Hi everyone, Have recently teamed up with a veteran futures trader and we manage a small futures fund and a system for a broker and his clients as well as our personal accounts. Would like to use the knowledge of the people on this site to recommend us a trading firm that 100% backs traders for a profit split to expand down this path as well. Anyone know of any good firms like that. Location not important. Much appreciated.
We have a contact that might fit the bill. Their goal is to fund emerging managers (small funds, CTAs etc) with a monthly profit split and monitor them for 12-18 months. The group partners with a multi-billion dollar institutional allocator as a "farm club" to identify key talent. After the 12-18 month period, the best managers are eligible to receive a traditional allocation (typically 2% management fee, 20% performance allocation) into their fund or a separately managed account. The group does require the manager to put up some of their own risk capital - that's just the way their program works. It's a great way to boost assets under management (AUM) and begin working with an institutional-grade investor. If you want more details, shoot me a direct message and we can chat...
These typically are NOT good deals for the trader. You essentially are asking them to leverage their OWN account to give you guys a risk free call. I know a lot of guys that do this setup. Ask the trader to put up 100k. Give them 1 million in buying power. If after 12 months they produce, you find them an investor. If they lose 10% of their strategy, they blow out. These guys are committing capital on a first dollar basis. The only way I would advise a trader to do this deal is if the losses are shared in equal proportion by the IB and the trader.
On the surface, I would agree with you. The leverage simply for the sake of leverage isn't worth the risk. But in this case, the funding partner is backed by a multi-billion dollar allocator who is looking to fund traders from a more traditional standpoint (typically 2% management fee 20% incentive allocation). The program is really just a "farm club" allowing the institutional allocator to evaluate the manager for a limited time period with minimal risk. Other benefits to the trader include higher AUM (it's easier to raise additional capital when you already manage a material amount), and the credibility of having an institutional investor that has placed capital with you. Now the trader can go to a small family office and say that this institutional investor has placed $XX million into the strategy. From a business standpoint, the methodology makes a lot of sense. Sure, it's not right for everyone, but for the manager who can control risk and generate consistent profits, it is a tremendous opportunity.
I understand the sales pitch. I've heard it many times and I'm not disagreeing with you on the benefits. But please verify for the readers of this thread, that their capital is first dollar risk.
Yes, the manager's capital is at risk. As stated, the program isn't a fit for everyone. Consistent returns with limited drawdowns offer the best chance of success.
I'm not trying to berate you, but let's make it a little more clear. They have what is known in this industry as "first dollar" risk. What this means is, they put up 100k, you give them another 900k so they are now trading a million dollar account. They lose 10% on the million. Their 100k is now wiped out. You wish them luck in their future endeavors. What do you guys get out this. Commish. It's all about the commish. You get the trading fees with no risk and you generate a nice brokerage business. If one out of 10 guys does survive that gauntlet, sure, you'll get them money and get more fees from that business. I'm not saying you are doing anything illegal here. I just want to make sure the readers of this thread understand the facts.
Actually, Mercenary Trader isn't getting any commission out of the deal. We've positioned ourselves to be a "resource hub for traders" - and this is a resource we think emerging managers should be aware of. We're simply making the introduction. In terms of the risk profile, yes there is a first loss structure. So if a manager puts up $1mm for a $10mm account and loses $100k in a month, that loss would be applied to the manager's capital account. One important note: The size of the trading account would not change, so the manager is not being penalized in terms of buying power for the initial loss There is also a first gain provision that would come into play the next month... If the manager makes $150k the next month, the first $100k would go back to the manager's capital account to make him whole. THEN - and only then - would the funding partner be able to split remaining profits with the manager. So the funding partner only makes money when the manager is also profitable. Yes, the program is constructed to allow the funding partner to evaluate managers without taking a significant amount of capital risk. That is the drawback. The positives are the increased AUM, the institutional sponsorship, and the ultimate opportunity to receive a traditional allocation. It's up to each manager to balance the pros and cons and determine if it's an opportunity worth pursuing.
Down side risk sounds no different if you open an account at Bright with 100k and he gives you 1MM in BP. At least with the farm program there is a an upside to get a lot more capital to fund a real business. But like the man said it is not for everyone...