LeeD, I'm not especially concerned about that aspect. This would probably be run as a separately managed account. I also don't believe there's at heart a legal problem with having side-letter agreements with different limited partners.
Have you checked with the bigger prop firms regarding a standard leverage agreement? As you trade your current $5mm, what is the leverage that you get through your broker? At the end of the day, what you're being offered is a leverage agreement. And the reality is that 55/45 is a crappy split for leverage. Of course I am ignoring the fact that we are talking about size, hence why it's worth checking out what is really out there when it comes to these arrangements. Did you happen to find out if you are required to use their clearing & software if you are to sign up?
In my eyes, it's a very simple consideration. An investor who will not take losses is not an investor...PERIOD. They want a no risk proposition - I would never deal with such investors. Question - would they invest in your fund or would it be via a managed account? Would they accept a lock-up of any sort?
If it's a managed account, I'm 90% confident they'll probably bail at a 5% loss. In fact if your first month is a loss of 3% - they'll probably bail then..which could mean you risk losing 30-50% of your capital (3 - 5% * leverage of 10), with no real opportunity to recover from this drawdown Worse, they may actually try and override control your trading/strategy. One more thing, in a managed account, these guys will probably even bail on you INTRA-DAY denying you the opportunity for recovering from intra-day or intra-month drawdowns. I think your long term prospects are very bright - no need to jeopardize those long term prospects by an alliance with these "investors" Given what I know so far, I would run. Trust me, good, sophisticated investors do not ask for these kind of "deals"
I'm trading futures, so prop trading leverage not an option. I also fundamentally really am not looking to leverage my money any further. I'm looking for size credibility for institutional investors. I have someone at Silverleaf I'm working with on cap intro from institutional money, and he thinks this might serve that purpose. So, that's encouraging.
Heech, That is a horrible deal for both sides involved. The industry standard 2/20 is much better for everyone. Also, I agree with your point about not needing the leverage addition. Futures are already leveraged. To look at this from a leveraging standpoint is absurd. Depending on broker, the futures are leveraged about 13X already, this would compound that to 130X. Nobody needs that kind of leverage.
Heech, I'm very familiar with these deals. I may know who you are talking to if they are based out of CT. For me the deciding factor would be the reputation of the group you are dealing with. The guys I know in CT that are doing this are managing several hundred million. What you want to ask them is how much money have they already placed with other managers with the same setup. That goes a long way. Also see if you can talk to them to get a reference. Not sharing in the losses is pretty standard actually. It looks bad on paper but "if" you are dealing with a reputable group, they should be able to raise you 50 to 100 million in a few years getting a standard 2/20. That would be very hard to do on your own. Also, the deals I have seen like this don't require you to use all that leverage. So I would just scale down the strategy and aim for high single digits return with drawdowns under 5%. Also, get a firm commitment from them that after the deal expires that they will commit a minimum amount of funds if certain returns are realized. The only reason someone would take this deal is to tap into their network and resources. If you could raise 100 million on your own you would have done it already right? So this might be your best chance. It all comes down to their reputation man. If they are reputable guys and they have followed through on their word on past deals, then it's a great opportunity.
Sorry to sound so cynical...but forget about reputation and "word" when it comes to money and investing. Anything that is not signed in a legal agreement AND legally enforceable AND practically enforceable is to be frank....hogwash and completely unrelaible. For example, if you have an agreement that they'll remain invested..unless this is signed in a legal agreement AND you have a 3rd party e.g. a Fund Administrator as a party to the agreement who can prevent them from redeeming...you are only relying on their "word' which when it comes to money generlaly comes down to what is best for them at that time. Sorry to be so negative...but this is just the nature of human beings.
No, I completely agree. I'm not talking about their funds. The reason to do this deal is to get them to "raise" outside funds for you. No way I would do the deal simply to get them as an outside investor. That's a no go. It would only interest me if they showed in the past that they have been able to raise serious funds for other clients. Look, these guys are not the money. Almost all these deals I have seen are capital raising agreements. They are simply trying to earn some vig, that's it. Of course you will get something in writing from them on what they will commit to you but trust me man, it won't be much. All their capital is tied up in these 3rd party agreements. You want them to "raise" you money. Otherwise what is the point?
Maverick, We are probably talking about the same guys. I've heard positive things from two parties. Principals are B and T, and the fund name starts with a T? Oh he'll, before break out pig Latin I will just pm you. Nice of you to confirm their reputation. B was pretty candid that 10-20% of their managers get funded, so I doubt they'll commit to any kind of guarantee. But that said, if I can't be in the top 20% of managers... I wouldn't want to be in this business anyway. Interesting to see a mixed bag of strongly divergent opinions from knowledgable posters. That doesn't usually happen!