Raising Capital through paper trading?

I myself was surprised reading that. For hedge fund you have to first start a hedge fund and sell only its performance...what did for your good neighbour 5 years in a row has no value when it comes to SEC's complaince. Now raising money to trade for friends is another thing, but then there are limits to how much you can raise.

http://www.greencompany.com/HedgeFunds/HedgeFundIncubatorFunds.shtml

I am pasting the paragraph from this page below:


Why the two-step process, with the incubator and full hedge fund later on?

It’s the ‘horse before the cart’ (or ‘chicken before the egg’) problem that we address. Consider that most managers need a stellar performance (or track) record to attract outside investor capital. Why not generate that performance record first before completing all the legal paperwork (offering documents and more), since the paperwork is the most expensive part of the startup legal process.

The problem is that you can’t generate a prior performance record to show investors without actually setting up your hedge fund and trading your own money in that fund. This is why we created the two-step process. First, form your hedge fund and trade it for success. Second, prepare the paperwork to give investors, showing that good track record.

But why can’t you simply show a track record on your personal trading accounts and skip the first part too (forming the hedge fund minus the documents)?

The reason is it’s against the law to show prior performance other than a hedge funds actual prior performance, with one technical exception in the law (explained below and which is not appropriate in our law firm's view).

Many traders ask if they can show prospective investors prior (unaudited) performance records while they worked at a mutual fund, hedge fund, or on a personal trading account. The answer is no, the SEC, CFTC and state law and regulations expressly prohibit use of unaudited prior performance.

 

Thanks a lot everyone for your opinions. What if we try to keep this thread going ...

1. find out the ways of raising capital for traders that are ready to go real trading.

2. share links and resources on the prop firms that can be good companies to contact.

Thanks a lot to everyone again. I hope that much more people than it was originally intended will benefit from this thread.

Jamie.

 

Makes you wonder what sort of "favors" these guys were handing out to their priviledged clientale.

 

Simple answer, relationships and track record.

I know quite a few of these guys, so maybe I know a bit of the inner
workings.

Believe it or not, a lot of the sell-side analysts have done good jobs in
predicting earning growth, yes a few "promoters" like Blodget and Grubman
get all the publicity, but pure analysts do exist, see Steve Galbraith (went to
Maverick, I think). So these guys would have a track record. And the Pension
fund relationships would help tremendously as well.

Even then, it is difficult to raise a lot of capital without a real trading track
record. A friend of mine, used to be head of South American research, only
raised about $20M.

 

What's funny is that often a good innovative, profitable, backtested but not yet traded strategy is cheaper and less risky than entering a fund with good past performance at a random point in time. When will people start to learn that under rationale expectations, past track record is no determinant of future performance?

I think the real issue with raising equity money from banks is credibility, not track record. Many are flush with unused money, and would have the capacity to enter potentially highly profitable strategies at a low cost and with high control. Two or three months of losses and they could pull back, that's not unusual in their business. Excessive trust in experienced traders is what takes banks down, not controlled risk taking in innovative ventures.

Oh well, if only I owned a bank...

 

Um. When you backtest a system, arent you attempting to predict the future results of the system based on how it performed on historical data ?

You're really just choosing one random path for another.

 

And so do I when buying into a fund with a good past track record.

Only difference is the fund will be discounted taking into account this past performance (and thus past performance will not give you any information on how the share you buy in will perform in the future), while with the backtested strategy, what you see is what you get (most likely)...