Managing money for others

The general thrust of Joetrader's post is accurate...however, it (starting afund with less than $20M) can be done without the US$20M AUM. I’ve learnt in my life not to focus on why something CANNOT be done, but why it CAN! That’s my personal philosophy.

Legal Firms: There are many solid legal firms that will charge less than the 80K from a "brandname firm" and from my experience many of the law firms - brand name and non-brand name don't care about you, have boiler plate docs which they just modify for you. Frankly in this era, one (any smart person who has done some research ) can modify any existing offering memo to create theirs, because this is what the lawyers do anyway. I hired a brand name firm in the BVI, paid less than 80K, but have been quite disappointed with their work. I had to make substantial edits to their work, was the victim of a bait and switch from their vis-à-vis the fees, etc./ and have jus been thoroughly non pleased. All my docs were boiler plate docs, and I found myself correcting them, and like I said making substantial edits. I’ve seen many an offering memo and know the general structure/requirements and there is nothing incredibly specialized in preparing an offering memo, if you know what you want/need. Legal advise is always good, but legal advice is also typically generic for similar/vanilla situations. Setting up a vanilla offshore fund has been done tens of thousands of times and the docs for this exist everywhere…is this really worth $80K? NO, NO!!

Administrator: As for the need for Administrators. yes many of the top administrators require minimum of 50K p.a. to bring you on board. I even heard that some now require 100K and if you were a prior client paying less than $100 p.a., they politely tell you to take your biz, elsewhere. And some of these so called brand name firms, use recent college grads with minimal experience to do the work..the result lots of errors. Again, unless you are trading exotic OTC instruments, administration work can be frankly done in-house or even with software. After all, every Administrator uses Advent or some variant of same to do your reporting. But again, there are many good firms that charge less and now even some software/ASP providers that cost you a minimal amount.

Prime Brokers: Many of the top ones require 20-50M to even talk to you and even then may require you do all your biz with them. But again, there are a few good PBs that aren't so AUM selective. There are many very good introducing PBs. GSEC (formerly SLK) will talk to you with even $2M, maybe even $1M. If you are in futures MAN will take you on with AUM in the 6 figures. Calyon & Fimat require you to have at least $1M. So it can be done. Frankly for a pure futures trader, Calyon, Fimat and Man are better shops than Morgan, Bear Stearns or Goldman Sachs. For a pure long short equity guy, GSEC or Merlin or Grace Financial or MS Howells are great places. You can still have the cachet of the GS name via GSEC (the old SLK). If I had enough AUM to choose any broker would I switch form my current PB, NO. They treat my small account as if it’s a $1B account and I get all the service I need. Now a Barclays Capital, UBS or Credit Suisse can provide me greater electronic access, access to exotic OTC instruments and probably better in house reporting, but this is a bonus NOT a necessity. So when my AUM does increase, I’ll open accounts with Barcap, CS and/or UBS, just to have options but I won’t leave my current PB, due to loyalty and the great service I get from them. You have to respect and be loyal to a house that treats you well, when others won’t even return your phone call.

Audit: Again, many good shops provide an audit for less than the steep fees the big four charge. Again do you research and NEGOTIATE. These prices aren’t the 10 commandments.

Summary, if you have a viable strategy, STRONGLY believe you can generate performance and have a clear business plan and have enough assets to run your strategy AND are prepared to live frugally, WORK 24/7 then go for it. Don't let all these imaginary hurdles of $20M minimum AUM prevent you from pursuing your dream.

In essence, the key is do you have enough assets to demonstrate your strategy, a valid strategy and the desire to work hard to excel NOT having a certain AUM threshold.

As proof, I’m doing it...it's tough, very tough, I have frustrating moments, but I know outstanding success will be mine!

I wish you all success!

P.S. Raising assets will depend on your performance AND your marketing skills. Therefore it is key to develop a track record in a fund structure, no matter how small that fund is. Don't trade your assets in a personal account with the intent to start a fund when you turn your grubstake into $20M. The reason for this is that if the track record is not for the fund, it will be HEAVILY discounted by potential investors.

P.P.S. As for the cachet of big name firms, it’s another myth. Investors want honorable fund mangers with good viable strategies. Period. Having GS or Morgan Stanley as your PB is not going to generate you returns, nor necessarily prevent fraud. A fraudulent manager will find a way to commit fraud no matter who are the service providers. Wise investors know this. Dumb investors don’t. and you don’t want dumb investors, the kind of investors s who are herd followers. If you have no-name service providers, will that prevent you from landing that 20M investor, no…as long as you can explain why you hired those no-name service providers initially. And when the large investors do come in, if you want to change service providers, you can always do so. The key is having a valid story and the confidence to convey this to potential and existing investors.

P.P.P.S. A key nugget here expressed succinctly: Aim to build a skyscraper but start building it floor by floor from the foundation up. Don’t attempt to build the skyscraper on day one, because all your neighbors have skyscrapers. If you do so, with no foundation, your skyscraper will just collapse!

 

Joe, great post, thanks.

One thing not immediately apparent that came to light from my own digging is that size can be more important than performance i.e. if you have been around 3 years and have USD10m under management no one will look at you no matter if you grew that 10m from USD500k or whatever.

 

CPtrader, also a good post and good point about it having to be the funds track record right from the start. Another pitfall.

 

Joetrade to have $10K set aside for each high speed lines.............does that include nudy darlings sitting and rubbing on your lap the whole day?

 

CPT good post indeed!

 

Outstanding posts. Very enlightening to know the track record has to be in a fund structure.

I guess one could set up a fund, use one broker, and just have their own money in it so no need for administrator costs or PB costs, and develop a track record that way?

 

Now you get the pciture....just get the prper structure, keep your records (tradingstatemnets, etc) and do it right but no need initially to build the skyscraper!

 

volatility - It is fine to attend one of those seminars although it will be mostly vendors trying to get your busines as you noticed from my post they skim a lot off the top. I think you will find however that the seed/angel investors wanting half of your firm will still want you to have 5-10M or so before they take the plunge and they will have to believe your capacity will be half a billion. And you will find that GOOD third party marketers wont even talk to you until your fund has 25M and they will also have to believe your capacity is hundreds of millions.

CPITrader - I started trading with only 8K and made millions first, then I started a fund with enough of my own money to be comfortable paying huge bills. Of course anything can be done but the barriers to entry are much higher than most realize now. The law firm set up six different entities for an onshore/offshore master feeder structure. I disagree with you here. Maybe if you have nothing to lose you will not care who does your legal but investors should be scared to death of someone with nothing to lose. Also I believe that you are incorrect on the importance of brand name auditor and administrator. You run a fund in the BVI...few investors of any size want to wire money off to some fund in the caribbean...they want to wire it to someone they know and trust and if they are sophisticated investors they wire money to many administrators and already have a realtionship of trust built with many of them. They trust that the money they send there actually ends up in your fund for one, ha! and in light of recent larg blowups you are really robbing yourself of clients by not using a top name auditor IMHO. last you speak of prime brokers and you are somewhat correct in that it is easy if you are trading only futures or only us stocks where GSEC (who i used for many years) will do fine. But god for bid you do something complicated like trade a foreign stock...then you are in for a bashing at a place like GSEC and will spend more time on the phone trying to get your trade to settle than you spent researching the trade in the first place. Oh and GSEC's books do not work at all with foreign equities...just an explosion. I mean I trade a simple global equities strategy and it really requires more than brokers like this can offer.

mokwit - size is extremely important when you are small, ha!

toc - just a simple and cheap bloomberg T-1 connection is 500 per month or 6K per year and really the minimum needed when you are using your bloomberg to trade which is maybe the very cheapest way to connect to nearly any broker in the world!

To all who think this sounds pessimistic, I counter that it is just realistic and that as far as I can tell it is the only way to grow from startup to 100M+ in todays world. I have also raised tens of millions from folks that I met while attending dinners with my legal, audit, PB, etc. and so it makes the extra mony spent well worth it. This is not pessimistic it is just a lot of work and it pays better than just about anything else.

The problem with the one man shop theory is that you end up spending so much time doing business things (regardless of how much you spend on your services) that your trading & research is seriously affected. For me, I needed to have someone else run the business side while I concentrated on the returns. By the way this is exactly what a client wants to hear when he invests in a small fund so take note. FoF and family offices, etc that routinely invest in small start up funds know the pitfalls better than you do and they are looking for folks who realize they are in over their heads and need help and are taking steps to structure themselves accordingly.

 

Joetrader.

Again I agree with you somewhat in general terms, but disagree with you on some of the specifics.

My simple thesis, is that if you wait to raise the so called $50/100M to start and pay premium service providers you'll NEVER START! People will tell you it can’t be done, bla bla , raise 50M first as if there is a tree where I can just go pluck $50M from. This line of thinking infuriates me.

If you do start with a grubstake equivalent or greater than the minimum required to properly implement your strategy, structure the fund properly, focus on the basics, generate good returns, have a biz plan that shows you truly understand the biz, when you do get that super investor who wishes ot wire you $20 – 100 M, setting up a new administration agreement with a Citco, DPM Mellon or other brand name Administrator, setting up PB accounts with a MS, GS or Bear will take you less than two weeks, maybe a month max. In sum, from the time it takes your investor to say they want to invest and you send the subscription docs, etc, you can convert your fund with no-name providers to brand name providers, if the new investor so desires.

Why should I use funds I should use to trade or worse bill the fund and deteriorate returns by overpaying name band providers upfront. Again see my skyscraper analogy. Yes you are correct, there are benefits t name brand service providers, even though I argue a lot of it is myth though, but there is certainly value, but it is very imprudent for a startup to pursue that route until they have assets that will bear the cost of such providers...and investors will understand why you went the no-name route when you first launched.

So take my situation, I had enough money to implement my strategy …just enough..barely.. not enough to deploy all my sub-strategies or to trade all markets but enough to demonstrate my strategy’s viability. I don’t have nay rich uncle, wife, ex-wife or family to seed me $5/10M. The so called seed providers want 50% of my biz – which I would NEVR EVER GIVE UP, they won’t even listen t me, because they have the same requirements as ordinary investors. The so called 3PM are even worse! So what do I do, sit on my hands in frustration. Well, NO WAY!, That’s not my style. I very strongly believe in m strategy enough to put in 100% of my net worth and have supreme confidence in the viability of my strategy. I believe with great returns and good marketing, I will secure plenty investors, once you cross the 20-50M mark it’s easy to grow. It’s the under $20M mark that is difficult.

So I put 100% of my net worth, got an offshore law firm to set up my fund. Paid too much in my opinion for the legal work. In hindsight I would have drafted the docs myself, and got a registered agent or law firm offshore to file the necessary BVI applications. Do you know that some of these offshore firm s can’t even draft offering memos, they rely on the memoranda drafted by US counsel. I mean once you really study the biz, there are quite a lot of expensive charlatans. Anyway I digress.

So I have a fund structure, I have a prime broker (Man Financial, formerly REFCO). They treat me like king, charge me excellent commission rates, provide me all the tools I need for electronic trading, electronic data feeds for my statements, access to a 24 hour desk that can trade any futures market in the world. What else do I want?

I use a software based Admin that provides me prompt great service AND analytics. When I first started I actually used a Chicago based Admisnaror that charged me about 20K a year. I fired them in January, because it took them 20-30 days to get my monthly reporting. I guess I was their smallest client so they treated me like thrash. Now with this new software based Adminisrator I get my DAILY NAV before midnight. Sweet! I pay..guess how much.. I won;t even tell you, it’s insignificant! But as my assets grow my fees to the Admin increase. They said they want to grow with me. Now thso ear emy ind of people. They also have a few multi-billion multi strat funds as clients, so I won’t even call them a no-name service provider. They don’t handle AML/subscriptions, etc..but I think they will in the future and if they don’t I ‘ll continue to do that in house until I can afford to outsource that. I use JPM Chase as the Fund’s bankers, so its not some post office box bank in the Caribbean

This is my 11th month. I have statements etc to back up my returns plus the monthly reports form the Administrator. In Jan 2007 I pan to hire an auditor to do me an 18 month audit. Be assured I wont just pick a KPMG an dpay 50K.. after all , note thatall the HF blowups involved brand name audit funds. Again, brand name SP don’t prevent fraud. I’ll pick a reliable and cost effective auditor.

Now when I start marketing, if someone asks me why aren’t you using Goldman , I’ll tell them for what I do right now, I don’t really need a Goldman. If they ask for an offshore Amdin or a brand name admin I’ll say fine. Once you invest and the fund’s assets can bear the added costs, Ill do so immediately. We can even have an agreement making the investment contingent upon hirng such service providers. Is this not feasible. Or do you think investors won’t even listen to me because I don’t’ have brand name SP from day one. My experience tells me NO!


Also I am not advocating the one man shop method as a permanent solution it’s an interim solution for a fluid growing biz. When I can afford to hire a CFO, COO, other traders, etc I will do so. It’s not fun working 24/7 doing the roles of 10 people, well it is fun, I love the biz, but it is stressful and not optimal. But conversely, why should I kill my dream because I can’t hire a full corporate suite on day one??!!

So when I now have hundreds of millions/billions of dollars AUM, as I will, D.V., I have choices and can grow my business because it has grown. But the key is here is that I got in business, not sitting on my lap waiting for $100M manna from heaven to fall in my lap!

One more thing, think about all the greats started this way, Paul Jones, George Soros, Tiger, Louis Bacon, Kovner, etc. I know things are different now, where ex Goldman guys raise $2B in one month, but that doesn’t mean one can’t be a successful multi-billion dollar HF manger with small humble beginnings. Have you forgotten, this is America!

P.S. I know of a CTA that started about 2 year sago with prop assets, got one managed account and now have about $300M, they’ve gone from 20M to $300 in about 9 months. They didn’t start with brand names and heavy overhead. Bottom line, start a fund with your grubstake, generate the returns, market yourself, grow your business prudently and in phases and investor swill work with you for your mutual benefit.

P.P.S I have EVERYTHING to lose. I have 100% of my net worth in this, I am living a very frugal/spartan existence, I focus 24/7 on this business, I live, eat, dream my biz. Don't you think I'm looking after my biz like a mother hen. Franly, if Iwere an investor I would invest in a hungry aggresive ambitious guy like myself not some super comfortable ex Goldman "prop trader" with little or no fire in the belly!

 

Very true. Reason being, the thinking is money finds good funds. So why can't you grow? Wen money is "easily available" Of coruse I could make a number of rebuttals for this. But the the general perception is if you havent grown you must not be good....