Sure Jack!
Yvw!
Capital Available for Traders
- Thread starter mickson
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Sure Jack!
Yvw!
Admittedly, I didn't read the entire thread, so this might have been mentioned before.
This business model doesn't make sense to me. In running my CTA I discovered that my time was better utilized by outsourcing aspects of the capital intro. Allow me to relay current market dynamics in that space.
Capital Intro -- Space is filled by Investment Banks and databases. IB's sometimes charge a rev split, but usually not. They get a portion of commissions generated through active trading, and that is their main revenue stream. They usually require a decent performance history and minimum AUM. The larger the firm, the higher the minimum. They introduce capital, but then they are very hands off after that. The highest rev split I ever heard in this space was 20%.
3PM -- Space is filled by boutique IBs and failed fund managers with large investor networks. Differ from capital intro in that they take a much more active roll. They usually handle branding, marketing, etc.. at least to a certain extent. They do all the heavy lifting in getting the fund manger in front of investors, host forums/events, and pitch dinners. Typical charge for this is 20-30% rev split.
You are coming into the market offering essentially a listing database with a proprietary ranking system and a 50% rev split?!? How is this even close to competitive in the capital intro space? Literally, the absolute highest anyone should be willing to pay for this service is 10% rev split.
This business model doesn't make sense to me. In running my CTA I discovered that my time was better utilized by outsourcing aspects of the capital intro. Allow me to relay current market dynamics in that space.
Capital Intro -- Space is filled by Investment Banks and databases. IB's sometimes charge a rev split, but usually not. They get a portion of commissions generated through active trading, and that is their main revenue stream. They usually require a decent performance history and minimum AUM. The larger the firm, the higher the minimum. They introduce capital, but then they are very hands off after that. The highest rev split I ever heard in this space was 20%.
3PM -- Space is filled by boutique IBs and failed fund managers with large investor networks. Differ from capital intro in that they take a much more active roll. They usually handle branding, marketing, etc.. at least to a certain extent. They do all the heavy lifting in getting the fund manger in front of investors, host forums/events, and pitch dinners. Typical charge for this is 20-30% rev split.
You are coming into the market offering essentially a listing database with a proprietary ranking system and a 50% rev split?!? How is this even close to competitive in the capital intro space? Literally, the absolute highest anyone should be willing to pay for this service is 10% rev split.
The highest would be 0.5%.Good point Epic!They are dying breed and not worth the while.
Quote from Epic:
Admittedly, I didn't read the entire thread, so this might have been mentioned before.
This business model doesn't make sense to me. In running my CTA I discovered that my time was better utilized by outsourcing aspects of the capital intro. Allow me to relay current market dynamics in that space.
Capital Intro -- Space is filled by Investment Banks and databases. IB's sometimes charge a rev split, but usually not. They get a portion of commissions generated through active trading, and that is their main revenue stream. They usually require a decent performance history and minimum AUM. The larger the firm, the higher the minimum. They introduce capital, but then they are very hands off after that. The highest rev split I ever heard in this space was 20%.
3PM -- Space is filled by boutique IBs and failed fund managers with large investor networks. Differ from capital intro in that they take a much more active roll. They usually handle branding, marketing, etc.. at least to a certain extent. They do all the heavy lifting in getting the fund manger in front of investors, host forums/events, and pitch dinners. Typical charge for this is 20-30% rev split.
You are coming into the market offering essentially a listing database with a proprietary ranking system and a 50% rev split?!? How is this even close to competitive in the capital intro space? Literally, the absolute highest anyone should be willing to pay for this service is 10% rev split.
Your assessment of the money management landscape seems pretty accurate to me.
We have a simple value proposition. Emerging managers often find it difficult to attract capital, either because the assets they are managing are too small for the bigger guys to consider them or they just don't have a network of any sorts.
RAPA is proposing to consider managers that typically wouldn't qualify for the regular database services or the 3PM crowd. We have put our money where our mouth is and seeded the initial allocations $1.3m. This is modest in comparison to the size of the hedge/CTA industry and the seeding of better known managers. It's at least a start.
Frankly, the share split should be the least concern of these managers; if they are not growing their assets under management a 90% or 100% cut of zero isn't that attractive. If they are growing their assets without us then they don't need us or they may only want to use us for access to a capital source that they couldn't tap.
What we will need to do as a company is prove through time that our mechanism of evaluating managers/traders is different (superior) from the commodity like databases out there. We believe we have something special and we will need to convince investors to trust our seal of approval of a particular manager. As we convince more people we will have more capital to allocate and hopefully continue to attract managers with unique undiscovered skills.
This is not a short term solution. We have been successful as a group seeding some major Australian managers and we hope to replicate that success on a global stage.
Quote from mickson:
Your assessment of the money management landscape seems pretty accurate to me.
We have a simple value proposition. Emerging managers often find it difficult to attract capital, either because the assets they are managing are too small for the bigger guys to consider them or they just don't have a network of any sorts.
RAPA is proposing to consider managers that typically wouldn't qualify for the regular database services or the 3PM crowd. We have put our money where our mouth is and seeded the initial allocations $1.3m. This is modest in comparison to the size of the hedge/CTA industry and the seeding of better known managers. It's at least a start.
Frankly, the share split should be the least concern of these managers; if they are not growing their assets under management a 90% or 100% cut of zero isn't that attractive. If they are growing their assets without us then they don't need us or they may only want to use us for access to a capital source that they couldn't tap.
What we will need to do as a company is prove through time that our mechanism of evaluating managers/traders is different (superior) from the commodity like databases out there. We believe we have something special and we will need to convince investors to trust our seal of approval of a particular manager. As we convince more people we will have more capital to allocate and hopefully continue to attract managers with unique undiscovered skills.
This is not a short term solution. We have been successful as a group seeding some major Australian managers and we hope to replicate that success on a global stage.
But your business model doesn't make sense. There are really only three possibilities. Let me explain...
1) You are investing your own capital
The split should be 80:20. You keep 80% of gains and managers keep 20%. This is what you'd be getting if you approached a firm like mine with a good history and impressive returns. So if that is the case, why would you ever consider a 50/50 rev split? In this case you, as the investor, are giving up far more than you should.
2) You are replicating a feeder fund or fund of funds model.
Similar to above, the split should be 80/20 of new net profits. On top of that, as the feeder fund manager, you'd charge either a flat 1-2% or a 10% incentive fee on new net profits. In this case, under your fee structure, the investors are treated fairly in that they still get the bulk of new net profits, but the managers are getting screwed. Your charge as basically a FoF should be on top of the managers' fees, not as a draw against their fees.
3) You are running a listing database with capital allocation services.
In this case you aren't really providing much more than barclayhedge, IASG, etc... You have a proprietary ranking system, but other than that the only difference is that you seem to be taking over the allocation of capital from the investors. This would make you fall more into the realm of a transparent FoF, except that you are charging your fee to the managers instead of the investors.
It seems to me that your intended business model is #3. Let me explain why this is actually bad for the investors. Managers with less than $1MM AUM are inherently MUCH more risky than more established firms. There is truly no way to tell if they'll be able to scale (both mechanically and mentally). If they had a proven track record, there would be no reason to come to you in the first place.
But your fee structure is so unfair for them, that you'll be constantly pushing out the best managers and again exposing your investors to risky unknowns. Even if a guy like me a couple years ago would've used your site to get started, after about a year or so I'd have had the track record and AUM to get rid of you and there is no way I'd try to keep your investment if it still carried a 50% rev split. I have to assume that you have a non-circumvent or procedure that doesn't allow a manger to go around you to the investor.
IMO, it is just a bad business model for you, the managers, and the investors.
YOU are doing all the work of a FoF only to constantly lose your best funds.
MANAGERS are getting ripped off.
INVESTORS are exposed to high risk and unnecessary turnover, ultimately losing access to the best managers.
Everyone would be better served if you just started an FoF that targeted start-up managers, charging a reasonable fee structure so that when you found the superstars you could keep them and allow your investors to reap the rewards.
There are more than three possibilities. Please mention a few more. Do the one with a propretary information flow model soon.
I realize that when investing your own capital, your take is now 90%, but there are many established programs out there that will give you similar terms if your end goal is to simply get good performance for a 10% fee. A huge number of funds have had to drop their fees recently. And if your only goal is to invest internal capital, you could simply use Barclayhedge info via your own analysis algos and save yourself the headache and expense of trying to run your own database.
Even if you are trying to use this as a way to locate top talent and negotiate a better structure once they are ready to get rid of you, you still could've done the same thing with less effort through Barclays and IASG. Unless you are trying to gain backstage access to proprietary trading systems, but I'm not going to accuse you of that.
Anyway, just giving my 5 cents as someone who's been through the whole process in the recent past. I'm a CTA offering managed accounts. Yes, my firm is a going concern. I'm not interested in sharing details on a public forum. The basics are that I used to be exactly what you are targeting. Start-up manager with less than $500K AUM and great performance. Looking back, my program is exactly what people are hoping to find in a start-up. At that time, there is absolutely no way that I would've subjected myself to the exposure that you seem to require and still given up a 50% rev split unless you were talk about funding me with >$30MM. Currently, it would take about $100MM capital infusion and a 3 year lock to get me to even let you peak behind the curtain for a minute.
I think what you are expecting is unrealistic.
You want to know how our RAPA algorithm performed in backtest, check it out here.
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