have been too high and foster too much skepticism, even with a 3.0+ sharpe. So my recommendation for anyone trying to get a start-up off the ground is to try to keep the returns below 40% annual, but above 15%. I realize that this is counter intuitive, but raising capital is similar to the Laffer Curve theory. There is a point where the level of returns draws the max interest from investors, and that point isn't at 100%+. But, with a normal fee structure, 20% returns aren't going to provide a good living unless you can raise at least $20MM to start.
Also, for business reasons, you'll want to make sure that your expected recovery period after a loss is less than one month. It's a huge disappointment if your recovery from a loss takes 4-5 months before you can charge fees again. Not to mention that you'll likely lose your clients.
Finally, Heech is correct, clients are looking for at least a 10 year relationship. The growth is in the compounding, and none of the good clients are looking for a 3-5 year home run investment.