Investors generally overestimate their willingness to stay invested through hypothetical future drawdowns, just as managers generally overestimate their "capacity." As to "screening" investors, that's a luxury that only managers with heat/buzz, or managers who don't really want fresh money, have.
Ok from the recent posts I think we have some solid insights or reenforcement of general principles: From "the1" we have: "The pattern of chasing returns and bailing on drawdown became so predicitable I had to have one-on-one discussions with investors and put every new investor through a screening process." So here we have re-inforcement of the idea that communication is critical. I am thinking this is a psychological effect beyond a "just the numbers" situation (what most traders focus on), being that the right kind of communication can help to build your franchise value with customers such that they are less inclined to yank funds. The idea that investors chase recent performance is a very powerful concept that most likely drives some of the inefficiencies that we as traders seek to capitalize on. The challenge in managing accounts is your own customers are subject to these same impulses, so I think we are seeing (from the feedback here) is that a strategy for managing this is important for generating real "cash on cash" results. "Trade2live" mentions the role of luck. Certainly this can play a role, as if luck is mistaken for skill assets can mistakenly be invested with a program that has no staying power. This is a different topic but suffice to say, hopefully anyone starting a CTA is reasonably convinced that their program has an actual edge and have extensive trading experience that backs this up. Mr. King says: "Investors generally overestimate their willingness to stay invested through hypothetical future drawdowns, just as managers generally overestimate their "capacity." As to "screening" investors, that's a luxury that only managers with heat/buzz, or managers who don't really want fresh money, have." This hits on something that i have noticed, and likely has to do with the way the investment climate has changed over time: The older managers who have been in business for 20-30 years often started small and often stayed relatively small for quite some time (even including the effect of the devalued dollar). The more gradual, organic growth process might have allowed such managers to build the extra skills and infrastructure in a more natural way. Today it seems there is this pool of hot money that (once on has reached credibility) encourages CTAs to in essence skip natural growth and balloon assets by a few orders of magnitude in a few years. It might work at times but it seems to often end in a broken business and huge losses. So I would say key goals might be: The business needs to stay edge focused, and capital needs to fit to the edge, not the other way around. Communication: Developing customer mind-share through a deliberate communication strategy (using Buffet as an example). Lastly: Getting to the point where one can walk away from any investor is a valid goal. This really sets one in a position to make sound decisions in all aspects of the business. I think it is when the allocators/sales/customers etc start trying to drive a business that things quickly can go to hell. Maybe not in terms of fees but in terms of the quality of product and long term staying power. Any other experiences or angles to view this from are highly welcome.
Prometheus, I could write a novel on what I've seen in the brokerage industry. The upshot is that after working in the industry I've become the staunchest believer in MANAGED FUTURES because most investors are professionals or retirees of sorts, and often lack the time commitment, requisite skill set, experience and equanimity to compete on a sustainable, long-term basis. For those who would've thought to ask, yourself included: Most of my managed account clients were previously with me as a broker. They know my style of trading, are comfortable with how I perform, including my losses / drawdowns and wanted nothing more than to REDUCE their commission rate 90% and give me an incentive to focus on profits exclusively. My advice to fund managers: BE FRIENDLY WITH THE BROKERS! Most of them don't want to be rseponsible for trading anyway, and would welcome a stream of residual income.
I set up my CTA with a 33.3% Incentive Fee and NO Management fees, or commission rebates. When connecting with another human being and explaining to them how your interests are TOTALLY ALIGNED, it's a very good feeling and elicits good responses, in my opinion. But YES, 2 / 20 is still the "norm" from what I understand. --------------------------------------------- On a related topic, I've observed a growing group of CTAs who receive COMMISSION REBATES. Anyone want to share any thoughts on the matter? In fact, three of the CTAs I know personally receive commission rebates. If I had to advise a FAMILY MEMBER on opening a managed account, I would probably steer them from a manager that has an incentive to churn.
No revenue during a long period without new equity-highs - is that economically feasable (for how long)? There is a tendency for firms that are way down off the high watermark to close down and start a "new" product, which is basically the same but the watermark is reset. Wouldn't your model without mgmt fee be a stronger incentive to do something like that? ---- Rebates as in outright kickbacks, or rebates as in lower transaction costs? Either way, its a nice conflict of interest in any case.
The other thing I wanted to mentioned and this isn't directed at Chicago CTA is I have seen more accounts churned and burned through managed futures esp. when they are some black box signal brokers will just churn for commissions the more signals the better.
NFA sells a booklet, you have to pay $25 which as I understand sorts by state/region. Otherwise on their site you can only search by company name.
Chicago, How do you report your performance to your clients? Given you are a CTA and not a CPO (not a pool operator) do you simply average returns across multiple/all accounts? In other words, sayou manage 10 accounts, so you simply take the average return of 10 accounts? Thanks.