You need real trades to be sure that you make 5% a month. Simulation is very dangerous and not reliable at all. If you really make 5% a week you only need 5-10k to trade it yourself. Believe me that this is better then working with people you don't know. If you start with 5K trading Eminis with a margin of 1200$ a contract and reinvesting all the profits you will make about 50k in your first year. The second year it will be around 500k because your trading capital will grow exponentially.
This system involves gaps in the stock market..Holding over night..Prop firms didn't want me to hold over night..Pattern day Trade rule is a problem as well...
5% a week is legendary. I would convince your family to invest, even take a 2nd mortgage on the house. Call all relatives every day and have them invest everything they can. You now have the system, so the plan now is to raise capital. I would be on the phone and in-person all day, every day with close friends and relatives and make them a fortune first. then go after stranger's money. but by then you won't need to...
to be honest, the 5% is on the margin money as well..It would be 2.5% on my equity...Assuming $50,000 in cash..Obtaining $100,000 in stock...Some short..some long.. Family has little money to risk
FYI update for anyone interested I haven't been around much for the last year or so. Thought I'd give an update to follow up on some comments made last year. Seems like myself, Heech, and a couple others were the only ones on here providing actual startup experiences on this topic. What happened to Heech? He and his company seemed to completely disappear. If anyone knows, I'd love for you to inform me via pm. Anyway, these are my experiences. The traditional "fund" structure is half dead. Modern acct management technology allows a single manager to easily operate separately managed accounts (SMA). Cheaper and easier to setup. Cheaper and easier to operate. Investors now want the transparency and control of SMA too. The traditional structure only applies now for programs with high capital requirements, e.g. $2MM minimums. Especially for the startup, you'd have a hard time finding many investors willing/able to meet that minimum. The pool isn't preferred, it just becomes a necessity. If you run a pool, keep in mind that you're competing against SMA that are now pretty ubiquitous. Not only do investors like them better, but they have a competitive advantage in operations, so managers can offer them for lower fees and remain profitable as a business. Also, if you are a pool and don't have a 3rd party admin and some type of internal compliance, it's gonna be a tough ride. On the performance side for the startup. The 10-20% target range was mentioned earlier. 10% consistent is for established firms. 20% consistent is the target for startups. You won't land many new accounts with target returns below 20% unless you have a 10y+ track record. But it is a double edged sword. You also won't land many accounts with 100% returns, especially if you've done it for 2-3 years. The opinion is that market conditions just happened to match your system or you're lucky, and since market conditions change about every 2-4 years, they assume you're at the end of your good run. The 100% profit really catches their eye, and then immediately plants them in wait-and-see mode. Then as soon as you hit a lull, they congratulate themselves for their prudence and you are no longer a consideration. Most don't care about relative returns. It's all about alpha and risk management. Zero correlation is sort of like a Harvard Med school applicant with a 4.0 GPA. They aren't impressed by it. It is expected. If you aren't zero correlated to all other assets, you'd better have a compelling story. Sharpe ratio is common, and should be above 1.5 but below 3.5. Go into a meeting talking about a 4, 5, or 6 Sharpe and you'll probably not get an investment. At those levels the two immediate assumptions are fraud or about to blow-up and doesn't realize it. Sortino is getting a bit more common, but only for the sophisticated. MAR and CALMAR are heavily used but many don't call it the Calmar ratio. Some call it ROMAD (return over max drawdown). We use it even if we have to explain it, because imo it's one of the most useful risk stats. But we also use proprietary risk processes that must be explained as a differentiation tool. Anyway, for the startup, your annualized returns should be at least 2X your largest peak-to-trough drawdown. And if you have a drawdown greater than 15% you can pretty much forget about raising money quickly. If you've already raised a bunch of capital and then have a 15% loss, you can expect to lose more than 1/2 of it pretty quick. Secrecy is also dead. SMA are completely transparent and they will literally track your daily trades. Especially in a pool, you won't get an investment if you don't explain the process in pretty good detail. Startups don't get the luxury of guarding their system. You'd better be able to explain it concisely and confidently. Expect them to dig much deeper than you are comfortable with. You aren't trying to convince them that you are doing something that they couldn't do. You are trying to convince them that it isn't worth their effort. Secret edges are unacceptable in the modern market.
As was mentioned before on this thread, incubator funds are a bunch of nonsense created by the legal industry to make money. THEY ARE TYPICALLY NOT LEGITIMATE and most times the performance cannot be used legally. I'm continually surprised that those professing intimate knowledge of fund law push a product that is typically so blatantly in violation of it. The concept of an incubator is for you to open a fund with only internal capital. This capital is usually personal, family, or friends. You aren't legally allowed to charge fees because the incubator doesn't have the proper registration or offering documents. But here's the catch. If more than 50% of the capital in the fund is either your own money, your family, or anyone providing services to the fund, it is considered a proprietary account which you won't be able to use in your performance capsule. Also, you don't charge fees in an incubator and, on multiple occasions, the compliance department at the NFA has insisted that I only use discretionary accounts that paid fees in the performance capsule. The entire concept of disclosing performance history is that you use history that is representative of your professional management. If it's your own money or family money and/or your aren't charging any fees, it isn't professional discretionary management. The law firms offering incubator services are not in violation of the law. They are simply charging you a ton of money for something that you probably won't be able to use. Whether you break the law and claim prop performance as discretionary is fully on you. Starting an incubator with your own capital is literally no more useful than simply opening another personal account to dedicate to a specific strategy. If you read carefully, the law firms are not stating that your incubator record will be useable in your performance capsule on the DDOC or PPM (your official due diligence material). They claim that you'll be able to use it for gathering "indications of interest" before creating your official fund and soliciting to prospective investors. They fully recognize that this track record is considered proprietary and is not typically useable on official docs. So you'd be using it as a teaser, but when the actual documents are presented to the investor there will be big bold statements that say; THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY. NEITHER THIS POOL OPERATOR (TRADING MANAGER, IF APPLICABLE) NOR ANY OF ITS TRADING PRINCIPALS HAS PREVIOUSLY OPERATED ANY OTHER POOLS OR TRADED ANY OTHER ACCOUNTS. That is accompanied by a performance capsule showing no history. If you choose to use the incubator history then you must also include performance for any and every other trading account you have for the most recent 5 years. This includes any live strategies that you were just testing. In the end, almost all prospective investors are very suspicious of prop trading results. Using an incubator to try to disguise them makes no difference and could get you into trouble.
Have you ever thought of joining a prop firm for your resume, which will help you raise money in the future.
Thanks for the comments, EPIC. I have been managing some friends and family money under a managed account structure now for a bit less than 2 years. I am also in the process of registering as a RIA with 2 states and going through the formal entity set up process to begin accepting clients under a SMA structure. My impression is that the SMA structure has the following advantages: 1. Minimal costs due to avoidance of administrator and audit costs. 2. Clients potentially like the transparency. 3. Simple to manage. While pooled structure has the following advantages: 1. No need to register with the state until you reach a certain size, also avoiding annual regulatory burdens, which I'm told aren't that bad. 2. Protect your position information and trade secrets, prevent clients from potentially shadowing your trades. 3. Benefit from carried interest tax treatment. 4. Lower fiduciary responsibilities to clients, as they are treated as your investors, rather than clients. Under a SMA structure you must determine whether your strategy is suitable for their situation and risk tolerance. 5. Can charge performance fees (I think) to everyone whereas your clients need to have a net worth of 2mm under the SMA structure before you can charge a performance fee. I was also sold by the lawyers on the incubator fund. While I am skeptical of its benefits, they only charged me about 1k more for its formation, I think. I am told that you can include the incubator fund performance or your personal account performance (I believe) as part of your presentation materials if you note that it is proprietary performance. Also, the lawyers told me that having the 'fund' lets you put your 'track record' in certain hedge fund performance databases.
I'm not really that familiar with the prop firm landscape, but my impression is that most of them are trash. Also, my strategy has become almost entirely investing based as opposed to trading oriented, and I don't imagine that makes sense with the majority of prop firms out there. Also I am managing 3mm of my own money now, and with IB's portfolio margin, that's a enough buying power for me.
I also have been sold on the incubator fund and am in the process of getting it setup. To my understanding based on information provided by the lawyers I talked to, you are able to have your performance audited and used for your track record unlike if you were just trading as an individual. However you can not take outside investments, advertise, and etc. when you are an incubator fund until you turn into a full fledged fund. But when you do finish the process to reach a "full fund" you are able to use the track record to get investments compared to a fund without any track record. The incubator fund is simply a more cost effective way to starting a fund if you are unsure of your ability in trading / raising funds.