A Fund vs. Your Own Money

[sf631]

Great success story Heech. That's the exact path I'm heading down. Niche quant w/ finite capacity, using OPM and personal capital in roughly equal parts, each supplementing the other.

One question: do you take assets from investors that aren't accredited/qualified (depending on your domicile), and therefore not eligible to pay performance based fees? My situational reality is that 95% of my network has assets that could be invested but don't cross the qualified threshold.

My current solution is to offer two strategies. One that's the "prescription strength" formulation, leveraged Long Short etc.... with 2/20, limited to those who can pay the 20, and a second that's an "over the counter" strength for those that can only pay AUM fees - unleveraged, less aggressive, long only, suitable for virtually anyone who wants some alpha in their life. Both deriving from the same research, similar models, etc... but with different return targets and return profiles (the one with short selling is a MUCH higher sharpe for obvious reasons, but I've found that most non-sophisticated investors don't particularly relate to Sharpe)

 

[heech]

I personally have not, and would not, accept investments from non-accredited investors. And it's not just a regulatory thing, but commo sense as well. Someone making $50k-$100k a year, with a couple hundred k in the bank, do not need to invest in alternative investments. They don't have the ability to diversify appropriately, and due to lack of experience aren't suited to judge risk / conduct due diligence. And at the end of the day, do they really need to make an extra 100-500 basis points a year? If they invest $25k, that might translate into... what, an extra $250-1000 a year?

Risk / reward simply doesn't make sense.

 

[chipmunk]

so what's your ROI gains like?

Drawdowns etc?

Thank you

 

[sf631]

I'd agree with the numbers you're throwing around but I am domiciled in a place where the requirement for performance fees is qualified, not accredited.

Suddenly when there's a $2M net worth requirement not the $1M net worth (or 200K income) requirement there is lots of room for $250K accounts from $1M net worth and 300K income types

It's also true, in my opinion, that everyone *should* care about sharpe ratios, std deviations, drawdowns, etc... regardless of account size. They typically don't, but should.

Regardless, I think 25K (account size) is far too small. 100K is a more reasonable cutoff.

 

[heech]

Quote from chipmunk:

so what's your ROI gains like?

Drawdowns etc?

Thank you

I'm really not here, subtly or not, trolling for investors... so I'd prefer not get into that. I hope that makes sense.

If you're really interested, send me a PM, and I'll send you a link to my firm's database page on IASG.

 

[chipmunk]

Quote from heech:

I'm really not here, subtly or not, trolling for investors... so I'd prefer not get into that. I hope that makes sense.

If you're really interested, send me a PM, and I'll send you a link to my firm's database page on IASG.

PM me...thx

 

[Smoker]

Hi chipmunk

Quote from chipmunk:

What kind of %'s are asset allocaotrs/ institutions looking for?

Like 12% per annum less than 7% drawdowns?

Or 18%+ per annum less than 10% d.D's etc?

Both?

We had this "discussion" before with a very nasty little poster (who thought he was the gods gift to this forum) What % per risk is deemed reasonable?

Ed Seykota says 2.5% per trade...

Others say 0.5%

Some say even less. Any thoughts on this?

The answers to all your questions are in the public domain due to the fact that the track records of all the successful hedge funds/CTAs are public so either eye ball them or run a risk algormithm over their individual track records and all the answers fall out.

I don’t know this Ed Seykota and had to google him and then realized he was one of the Market Wizards in the 1980s book.

I don’t know how much money he runs or any institution that allocates to him so don’t feel that I should comment on his answer to you.

My answer is to scale your stuff in testing to produce the same kind of equity curve the biggest and successful Hedge Funds/CTA have so you can see where your method stands verses the pros.

Quote from chipmunk:

Generally what is Inst. money looking for?

They are looking to sign the Beatles and not get fooled by a one hit wonder.

The required equity curve is in the public domain (see above).

Quote from chipmunk:
With ll the set up costs anything less than $100m+ A.U.M. isn't worth it..2% and 10%?

I am repeating myself but this is a very simple issue.

You have to spend money to make money which means passing due diligence.

Due diligence is what separates the pros in the NBA from the wantabes playing pick up ball in the local park.

This is a catch 22 for most independent traders. They have to spend the time, money and resources it takes to pass due diligence but they don’t want to spend the time, money and resources it takes to pass due diligence unless they know for sure they will score an allocation.

This dilemma becomes a judgment call on the part of the trader. If you have an edge and have the numbers that show you have an edge and you are pretty sure you can compete with the big dogs and you seriously want to be rich then go for it.

If you are not sure if the big leagues are for you and you are happy with your current level of success then just skip the whole idea and keep doing what you are doing.

In the professional asset allocation world your risk/reward fit with the existing asset allocator’s portfolio of Hedge Fund/CTAs is far more important than your profile as a stand alone.

I think the problem many independent traders face is they try to raise money from amatures that look at them as a stand alone investment rather than the professional asset allocators who view each potential allocation decision as just one of dozens of Hedge fund/CTAs with who they have investments.

It is far better to raise money from the pros that look at you as part of a portfolio than trying to convince amateurs that they should try investing in your individual risk profile.

Finally you have to be able to handle size.

The minimum allocation in the professional market is in the millions and for the majority in the tens to hundreds of millions. Any less and the asset allocator is spread too thin and wouldn’t have enough qualified people employed to do the required due diligence. You just can’t practically manage an external allocation book of thousands of different traders/hedge funds/CTAs etc.

When the standard size of the successful asset allocators pool is in the billions they need to find funds that can pass due diligence and divvy out the cash in blocks of 20, 50, 100 etc million at a clip so they can have an external portfolio of 30, 40, 50 etc hedge fund/CTAs rather than the thousands required if they made smaller allocations.

Now as an aside it is my personal belief and I share it with most professional asset allocators that unless a guy can handle size don’t ever invest with him.

If the trading methodology can’t be scaled up then it is a red flag that the method is not robust and it’s an “emperor has no clothes” situation.

Remember they are looking for the Beatles and not a one hit wonder and the scaling issue is the filter of choice to avoid wasting time and money trying to guess if you have wandered into a mine field.

Cheers Smoker

 

[rwk]

Quote from Smoker:
Now as an aside it is my personal belief and I share it with most professional asset allocators that unless a guy can handle size don’t ever invest with him.

If the trading methodology can’t be scaled up then it is a red flag that the method is not robust and it’s an “emperor has no clothes” situation.

I don't understand this last part. It is easy to see why an asset allocator would not be interested in a program that cannot handle size. But are you saying that a method that does not scale well cannot be a valid edge?

I have spent the past 10 years searching out and exploiting edges that are hard to scale up. It is metaphorically referred to as gathering dimes in the path of a steamroller. This is how I pay my expenses. It is not a program I could sell to an allocator, but it seems robust enough. Should I give the money back?

 

[Smoker]

Hi rwk,

Quote from rwk:

I don't understand this last part. It is easy to see why an asset allocator would not be interested in a program that cannot handle size. But are you saying that a method that does not scale well cannot be a valid edge?

Just my opinion and my experience and nothing more so of course such a methodology could be out there it is just I have never experienced it or seen it.

However I also believe that the professional asset allocator market also shares my opinion.

Never forget they want the Beatles and not a one hit wonder so robustness trumps flash every time.

Quote from rwk:
I have spent the past 10 years searching out and exploiting edges that are hard to scale up.

I am repeating myself from earlier in the thread but the following quotes I wrote in earlier posts on the thread are still my opinion:

Quote from Smoker: All I can say is from listening to the cream of the hedge fund/CTA world coming through the door out here to pitch for an allocation is that necessity is the mother of invention.

It really comes down to the Doctor Evil quote: “why make billions when you can make millions”. If someone chooses not to leverage their talent then they are making a decision to accept Doctor Evil's logic as correct.

Over and over people think they are at capacity but when it comes to leveraging talent so you can become seriously rich most figures out a way to do exactly that.

The other thing is it has been my personal experience that true edge is robust and if it doesn’t work in most time frames and most markets than it isn’t robust enough to put capital behind.

Quote from Smoker:
Hi cornixforex,
You know I keep saying this to people on this board that think they are at, or closing in on their strategies liquidity restraints but think of your edge as less of a scalping set up and more of a methodology and it might be a lot more scalable that you currently realize.

I cut my teeth in the 80s in FX interbank market making and then options market making on the CME. Along with market making I used to scalp futures and day trade futures throughout the day as opportunities appeared.

Later when I went into money management my first CTA mentor who hired me as a short term swing guy to supplement his long term trend following angle convinced me to systemize my setups into an algorithm and test them in longer time frames.

It worked out ok and then years later when the floors started to die and high frequency came along my programmer took my swing/day/long term stuff and brought it into high frequency time frame.

So think about trying the same with your scalping set ups and you might get a pleasant surprise and suddenly that liquidity issue disappears over the horizon.

At this point in my trading career unless some idea works all along the time line I drop it since working every where and across most markets is one of my personal litmus tests for robustness.

Anyway it’s just a suggestion?

Quote from rwk:

It is metaphorically referred to as gathering dimes in the path of a steamroller.

This quote is from my former boss at CRT Joe Richie and the strategies he was referring to were used to managed billions in markets all over the world.

CRT picked up a whole lot of dimes and the CRT partners made themselves seriously rich.

Quote from rwk:

It is not a program I could sell to an allocator, but it seems robust enough. Should I give the money back?

That is your decision and not mine. All I gave you was a personal opinion that does not match your own.

Figuring out how to scale strategies and then managing institutional money for me simply boils down to if you are happy making a good living or you want to leverage your talent and get seriously rich. So as long as you are getting what you want from trading all is well. Just understand what you want to get from the market might not be what others are looking to get.

All the best!

Cheers Smoker

 

[sle]

Quote from Smoker:
If the trading methodology can’t be scaled up then it is a red flag that the method is not robust and it’s an “emperor has no clothes” situation.

Personally, I'd feel that it's exactly the opposite. The bigger is the capacity, the less of an alpha and more of a beta trade it becomes. There are edges out there that exist for decades simply because of capacity constraints and are simply waiting for someone to harvest them. If anything, ability to generate alpha negatively correlates with size and at some point any sort of fund trading boils down to large beta bets, sometimes smart and sometimes not so much.