I trade only futures only - but know my potential to generate significant trading income (millions yes millions) is limited by the continous withdrawals from my account to meet living expenses. Its a double whammy on the account equity when I end up with a losing month. My wife works a regular job but her monthly salary cannot meet living expenses. Mortgaging my house to boost account equity is not an option nor is borrowing from my bank. Don't ask why. My dilemna is- Continue trading my own account and not answer to anyone except the wife and bills or set up a private hedge fund with a close mate who does not know anything about trading but is well capitalised and willing to take the heat and profit from my futures market operations? My motive for setting up the fund with him is that he is willing and able to inject substantial risk equity which would overnight make more options available that would otherwise take years to reach on my own hook (Increase in trading size & degree of market diversification). His motive is that he has seen only the success part of my trading and wants to partake but he has not seen the pain and sleepless nights I endured and still do sometimes. I'm uncertain about his attitude towards losses though he says no risk no profit, but in reality most mean gain no pain. Its difficult to teach a non-trader the meaning of losses and why they are necessary and how to handle them. But his money would make all difference and comes with 0% interest and no payback periods or amounts. Any thoughts, will this destroy our good friendship? Any one with similar experiences?
I do not have personal experience, but from everyone I've talked to on the subject, the consensus seems to be do not trade for friends or family. If something happens and you end up losing your friend a pile of cash, the relationship will inevitably be strained, no matter how convinced your friend is that he is ready to take a risk. On the other hand, you both have an opportunity to make some money. As in trading, it's a risk/reward scenario. Is the risk of straining the friendship worth the benefit of making money?
Have you traded other people's money before? It might do more than ruin the friendship, it might ruin your trading. You mentioned that you don't know how he'll react to drawdowns. How will YOU react to a drawdown when it's OPM? And how will you feel, will it possibly change your performance or willingness to be involved in this arrangement - or in trading at all - if you feel pressured by him at any point? I had that experience early on in my trading career, in the early 90s. I was doing fine but wanted more capital. I started a small fund. Ended up getting trigger shy because the investors were calling to "see how we're doing" and it really rattled me. I had to take a long break from trading. Just pointing out the possibility....
Nope - have not traded other people's money and don't know how I would react if in drawdown with OPM. Good point here as reaction to OPM losses could mean success or failure.
Don't do it. If you can make money trading you don't need your friend's capital. Make your wife get a job to pay the bills while you build up your account. Of course, make sure you have a plan that is profitable before embarking on either.
If your method is discretionary, you're probably asking for trouble if you go ahead with it. It might be different if there were some form of "insulation" between you and the investor(s), like a fund manager handling the direct interface with clients. But if the OPM is from someone you'll have direct contact with? Well, having seen it hurt my trading to the point where I had to stop trading entirely until those memories were in my distant past, I certainly wouldn't do it.
FWIW, I now have three clients who used to be CTA's managing well into 8 and one was into 9 figure accounts. They trade their own accounts now because they felt it just wasn't worth the effort in terms of dealing with clients.
For the record, I never traded OPM. Here's what I would consider: 1) Provide full disclosure to buddy in form of audited statements since inception of profitability. 2) Highlight draw-downs and max draw-downs incurred since profitability. 3) Sit friend down and tell him bluntly: anything can happen. Future losses can be larger than historical losses. The market may crash. You might lose 100% of the original investment. 4) If he's okay with that, accept 1/20th of his intended risk capital. Tell him why. Trade it. See if it affects your execution judgment. If it does, bail. If not, and profitable, scale up. Beyond that, I'd cover your ass legally so your friend doesn't come back on you for losses. How long have you traded for? How many trades? What's the return like?
Part time & learning trading 5years and full time(trading for a living) professional trading 3 years. The number of trades varies depending on strategy being applied and market conditions. As for returns let me put it this way - I'm a former mechanical building design consultant engineer and a former director of a medium size consultancy. I gave up that career paying north of $100K because the trading results and equity growth justified it and still do. Its scaling up big time thats on my mind.