Buying Power - Pooled Equity - Trading Capital

Discussion in 'Prop Firms' started by InflectionPoint, Dec 6, 2003.

  1. Recently I have seen various firms offering trading capital and leverage to active/prop traders. What are some of the pros and cons of the following arrangements:

    1)Forming an LLC funded with trader(s) capital, firm capital, and outside investor capital. With this structure "A" shares are sold in the venture. Similar to a hedge fund or VC fund, the outside investor and the firm receive a 1% management fee on assets under management and 20% of the profits as a performance fee. (eg. HedgeCap/ETG)

    2)Forming a private corporation whereby traders are hired as sub-contractors who keep 90% of their net profits after putting up minimal personal trading capital. (eg. HLV)

    3)Pooled equity arrangements (many day trading firms)

    What is the most common method of providing leverage and/or buying power to traders or trading teams?

    Finally, will any of the traditional leverage providers (Bear, SocGen, or Deutsche) extend leverage to a prop trader/active trader?

    Thanks for any input,
  2. How about D). Trader puts up small capital (minimum risk), trader keeps 100% of trading profits. Firm has enough capital that "pooled equity" is not at risk ($10 million of Firm capital minimum guarnteed, not part of "pool"...100 times that of SIPC).

    Why get involved with all the nonsense involved with hedge funds, etc.? A legitimate hedge fund, per regulation is above $30 million, and requires a lot of paperwork. If you form an LLC with less, and simply want to Give away your profits, then you might want to rethink that.

    We allow traders the "use" (vs. "abuse" ) of $1-$5Million or more if they need it, and don't keep a percentage....and help you with not only strategies, but risk control.

    And, you'll save a heck of a lot on taxes and tax preparation (sorry Bob Greene)....

    The trading game is simple, if you don't get bogged down in it.

  3. Don,

    Thanks for the straightforward advice. Point well taken. If I understand correctly, one of the distinctions between pooled capital and firm capital is that with pooled capital the capital could be depleted through OTHER trader's losses?

    Going back to the hedge fund "incubator" approach. Does your firm or any other firm offer capital introduction services (ie. introducing accredited investors) for emerging hedge fund managers with superior risk-adjusted returns?

    Appreciate your input.

  4. What we do with the (many, many these days) people who come to us with the idea that they want to "manage a hedge fund" is ask them "why?" "Why, if you are even a "fair or decent" trader would you want to give away EIGHTY percent of your capital to these people?" I have personally helped dozens of these gentlemen by explaining that they don't need to "raise money" (or beg for capital on "hedge fund circuit with everyone else)...

    If they can actually make money, we'll give them enough capital to trade with, and they can keep ALL their profits. This is so, so, simple (to me at least).

    Now, if someone isn't really any good, sure...they can try to raise a zillion dollars and pay themselves 2% and take a flyer that they may make 20% of the profits, if any...but that sounds a little devious, if you ask me.

    The other thing that comes up is that he person simply doesn't have any money they try to "legitimize" their borrowing of other people's money (OPM), buy calling their venture a hedge fund.....and waste a lot of time and effort in doing so. Say what it is....if someone is going to fork over some cash...tell them this: "Look, I only need $25,000....when I make $50,000, I'll pay you back with 100% return (or some derivation therof), and keep the well earned seed money to continue in their successful, independent trading career....without the "investors" or the "regulators" looking over your shoulder.

    Question: What do traders do when they blow out their trading accounts?

    Answer: Start a "hedge fund".... (My brother's joke, yell at him, LOL)

    (and I don't want to hear about the 1/100 of 1 percent "Geoge Soros" types....(just like "gee, my company could be like Bill Gates and MSFT).... I am speaking real world here, real opportunities, not blue sky silliness.

    (more than you asked for, and probably more than you wanted to hear...but what the heck, I'm waiting for my music files to download)....

    Good Day

  5. ETG provides service that helps you set up a hedge fund and introduce you to clients. however, i don't see the link on the homepage that used to be there. maybe, they quit doing this after leaving SLK? you could look into it though.

    it seems like a big headache running a hedge fund, with clients moaning over performance monthly, etc, etc. but clearly, there is more money in it than prop trading. there are no prop traders that clear 500 million a year, but there are hedge fund managers that do.
  6. Don,

    Never really thought of it like that. I guess the forming of a hedge fund is ONLY in the best interests of those who are mediocre, if not, sub-par traders? Only for individuals/teams who have superior asset raising skills rather than trading skills and desire to make a living off of the 1% management fee and 20% performance fee?

    If someone was more interested in raising capital -- perhaps they could raise approximately $10MM, buy a self-clearing b/d, lease or sub-lease office space, invest in a trading paltform, and form a prop trading firm. :)

    All kidding aside, on a separate but related topic, would it be safe to say that a prop trading firm yields a more competitive return on investment (ROI) than an "average" or "mediocre" hedge fund revenue stream? I have heard prop trading firms average rates of return range from 20% to 49%. Does this sound about right? If the above is true, what are the barriers to entry (re: Vaquero's thread "NEW BROKERAGE MODEL") in forming a prop trading firm? Is it ponying up $10MM??

    Hope you are enjoying the music of your downloading efforts. Liked the hedge fund joke -- thanks to you and your brother:D
  7. DFman,

    Thanks I appreciate the info. Would that be ETG's HEDGECAP program? I agree ONE of the headaches in running a hedge fund is dealing with the "what have you done for me lately" clients. Investor relations is clearly one of the bigger headaches as well as the accounting, administration and reporting associated with running a hedge fund.

    Thanks again. I'll look into ETG's program.
  8. OK, still downloading stuff for the radio show ads...let's be "sorta serious"..

    1. We have hedge funds, we have family LLC's, we have many groups withing the Bright umbrella.

    2. Think about your question about "pointing out someone who may want to invest in a new hedge fund." First off, I really doubt that someone as astute as Mr. Kantor at ETG would get involved. The only reason for doing so would be to generate trading volume at the Firm, and I think he's above that.

    3. Again to your question in #2: We always have people coming up to us and asking if the Bright Brothers would take their money and invest it for them, form a hedge fund, manage it, whatever label you want to put on it. So, if we were going to get involved in anything like that, we would simply do it within our established framework. Additionally, if we were to ask someone else to give Mr. InfectionPoint, LLC a bunch of money...the obvious question would be "hey, why aren't you guys doing it?" So, for anyone to get invovled in "placing money" (unless they're just desperate for some sort of Fee or something) doesn't make sense...and if they want a fee, what good are they?

    This thread is probably too long and boring to most, but I would be glad to discuss the various alternatives available for a good trader, either short term or long term...and I might even be able to let you talk with one of our hedge fund people.

    Oh, and as far trading Firm's getting that great ROI, remember how many have closed up recently. We do extremely well because we don't get bogged down in bureacracy and overhead, so it's Return on Labor and management, not capital (we already have that, fortunately).

    Feel free to come by or call....

  9. bone


    Usually it's bassackwards. Typically you're a very good and consistent trader, and people won't leave you alone throwing money at you. Gotta have a track record, and you get that by trading for your own or with a firm.
  10. MDCigan



    I have two questions for you regarding your answer above in terms of somebody being a prop trader under Bright vs. forming and setting up their own hedge fund.

    1. Do you allow the trader to trade the markets (equities, futures, currencies), instruments (underlying, options), and time horizons (day, month, 6 months, etc.) that they are ALREADY SUCCESSFUL AND COMFORTABLE with or do you force them into whatever the "Bright" system of successful trading is?

    An example. In my case, 95%+ of my trading is POSITION TRADING EQUITY OPTIONS. I've identified an "edge" there and I am successful at it. I have no clue and no desire whatsoever to daytrade equities, scalp, or even swing trade. It took me a long time and lots of hard work to get to this point and I have no desire to learn a totally different trading methodology JUST TO GET ACCESS TO ADDITIONAL CAPITAL. I have no concern whatsoever for my daily P/L as that is just noise. My focus is on month to month results.

    2. What is the maximum capital and leverage you offer to a potential trader?

    I think it isn't a stretch to say that if somebody can genuinely build a strong track record with high returns, low drawdown, that eventually getting AUM over time to 25 million, 50 million, 100 million, or above isn't impossible. Is that same opportunity available under the prop system.

    One of my goals is to set up my own hedge fund, but I am interested in the prop trader route if I think I can get the same benefits. But it comes down to, can I

    1. Trade the approach and methodology I WANT TO (which in my own hedge fund I obviously could)

    2. Get the leverage of OPM. 20% (incentive fees) on AUM of 50 million is going to be a bigger take then keeping 95% tradin profits on trading capital of 1 million.
    #10     Dec 7, 2003