I think it's the only real hedge fund model.
Individual traders don't make money every year. And strategies go in and out of favor. But a basket of strategies along with good risk management can withstand all that.
A Fund vs. Your Own Money
- Thread starter Opulence
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I think it's the only real hedge fund model.
Individual traders don't make money every year. And strategies go in and out of favor. But a basket of strategies along with good risk management can withstand all that.
For the managers, an ideal situation, of course, would be a coop of strategy managers. This would give each manager the benefit of diversification and the economy of scale. I doubt, however, if it can be done properly and efficiently for variety of reasons (free-rider problem, risk supervision and alignment etc).
I think top money managers make huge money when they invest in their own fund. Their revenue is not only compensation but also part of the fund P§L. In fact they usually end up closing their fund, opening it only to employees ala Simmons and becoming a de facto prop firm.
It should be more interesting to compare prop firm partners and money managers revenue than bank traders ( with compensation only )and money managers.
However, you certainly know a lot more about funds, compensation... than I do...
Yeah. These things don't work well by committee.
That's an interesting concept... are you referring to actually sharing returns? I personally would find the idea of emerging managers cooperating very attractive... although sharing performance seems like it would be difficult to coordinate. Other obvious ways to cooperate:
- fund raising / sharing leads. On an informal basis I already do this, recommending interested investors to other managers I know with uncorrelated strategies, for example. This wouldn't make sense for managers in the same strategy/space, but for everyone else... we really aren't competing for investment dollars.
- marketing. If nothing else, just attending conferences and putting up a table can be a substantial expense. A "co-op" would make sense here.
- back-office operations / investor relations. I need back-office people to assist with trade reconcillation, but that's really a 1-2 hr a day operation. Might as well share that.
- compliance / legal expenses. Operational risks are always the biggest red flag, no better way to build out a back-office than to share.
I've thought about this several times Heech as there are guys like you who run funds with equity curves similar to mine and would make a coop appealing. The basis of the idea is that there must be some version of profit sharing. One of the main draws for managers like us is that if we happened to hit a rough patch, expenses wouldn't bury us before we were up and producing again.
As an example, your strat, my strat, and one or two others with similar profiles when combined would likely have the ability to preserve most of the large returns, while at the same time a negative month would be quite rare. This is just the natural result of combining 4 programs that each have low correlation, high sharpe, and above normal returns.
In terms of profit sharing, it couldn't really be a straight rev split. It would need to be more complex than that and correctly align the incentives of each manager. A structure that would discourage free loading, but also discourage excessive risk taking. Something like a base rev split with performance bonus and then some version of a punishment for exceeding predetermined risk parameters.
The last requirement is the most difficult though. Each manager would need to be respectable enough to want to be in business with.
Well, it sounds like you and sle were thinking more along the same lines, in terms of some form of profit sharing...
... I'm a little more skeptical. I think I could be sold on the idea, and your argument makes sense. But just the idea of tying my fortunes to the performance of others... I'm just ideologically a little opposed to that idea. But you guys should talk it out, and if there's really a workable model, I'd definitely be open to exploring it.
EDIT. It's almost like a self-selecting fund of funds, I guess... except we don't add on an additional layer of 2/20?
... I'm a little more skeptical. I think I could be sold on the idea, and your argument makes sense. But just the idea of tying my fortunes to the performance of others... I'm just ideologically a little opposed to that idea. But you guys should talk it out, and if there's really a workable model, I'd definitely be open to exploring it.
EDIT. It's almost like a self-selecting fund of funds, I guess... except we don't add on an additional layer of 2/20?
I understand where you are coming from, but the concept of rev sharing is really the driver of any type of relationship like that. In my experience there really isn't a strong driver to form a co-op to simply split costs. I do that already in a sense, by hiring out marketing, legal, and some admin I am sharing the cost of having in house providers with the other clients. I wouldn't save all that much more by simply getting a "group discount".
The right formation of a co-op would offer the main benefits of an outstanding equity curve and risk profile, much higher caps, much more institutional interest, and significantly easier marketing and rapid equity growth.
A more steady revenue stream would eliminate what you refer to as knowing that you are really just a few months of bad performance away from closing shop as a small startup.
Yes, that's the positives - the negatives are obviously free rider problem, risk control and smart split. Even with a single partner who is my close friend, i am struggling with various forms of these problems. If you could structure it such as to resolve these issues, this is a dream come true for either emerging managers or independent large traders.
You could think of this as a multi-strategy hedge fund where every PM is a partner.