Educate me. I thought 50% a year was good

what about track record? at what point does track record take precedence over a manager's background and reputation?

what can a guy who doesn't fit the profile below but has a descent track record do?


Quote from rufus_4000:

Wow, I am having flashbacks, it has been almost a year since I left the
scene. Heh. This is probably the last brain dump, since I need to tune my
model. :)

Choosen the right "stable" of startup funds is more of a black art than
anything else. If anything, there are pecking orders in the hedge fund
industry as to how important they are.

Tier-1: Ex Portfolio Managers of Top funds, like anybody in the top 20. So
an ex-PM from, say, DE Shaw, or Citadel would get a *tonne* of
attention, regardless of size of their new fund.

Tier-2: Ex Portfolio Managers of top asset management firms. So, say,
the former head of stat arb at Goldman, yep, a lot of attention.

Tier-3: Former top Prop traders, these guys probably made as much money as
Tier-1&2, but Investment Banks rarely publish their Prop desk returns. So
there are no verifible track record, so it is reputation based only. The big-3/4
prime brokers would rarely touch anybody who is not Tier-1-2-3.

Tier-4: Former head of desks, head of research, etc, of various investment
banks. These guys tend to be on the sell side, so no track record to speak of

Tier-5: Mutual fund stars, back in '99-'00, a lot of these guys are hot, but
they mostly flamed out since very few of them know how to use leverage or
risk manage in a down market.

Then current capital under management and the commissions
they generate get evaluated. It is not unusual for a hedge fund to generate
5000-20000 trades daily. So future growth is absolutely the key here.
$1B hedge funds seem to grow on trees these days.

Now, I am more familiar with the first tier prime brokers (Goldman, Morgan,
Bear, UBS, Citi, Merrill, BofA barely, etc). The second tier prime brokers like
Fortis, Refco, DrKW, ABN AMRO, etc are less selective, since 90-95% of the
"star" funds go with the big-4 or 5. There are such thing as third-tier
prime brokers, Bleischroder, Scotia Capital, etc, then they would be even
less selective, but their ability to do good capital introduction or complex
products will be very limited.

A good story is that a friend of a friend who was the head of economic
research for an tier 1.5 investment bank, started a hedge fund (of around
50M), both Goldman and Bear passed on being his primebroker, so he had
to settle for a tier-2 prime broker. His goal is now to have 2 years of
track record (and he is doing pretty good so far), then maybe GS, Morgan,
or Bear will take him.

Disclosure, I am currently clearing through a tier 1.5 firm now, but I am
not a hedge fund (and don't plan to be), and I have basically no financing
needs nor overtly complex portfolios.

If I were a part of a hedge fund, I would ask questions like:

* Integrated product offering, the last thing I want is my fixed income
portfolio and my equity porfolio maintained seperately, they should
be financed as a package, for instance. You will be surprised how many PBs
do this poorly.
* Access to desks, can I call up the head of the stock loan desk and ask for
all the "hard to borrow" inventory by 7am? Can this be done regularly?
Who do I call when I need a read on Chilean GDP growth as correlated to
Philipino currency flunctuations?
* Risk management, how is my portfolio risk calculated, this is especially
important for funds with exotic trading models, since financing charges can /
will kill you.
* Access to markets / different technology, if I have, say MacGregor,
how quickly can I get the positions from the trades processing engine? 2 secs?
5 mins (why?)? Can I get access to the snowball basket option pricing
engine that the investment bank have?

Basically, I would be quite frank with the prime broker, as to my general
model (and I would expect them to understand it! not just headnodding),
my growth, and where I think my needs are (finacing / capital / people /
technology / administration / etc).
More...
 
Quote from jerryz:

what about track record? at what point does track record take precedence over a manager's background and reputation?

what can a guy who doesn't fit the profile below but has a descent track record do?
More...

You need to do research into what the prime broker does and *want* to do,
if you fit into their future product / technology / growth strategy, they
will take you, even if you don't fit the "standard" profile. You will be the
"guinea pig", if you will.

The second tier or third tier look at track record and commission generated
much more heavily. Since they are not the first call a new hedge fund manager
makes, they look harder. Still, these guys are still looking for funds that can
generate minimum 50k a month in financing + commissions. In general,
if you are starting out, say with $20M, then BofA might a good place to start,
also it helps *not* to be in NY / CT, since the prime brokerage sales guys
at other places have a harder time meeting their sales targets.

Each primebroker has "soft" spots for certain products, or certain markets.
So if you play into their "new product development" area, then you re in
luck, you not only get a good deal, but also a lot of support. E.g., when
Goldman was building up their prime brokerage, if you have a large and
diverse portfolio, but doesn't trade often, they might take you. When
Morgan was build up their accting side, if you have a lot of LPs, they might take
you, etc.

Once you are in, then track record is pretty much everything, of course
size matters. Every primebroker I know of do an internal return ranking
by strategy at the end of the year, for instance, the hedge fund I was with
got lucky, and placed 2nd in returns for risk arb one year, and the money
literally poured in (went from 60M to 200M in a couple of months).

Heh, 3 years ago, I was almost in the "eye of the storm" in terms of hedge
funds. I was engaged to a hedge fund lawyer (since parted ways, but we
are still good friends), and was living / breathing / sleeping hedge funds, first
in a fund, then helped to build a prime brokerage service ... weird times.

And yep, you guessed it, every time my ex-fiancee calls, she is encouraging me
to start a fund ... :)
 
Electric------------ I can understand some of your previous thoughts in terms of wanting to go run with the wolfs as they use and give you praise for your great strategy {and hopefully make tons of money}. These type of feelings are all based on pride and the need to impress other humans------------auggghhh!

There is only one thing that humans can do 100% right all of the time--------and that is to fail. So why waste your time trying to impress everyone that fails. I think you can trade opm, but it needs to be done as a proper paid for service that is not based on needing any response from your investors of praise or admiration. Let them give you silent praise by staying in your fund through your good results, and them paying you 20 to 30 percent of the profits for management fees. Do not "need" their praise or recognition for your abilities----------just let them pay you based on your performance and let that BE ENOUGH.

Being the reason that you and others make very large amounts of money together can be a very perilous trap if you are not trading for the right reasons in my opinion. Heading in the direction you were initial interested in has a very rough risk to reward ratio from what I can see--------I think you see that now, thanks to much of what Rufus has described and that is a very good outcome in my opinion!
 
why do some funds use several prime brokers? is it simply to obtain more services or is there more to it than that? info on the web about how prime brokerage really works is difficult to find.

tell me if i'm interpreting what you're saying correctly. while a hedge fund can get meetings with FoFs and pension funds by itself, the chances of an allocation are a lot higher if the hedge fund was introduced by a prime broker. this is partly because the prime broker and FoFs are doing favors for each other, and partly because at the end of the day the FoFs really don't have clear reasons to invest in one hedge fund over the other, so they find security in going with recommendations from a brand name prime brokers. would you say this is what's going on?

i am curious. how much credit would you give to the prime broker for the AUM growth from 60M to 200M? how much money do you think you could have raised by yourself showing your track record if the prime broker cap intro wasn't there?

i would be very interested in hearing how you got your fund started and how it ended if you don't mind talking about it.

Quote from rufus_4000:


Once you are in, then track record is pretty much everything, of course
size matters. Every primebroker I know of do an internal return ranking
by strategy at the end of the year, for instance, the hedge fund I was with
got lucky, and placed 2nd in returns for risk arb one year, and the money
literally poured in (went from 60M to 200M in a couple of months).
More...
 
Most funds (say, Citadel) that uses several prime brokers for confidentiality
reasons, since some funds are known to have size of positions that can
move markets (e.g., the fairly notorious Turdor $800M short of Nasdaq 100),
and such information can / will be traded on. Funds also use different
prime brokers to "cherry pick" the best deal, e.g., Merrill has a huge inventory,
so their equity financing can get some of the best rates, Goldman has good
portfolio risk management, so for certain swaps, Goldman will price them
better than others, etc, etc.

The main thing that prime broker get for the FoFs and Pension funds
is the "trust" factor. I am not saying that FoFs don't trust ABC Capital
Management, since it is fairly easy to make inaccurate representations. But
if the data is provided by, say, Bear Stearns, the reputation is there so the
information is much more trustworthy.

Also, large FoFs and Pension funds want good transparency, and the only
good place to get transparency is the prime brokers (or for several, the
"prime" prime brokers). FoF need to get today's NAV, yes, people are
demanding daily NAVs now for hedge funds.

The fund I was with (I was a jr partner) did poorly after the capital infusion
precisely because we had no idea what to do with the new capital, the
original model has a capacity limit, and the market for Risk arb dried up.
We were sitting on cash, around the same time, rumor had it that Andor was
sitting on 55% cash (that's $5-6B), so we started experimenting with trades
that we really didn't understand. We really didn't lose money, but the growth
stopped. The prime broker did a lot to get us to right presentations, and we
met with some very good endowments, pension plans. We probably could
have grown to 100 on our own, but not 200. We believed that we needed
200, but we really didn't.

Believe me, while we all wish we have, say $50M to trade with, having $50M
to trade with brings an entirely different set of headaches. Try short
5,000 contract of 10 year note future, and hedged with, say corporate high
yield bonds, it is still unnerving.

Quote from jerryz:

why do some funds use several prime brokers? is it simply to obtain more services or is there more to it than that? info on the web about how prime brokerage really works is difficult to find.

tell me if i'm interpreting what you're saying correctly. while a hedge fund can get meetings with FoFs and pension funds by itself, the chances of an allocation are a lot higher if the hedge fund was introduced by a prime broker. this is partly because the prime broker and FoFs are doing favors for each other, and partly because at the end of the day the FoFs really don't have clear reasons to invest in one hedge fund over the other, so they find security in going with recommendations from a brand name prime brokers. would you say this is what's going on?

i am curious. how much credit would you give to the prime broker for the AUM growth from 60M to 200M? how much money do you think you could have raised by yourself showing your track record if the prime broker cap intro wasn't there?

i would be very interested in hearing how you got your fund started and how it ended if you don't mind talking about it.
More...
 
Quote from ElectricSavant:

Catmango,

Sure I am confident.

If you knew my system and read my thread you would understand why it is not a problem. Now that I slept on it, I do not want any part of OPM.

I do not want to sell myself to clients, CTA's, HF's or Banks (I am a CTA, just need to pay the 1k and re-activate, and make some disclosures doc's). I just want to trade and it will be with my own money. As far as the Journal here in ET and my personal motives (everybody has to have a personal motive) well, I guess I will keep posting, but I do not know why anymore.
More...
Sorry, Savant, I didn't know I was asking such an idiotic question. I trade equities, where slippage grows with scale, and the spot forex is foreign to me. I was just commenting on the fact that anyone who is confident that their returns were scalable based only on data from a 5k account was probably basing their conclusions on faulty assumptions. But, if you are confident that the spot forex can accomodate your strategy on a compounding basis, then more power to ya.

Unfortunately, at 50%/yr, you're going to need at least 100k in starting capital (100% yours) in order to pay the bills and grow your account measurably. If you're trading OPM, then you'll be needing even more.

BTW, if you take that kind of attitude to potential investors ("Of COURSE the returns on my 5k account are scalable -- it's the spot forex dammit!") then good luck getting into the "inner circle".
 
Cat---------I trade opm and I did not need 100K for any expenses at the 50% return level-----------please explain that comment so I can understand the specifics of what you are talking about-----thank you.
 
Quote from MacroEvent:

Cat---------I trade opm and I did not need 100K for any expenses at the 50% return level-----------please explain that comment so I can understand the specifics of what you are talking about-----thank you.
More...
I'm assuming that if he was trading as a fulltime gig, then he would need his profits to cover his living expenses. 100k would only yield him 50k for the first year (assuming that it was all his money), leaving only enough to live a minimalist lifestyle and keep the account growing. Obviously if he was just doing this on the side with zero drawdown for living expenses, then he would need less starting cap.
 
California monthly: 2 persons w/one working

Mortgage and property tax 2,000.00
Car & Ins 600.00
Utilities 450.00
Fuel 200.00
Food 750.00
Misc 166.00
______

50K/yr.

If you have a lower mortg or rent...then add Health and Dental Insurance, Homeowners Ins. Renters Ins...Car Maintence..etc


Just forget pet ownership and let the kids pay for college. Also go naked cause there aint any money for Tommy Hilfiger.

By the way when the house needs a new roof...let er' leak (maybe you can take out some more equity and raise the mortg payment, equity is alway there, California is an equity machine)

Forget earthquake ins...

Traffic Tickets and car registration are double. don't be late on anything.

If the parents don't have long term health care ..don't let them move in.

Now as far as that asian vacation...try little tokya in Los Angeles if you can afford the fuel..it must be near 3 bucks a gallon by now!

Savings account whats that? a pre paid phone card, when the cell phone gets shut off? Novel idea...hmmm. Savings account.

OH YEAH! Pay the IRS quarterly or you will need to get an installment plan at the end of the year, unless you have a big prepaid phone card!...Figure on 2 or 3 C notes a quarter.. Traders!
 
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