Starting a fund / raising capital

Discussion in 'Professional Trading' started by doublet83, Apr 21, 2012.

  1. Like many a young analyst or trader, it has long been a dream of mine to run a successful hedge fund. I would like to get some advice on the process. There seems to be some posters here who are credible, and best of all, advice here is free. Thanks in advance for any insights you have to offer.

    I have been trading and investing my own funds for about 2.5 years now. The first 1.2 years were done under a family account and won't be useful for raising capital. As of 1/2011, by returns are as follows:

    2011: 87.2% return. Max drawdown (based on monthly returns) of 5.0%. Profits of 330k
    2012 YTD: 36% return. Max draw down of 4.1%. Profits of 200k.

    These returns have been achieved with generally market neutral strategies, although currently I intend to maintain a long bias. Monthly returns show a R squared of 0.04 against monthly returns of the S&P500. Despite low draw downs, high returns are somewhat concentrated around a few great months, which is I know is incrementally negative. StDev of monthly returns is 10.8%.

    I have about 5 years of experience working on Wallstreet doing primarily fundamental research of US equities as an associate level generalist. I've worked at two small hedge funds that are not well known, but legit. My age of 28 is on the young side and may work against me.

    Investment approach -

    Primary doing l/s based on fundamental research. I have been opportunistic and employed some short term "trading" strategies, but these have also been based on fundamental analysis. These short term strategies account for a good chunk of returns, although I am focusing more on the long term portfoilo more nowadays.

    Raising Capital?

    I hope to start raising capital in 1 to 4 years. I do not intend to raise capital now, partly because I don't think my trackrecord is long enough, but also because I'm very busy right now with research. I am becomming increasingly comfortable with my investment process, and I believe I can continue to achieve 50% + returns with low draw downs. Initially I will be satisfied raising at least 1mm. Although the fees from 1mm will be fairly small, it seems a worthwile start given my belief that I will continue to produce positive risk adjusted returns and attract greater investor interest over time. This is assuming the 1mm is from one client- I'm not interested in the hassle of raising 1mm from various small investors (friends and family). I obviously hope to raise more, but I don't know what is realistic at all. If i can't raise 1mm, I will continue to manage my personal capital.

    I'd love to hear what I can realistically hope to raise in one or two years assuming I can maintain these results, and also considering my relevant, but not impressive, professional background. If the answer is zero, what kind of track record will it take to raise a few mil?

    Also, some have recommended going the way of a managed account. Ideally I'd like to set up a fund, but I can understand that investors are reluctant to send a few mil to a stranger, despite how trustworthly I look in person. I suppose a separate managed account in addition to your own account will be just as good for building a track record when audited? Some potential conflicts of interests with respect to how to execute trades do immediately come to mind. Some of my shorter term trades will need to be executed quickly, and I'm not sure how it will be possible to have these trades executed at the same time if I'm managing multiple accounts.
  2. rmorse

    rmorse ET Sponsor

    You need to start to establish returns your can market, possibly have audited in the future. Helping small funds is something we do well. My advise is to establish a relationship with an Introducing Broker like myself. Open an account for either an investor or a group of investors that will stay with you through the process. This can either be an LLC or an LP.

    We can help now with the Introducing Broker relationship by setting you up with platforms and a prime broker. Monthly statements to show investors. Then when the time is right, introduce you to attorneys, administrators high net worth individuals and Fund of Funds. We can help you through the process.

    Please contact me directly for more details.

  3. hoop121



    How much experience does your company have with setting up small energy trading prop firms?
  4. Your returns seem very high for a fundamental long/short equity book where volatility should be like 15-20% if you were just long or short 1x.

    It implies you are taking on a massive amount of risk via leverage or asset selection. I would think that most investors will think (myself included) that you are going to have an irreparable drawdown if you are running enough equity risk to generate these kinds of returns.
  5. ocean5



    What was the initial amount you started trading with to achieve 330K in profit in year?
  6. rmorse

    rmorse ET Sponsor

    None. When you say "energy trading prop" are you talking about a group of futures traders? The majority of our clients are on the equity/option option side of the business. That does not mean we can't help you put something together that works for you. We have an Introducing relationship with Penson Futures and FC Stone. The FC Stone relationship is very new.

  7. This is probably a scam. The drawdown is too low, as there is no fundamental strategy that could ever do that.
  8. Contact a representative from a hedge fund administrator like Citco. They can provide advice on legal, regulatory, accounting, and other administrative concerns in starting up a hedge fund and in the capital seeding process, so that you can just focus on the trading.
  9. the1


    Good advice. The paperwork and red tape you have to tackle is mind-numbing. If I ever started another hedge fund I'd pay someone to do this part of the startup.

    OP, just FYI, the first thing you need is a Private Placement Memorandum, an Operating Agreement, and a Subscription Agreement. These are the three forms that all hedge funds use.

    Research non-accredited investors and make sure you know what you can and can't do with each type of investor.

    No advertising. Lots of do's and don'ts. Don't forget you'll need the series 3 and register as an RIA in each state you have an investor in, depending on the requirements of each state. Getting off the ground and staying in compliance is no easy task.

  10. OP, what's your max "daily" DD for last year and this year?
    #10     Apr 22, 2012