Yeah, all true, except generating Sharpe of 1 on 100+ million is way harder then generating Sharpe of 4 on 500k. It's relatively easy to generate 100%ish returns with very reasonable risk on a couple hundred thousand (I can think of 5-6 strategies right off the top of my head) and it is way harder to generate 10% on a couple hundred millions.
Great points. I ask this though? Why would anyone want to really take on that type of capital risk in the markets? There seem to be better options outside capital markets with less risk plus you're not responsible for OPM at that point.
I am not sure what question are you asking. Why would someone want to run a 100+ million fund and only generate 10% for his investors? Well, that's simple - he's getting paid 2mm in AUM fees and another $2mm in performance fees on each 100mm, pretty good bang for the buck. I doubt anyone can generate this sort of personal profits with similar kind of risk in any other industry. Truth is - I know a lot of funs that only allocate risk on 5-10% of their assets and the rest is in various riskless instruments (e.g. money markets or treasuries). Why would anyone invest in such a hedge fund? Well, two separate reasons - 10% with Sharpe of is still better then most anything you can get this days in capital markets and it's (supposedly) a nicely de-correlated stream of income. Personally, I think investing in a multi-billion fund is a horrible deal for the investor (due to the 2/20 model, the fund is truly interested in the 2, not in the 20). Truly small fund is rarely a good deal either because majority of smallish PMs ("retail" size) are essentially hacks or basket cases, as is well illustrated by the majority on this board. The only exception to the small fund rule, in my view, are the small-size quantitative guys (former science/engineering people of various shapes and sorts) that keep applying scientific method to the markets and probably do generate true alpha. This kind-of leaves the truly interesting funds in a small niche of 10 to 50 million, where the partners are still a critical part of both AUM and alpha generation, yet they are usually truly experienced guys (either former large fund PMs or sell-side exports) that actually have a clue and still have true skin in the game. There are fairly few funds like this, probably because these people usually would rather work for a large(er) fund then get into the nasty details of running their own business. I am one of these people and I am sure there are others. If you have institutional experience (e.g. running a book at a large bank or another fund) and willing to commit a fair share of your own net worth (50%+), you might be able to raise some money without an audited track record.
My apologies for not being clear, you did answer the question I was looking for though. I see the point on the 2% - which is great and I guess I had never considered the allocation idea you just mentioned. I'm in the boat where managing $50-$100 ( so I believe- but who knows) would be less work than the larger style funds. Again, I say that with no experience running that type of capital. Appreciate your thoughts.
Fair enough. I can definitely understand that. My problem, is that I have never worked at a bank only a family office and then a really small fund, so, the task of raising large capital is a little more difficult. At this point I am committing about 90% of my net worth into my personal accounts with the sole goal of going to OPM and showing tried results that are not with a $100 or $500k account but something larger. Thank you for the input.
Just to complete the picture. There are also first-loss capital providers and capacity-prioritized seeders that you might want to consider. The first-loss guys will give you leverage (e.g. 1:10 with a 50:50 split), but you are a first-loss recipient (personally, I would just think of it as access to leverage, but on paper it would appear as if you were managing 10x the capital you actually have on-hand). If you have really high-Sharpe but capacity constrained strategy, capacity-prioritized seeders will give you money with 2/20 conditions as a managed account, but will have the priority on fills given the current size breakdown. Both, in my opinion, are crappy deals, but you should know about these options.
Well said - AUM size differences can lead to huge differences in Sharpe. I have more than one 2+ Sharpe strategies but they will scale only to medium size say 3-4m PL per year. So, I can not run any 100$ fund, even if someone gives that kind of money to me today. Maximum I can look for would be like 20$ fund. If someone is starting out with GS prop trading pedigree, then he can raise 50 bucks as a start. But if some retail guy wants to get into this game, he will essentially be looking at building his business feet by feet, block by block. My original question was directed towards such a guy. 1) How much minimum seed capital he should have so that outside money will find him? 50k, 500k, 1m? 2) How many minimum months, years should the trackrecord hold? 3) Also, how will outside money find him, if it is a fund structure and not a CTA. Because as far as I know, you can list even a 100k CTA on sites like IASG, but I don't know if you can list a 100k fund anywhere Again, talking about 50% return with 15% DD and quantitative strategies?
It all depends on your trading style (frequency, asset class, level of automation), on your own experience and on your eventual goals. First of all, fund raising is a game that you should hire a professional for. There are guys other there that would bring in cash for a split of the AUM fee and (some) a split of the performance fee. The rule of thumb unless you are doing HFT is a year and $25m AUM is the low end of where institutional money would care. Some FoF want 3 years of track record. Some don't want to be more then 5% of the total capital and they only give in chunks of 5mm (so, a 100mm threshold). Personally, I'd say if you have Sharpe north of 3 on your total strategies and good draw-down properties, there is no reason to go large OPM at all. Take some friends and family cash in managed accounts and displace them with your own money (from the strategy returns) as soon as you can.
So, you are saying open a prop. trading futures firm for Sharpe >3. Sharpe < 2 and below, go the OPM route, because the high Sharpe will allow much faster compounding on your own money and OPM won't be needed. Thanks!! Another poster I respect hugely on ET wrote basically the same thing few months ago. To be honest, I don't know what my portfolio Sharpe on syst. strategies is! I am currently writing some tools that will help me get my portfolio backtested sharpe and historical performance (on syst. strategies). I think I should have detailed results in 3-5 days. I will see if I can post them on ET to get some feedback, without revealing too much detail. My plan is to start trading this syst. thing with my own money. For first 3 months - my aim is to just run everything as planned and then take it from there. I doubt I will reach 3 on portfolio level though. We will see.
As I mentioned earlier, if your are managing friends and family money and charging fees, IB is capping you to 5 accounts max for non -RIA's. There could also be more restrictive policies depending on which state you are operating from. I have no idea how cumbersome the process is to become a RIA, besides the tests I know you need to take (if someone can chime in here, it'd be great). 5 accounts is not much to grow from if you're only managing a couple of 10k to 100k accounts each, really this doesn't seem like a great option to me unless I become an RIA. As to raising institutional money, some other earlier posters suggested this would be likely impossible even with a great track record unless you have some organizational infrastructure with compliance, audit, etc. I imagine this is a generally accurate statement with some exceptions. I'm starting to build a respectable track record, as I mentioned in my original post. +87% (+330k) in 2011 and +98.2% YTD (+520k). Max DD of around 8 to 10% and max DD on monthly returns of 5.8%. Now managing 1 mil of my own money. I also have 4 years of relevant work experience at a two hedge funds (no where pristigious) before I started doing this full time. Do I have some other options to raise capital besides going family and friends? Maybe I should try talking to some asset raisers? Anyone know of any decent ones?