This is not a "I have this great strategy, how do I get money to back me" type of thread. The assumption is that you already have a verifiable track record which traded real money and shows the product(s) being traded to show the liquidity. Let's suppose you have a three year track record, but no Wall St pedigree. Where should you go from here? I see 4 major routes, each with their own pitfalls and would love for some feedback and discussion: 1. Ask friends and family then referrals from them. This is slow and conflicts of interests abound. Whether you do it with managed accounts as a RIA or hedge fund, it does not see like the most efficient or optimal way to do things, at least as a career. However, it is the most "safe," especially if you pass the series 65 and become a RIA. You collect your 1-2% AUM fee and maybe 20% of gains, but you need a lot of capital before this becomes lucrative. 2. First loss capital providers as explained here. This seem a bit better, provided you have at least some capital to start with. Economically, this is somewhat like providing you higher leverage on your capital, but because you get first dibs on gains after a recovery, it's not exactly the same. This is higher risk/reward than the friends and family model. Typically, the trader keeps 50-70% of profits, although I'm unsure whether they are a profit allocation or 1099 income where you will have to pay self-employment taxes. 3. Prop trading with first loss. Very similar to #2, but prop trading has a terrible reputation in general. Highest risk/reward where payouts are in the 80% range. Holding the first loss in an actual third party escrow rather than just as a deposit on the prop firm's books is crucial. 4. Give up this pipe dream and work as a lowly analyst at a hedge fund/FO to build up connections with UHNW individuals/institutions and get backing after 5-10 years of building up relationships. Are there another avenues for capital raising that I'm missing? There are places like Collective 2, Covestor (now Interactive Advisers), Fundseeder etc, but they don't seem to be very popular overall, at least for raising substantial amounts of money (or small amount of money, but you keeping the lion's share of profits).
Depending on your geography simple "backers". Looking for talent with some revenue split. Family offices, but you'll need real vigorous record documentation and no product conflicts.
If you have low dd, leverage on your own money and keep 100% profit. Never take money from your friends unless they are rich and do not care you lose their toy money. Some years ago I helped friend and family members invest in abroad, which ended up that I paid back all their loss, though I did not need to.
if you have real track record, money will find you. in this environment, everybody is desperate for return... people will stuff money in your pocket if you can generate any.
I wish this was the case! Put yourself in a private traders perspective - She has 100k and knows a strategy (lets say a risk free strategy) that makes 100% a year. You have 1 year of performance history. What do you do? Who do you talk to? Will someone believe those returns? She still has to find people who will trust her. In her case, do you really want to be charging 2/20? Imagine telling someone you want 5/40 when you are first starting out. Even if you are good, raising capital is not as easy as "being good". You have to be a salesman.
Scenario sounds purely hypothetical no? In my experience after a few years people start to ask me if I can manage their accounts. OP did say 3 years. Should be enough if he just let people know. Family friends investment clubs. Nowadays there is too much money out there!
I'm in the infancy stages of setting up a CTA. Should launch in 2021 with a "small" chunk of change. I'm looking to target 20% yearly returns after fees with drawdown of less the 4%. I think it is quite compelling for investors considering index futures make up a small part of my strategy. Even though my returns sound great and will be audited I still anticipate an uphill battle raising capital. Good news is my background is sales and I am building a list of 100,000 people that I will target to bring on 1 account at a time. The revelation came to me when I realized instead of dealing with the volatility and stress trying to target 60-90% in my account, why not trade smaller and market my "fund". I think it is easier finding people who want 20% vs 60% returns per year. People like above average with low volatility vs chaos and huge returns. I'm up to the challenge of raising capital and I know it will be difficult but quite interesting at the same time.
I met a few guys asking me to handle their money but in the form of ib’s master-client account. In that way, money is still in their own accounts. They feel safe but they can see every trade I make. That is a concern to protect trading strategy. What do you think?
lol no worries... generally speaking people overestimate risks... if you want to put some math around it, the odds of someone reverse engineer your strat and also be able to excute it is gonna be much smaller than a traffic accident, yet you still drive around don't you? not to mention some strats are scale unlimited... like I have laid out everything I know in my thread.... it will be helpful to some, but I know most people won't be able to execute. most people don't have the guts to get rich lol.
Great responses here and it's getting the wheels turning for me. It seems like the deciding factor should be how volatile your trading is. Low volatility = look for a first loss setup where you provide 10-30% of the downside protection with your capital for a backer in return for 70-90% of profits. This is essentially leveraging up your overall strategy--the less volatile, the more you can lever. Of course it's always a gamble that your projected vol gets blown out the water so never do this with all of your capital, but it's a smart bet if you are great at understanding how innately volatile your strategy is, not just backtesting it to historic events. Higher vol = managed accounts/hedge fund model where you take a 0-2% AUM and 10-30% performance fee. It's still a good living if you're making 30%+ gross returns taking on the appropriate amount of risk. I think there's enough money out there looking for both types of strategies. The trick may just be marketing your strategy to the correct crowd. Good luck to you! I just started with a small chunk of change from friends and family as well, but looking to go the first loss route eventually.