In US, UK, various EU countries?
If you happen to know.
I would say in the US, if not complicated, between $25K and $50K.
In US, UK, various EU countries?
If you happen to know.
I would say in the US, if not complicated, between $25K and $50K.
Heck, I would have expected it to be much more.
Depends on who your service providers are and what they charge. Some will do it for less. Are you looking to do that? I can make some referrals directly. The bigger the firm, the more they charge,
Well, I'm living in an Eastern Europe EU country and it's €125,000 here. I'm considering my options...
Contact Paul Staines (the man behind order-order.com for UK. Don't know what he charges now.
Do you have investors lined up? I explored setting up a fund before.. fortunately my prop firm gave me seed capital of a few million but considering there are setup charges, possibly staff costs, administration costs and then a standard fund gives 80% of its profits to investors (standard 2 & 20 deal). I don't think its worth setting up a fund unless you have at least 10 million in backing.
After a year of doing it I realised you are far better off trading prop/own account. Would you rather have to make 5million a year to earn $250k or make $300k to earn $250k?
IMO, not incorrect but it would depend on your cost structure, scalability and expectations. For a strategy that does not lend itself to managed accounts, there are circumstances where some can start with $2mm even with an expectation of not going over $10mm if it is a 1 or 2 man shop, running their own funds anyway or want to manage money but don't want the clients to see their trading.
Some strategies don't make sense under $50mm to start.
But if you're running your own money its not really a hedge fund is it? Its no different to a prop account until you get outside money in. Unless its just you and one other guy that says "heres 2mill you trade it and give me half, you get the other half". But I wouldn't go through the effort/cost of forming a "fund" to do that. Just setup a limited partnership
It is a hedge fund if you have an LP and an management company and accepting investors into the LP. This is an example. Let's say you have $1.5mm of you money to trade with an allaoction from investors or friends and family of only $1mm. With your $2.5mm, you start to build your track record and market yourself to investors ready to accept funds. The added expense you incurred was the formation docs, admin and auditor, that you would not have needed for SMA. SMA might require an RIA. Maybe we are taking $25K - $50K a year or 2% of your AUM. However, it starts you on a path. If you never get started, you can't get to $50mm or $100mm.
My number would be $5mm to start, I would never join a prop firm and co-mingle material assets. Not from me. An allaoction from a hedge fund or true prop firm is different, but running your own business is what someprefer. I did that for 25 years and decided I'd rather make less money and risk my capital than work for others.
Only want to add it's not impossible to ramp up to billions if successful. Local guy, Brian Taylor, started Pine River Capital Management with $5.3M(https://en.wikipedia.org/wiki/Pine_River_Capital_Management) and eventually got up to $14B AUM. A few years ago, his 2 funds had, the highest returns, with 80-90% returns or something doing mortgage arbitrage. SAC was started with $25M.
I think the B with AUM is out of reach of most of us. I say the goal for most of my hedge fund clients is $100mm.
Just trade futures? Become a CTA and run managed accounts. Cheap and easy way to start.
It was a slightly different time. These days, I'd say you have almost zero probability of success if you are not starting with 50+ AUM.
I am not sure your math works out. As a fund owner, you are taking home from 10 (low) to 25 (high) percent of the performance plus the AUM scrape of say 1-2%. If you are making 5 bucks, you would be taking home at least 500 (which is "much more" than 250).
PS. If can make 5 million with a reasonable IR and ROC (say IR of 5 and ROC of 20%), you can find plenty of shops that would give you 25-35% of your revenue as a payout.
Here are the results of the backtests as net asset value of my Interactive Brokers account ($10k) over a period of about 2 years. It's the first time (in 12 f***ing years) that I'm getting systematic profits while being in full awareness of why I'm getting them and why I do what I do.
So about 25% per year after I checked off my list the first two phases:
1) Theoretical proof of principle (knowing why I do what I do)
2) Confrontation with / adaptation to actual market through backtests.
And now I'll start phase three, the easiest one, like it will take me a couple of weeks (compare that with the 12 f**ing years).
3) Implement auto-trading system and do live trading through Interactive Brokers.
3.a) After implementation is complete, deploy in staging environment (connect it to the paper trading account) and have it running for a couple weeks, to iron out nasty software bugs. Not as much failing to trigger as entering some trigger frenzy (improbable but I've seen things) or say inverting the quantity with the price, which was an actual situation that happened once in Japan and those guys lost some $2B (and that order happily passed some 10 systems, with safety limits and all).
3.b) Deploy in production environment (connect it to my live account) and run it for the foreseeable future.
After several months of (profitable) results I'll have to think how I proceed next. Definitely I'll need more capital that I currently have by myself if I'm going to exploit the system I've worked so much on. What I'm not sure (zero experience) is weather I'll try setting up an investor advisor account, a hedge fund and try get people to invest directly (I got friends and acquaintances who are willing to do that, question is weather it's enough to scale by word of mouth). Or approach some prop shop (got someone I know who expressed interest in what I have, I'll drop him a mail and see what terms he offers).
slow down there tiger,if you got the goodies money will find you,it will only take longer
No i don't want to meet,invest,i just have one question.Where in Eastern Europe are you? I am myself from and living in same part of the World.
Note to your friends.
If they have an opportunity to read this,otherwise you read it to them:
If you show them 15 year backtest then maybe they be wise to invest half the amount to what they agree now.If the backtest is promising that is.Otherwise it would be prudent to just walk away from it.
There are providers that will do it for you in the UK for $30k set-up and then $50k a year for accounting/platform etc. Google AK Jensen or Bastion Wealth (Malta). This is not an endorsement.
I did say "After several months of (profitable) results I'll have to think how I proceed next". It's not like I'm going to take money from friends before running by myself for a while. Plus there's always the option of plain borrowing from a bank, at 10% - 50% (depending on risk) per year I'm definitely making much more than the interest.
As European located asset manager you can get CTA/CPO licensed (NFA + CFTC). Beside that you need a local registered LLC with the requirements like accountant, lawyer, etc. Here in my country one may buy a new empty company off-the-shelf that is already setup and got everything needed, all papers, accounting, bankning, funded company account with minimum legal balance ($6000).
Interesting, I might consider it, gotta think about it. Right now I'm putting a bit the chariot before the horse (I still have to run my strategy privately for a while), but I like to know in advance what options I have after that.
>> PS. If can make 5 million with a reasonable IR and ROC (say IR of 5 and ROC of 20%), you can find plenty of shops that would give you 25-35% of your revenue as a payout.
OK, I gotta ask some questions related to how these prop shops operate.
a) Do they require that you explain your strategy to them?
b) If not #a, at least do they require that you show them your trade history (& ongoing trades) so they can track the risk you're taking?
I would expect at least #b, case when question #c.
c) What happens if #b and they successfully reverse engineer the #a in your strategy?
Asking these questions from both the perspective of working *for* a prop shop and conversely, say I would somehow handle the sales part and get a significant amount of capital. If my strategy stops working then I'd need to have some backups and diversifying (working with several traders other than me) would be an idea.
In this case, I'm telling you I wouldn't fund jack squat if I wouldn't get #b: the historical trades AND the live trades. I know at least that much finance as to figure out weather the whole stuff can blow up. Case when no deal, from my point of view these guys were just lucky.
But then there's the very real possibility of me reverse engineering what they do. Afterall I've worked 10 years as a quant developer and developed my own working strategy in the past two, so I do know some tricks.
So how are these things handled in the industry?
May I ask a couple of questions:
1. You have a few months' record of ~ 25% annualized return. As a point of reference, SPY returned 23.7% in one year to date, MSCI EAFE returned 26.5% in one year to date.
2. What is your return on a risk adjusted basis?
1. 24 months are not that "few". If something doesn't show results after 2 years then funk it, I'm not interested in it.
2. Haven't computed it and now I'm busy developing the live trading system. After I'm having it running in staging environment, I'll get back to backtests and run the strategy over a longer time period (which is quite a hassle since I have to import a lot of data which takes time). Eventually I'll compute a Sharpe ratio or whatever people expect to see when they say "risk adjusted". For now, for myself I know that putting in $1 and getting out $2 is a pretty good deal, while putting $100 and getting $50 is not.
By the way, I think this is what people talk about when they describe "prop trading" firms: https://www.indeed.co.uk/cmp/100-Point-Capital/jobs/Financial-Market-Trader-5f5fadc6fc35c30c
"No previous financial market experience or specific academic qualifications necessary.
Applicant must be financially sound and able to commit a one off £25k.
£15k - (12 month onsite mentorship) to be paid in advance.)
£10k - (Applicants funds for trading capital, to be held by the applicant)."
Looks like "prop trading" and "hedge fund" are just as related as the following Radio Yerevan joke:
- Q: Is is true that Stahanov was given a car for free?
- A: Yes, it's true only not a car but a bicycle and it wasn't given to him but stolen from him.
Well, in all fairness, proper “prop firms” are only different from the hedge funds in how they source their capital. I am still struggling to understand the concept of prop firm as described above (if you get to trade your own capital, why not do it from home?).
PS. I guess maybe the idea is that they provide capital in a first-loss form? Not sure
What's the IR on this strategy? Does not look too smooth to me. The number of time periods that you need to verify a Sharpe ratio with 95% confidence is Q(0.95)^2*(1+0.5*SR^2)/SR^2.
PS. Here is a a handy table of performance days needed for different confidence intervals for a range of Sharpe ratios:
Code:90.0 95.0 98.0 0.5 1683 2773 4323 1.0 422 695 1084 1.5 189 311 484 2.0 107 176 274 2.5 69 114 177 3.0 48 80 124 3.5 36 59 92 4.0 28 46 72 4.5 22 37 58
The prop firms referred to most on ET, in the US, are based on a joint back office (“JBO”) arrangement with a clearing broker. https://www.finra.org/sites/default/files/NoticeDocument/p004001.pdf
Basically, an SEC registered broker dealer with $1mm in net capital, can solicit a type of partner that will add their capital to firm capital in return for a payout of net earning from their trading. The trader's capital is first loss and the firm can provide extreme leverage on that first loss money as they can use not only the $1mm the firm was started with but all the capital of all the traders. They can use the JBO relationship to maximize this leverage and get many of the advantages of the clearing firm.
Although there are some JBO prop firms that focus on option market making that require $150K or more, most in the past focused on equity day trading and accepted as little as $5000 in a deposit. Any trader deposits used toward net capital, requires a holding persion of 1 year and are not protected by SIPC. This gives an under funded trader 10x to 50x leverage for DT. The parent firm makes most of their money from charging for training and commissions that they mark up from the clearing firm costs.
So to answer your question, "if you get to trade your own capital, why not do it from home," most can't get leverage with their own capital or the lower trading rates that the prop firm can offer for a small account. Most of these prop firms are gone. Only a small handful remain.
You know, this was a question that always interested me and finally you managed to explain it!
The most important item to remember is where profits come from. You are correct, the only real difference between a hedge fund and a true prop firm is that prop firms are not set up to raise AUM and Hedge funds are. They both generate profits for the owners from profits. A JBO Prop firm generates most profits from training or activity from their own partners that risk their capital before the prop firm. Even though the SEC/FINRA consider it a red flag when a business pays out near 100% of trading profits, that has not stopped these firms from getting around that.
Risk of ruin is very high if the under funded trader uses 10X-50X leverage. I suspect the prop firm will not let the margins eat into their capital base, so they will cut you off before the trade has time to develop making your risk or ruin even higher.
Equity JBOs generally don’t like overnight positions and will do what they can to not allow you to lose firm money over yours. That does not always happen.
I'm leaving aside the scam-like prop shops who provide "training", especially to people with zero prior qualifications and experience. In theory, training could work and that's what proper hedge funds are doing, but the material they work with is already very well pre-trained. By definition it's not profitable to train someone to simply do what you're already doing since the return on this sort of strategy is halving the profits you already make.
So you want people who are capable of creative independent thought, focused on the capital market and who have the education background to succeed. Training these guys could work and it's the sort of thing I have in mind when I proposed investing $50k in a prop shop business. But that's obviously not enough, so I'm looking for partners.
Reiterating the idea: Get 10 partners (including me) who invest $50k in R&D and $10k as trading capital. That's $100k of trading capital and $500k as development. And it's not a mistake that I'm estimating 5x more for development than capital. The figures can be swapped only *after* you've got several solid trading strategies, point after which the possibilities for growth are multiple (borrow more capital, work with investment banks, do your own sales trough a hedge fund business). And those $500k are not going to hatch golden chicken in a couple of months, think more like 2.5 years under a normal distribution (extremely lucky to get something in 6 months, can close "early" if it doesn't reach profitability in 54).
Ideally, the 10 partners would already bring enough ideas and experience to the table that the whole thing would spark a chain reaction: individually, each Uranium-235 partner would not reach ignition level, but 10x that would do the trick.
And this also gives simple to understand explanation why there aren't more successful traders: because even the hardcorest individuals need too much time to gather the critical mass by themselves. At this point I'm a guy with $10k in capital and $50k in comitement over a period of 5 years and with the dev / quant / trader knowledge I've got so far I dare to say, this makes me a rare element. Worst case worst I gotta reach critical mass by myself (and looks like I already did it, though I'll be more certain in 6 months or so). But you also get my explanation why the default approach in this business "come back when you're successful" is utterly retarded and a bunch of skilled, determined and capitalized enough individuals (like me) could seriously challenge the status quo.