The second being where the investor may have multiple accounts and assets with a broker, the broker allows the investor to fund your account notionally. So in essence the only real cash sitting there is yours but you can trade as if it is actually fully funded. This has pros and cons, but the main con being the ease at which the investor could walk away without solid binding agreements on Drawdown etc.
Growing AUM with "first loss" funds
- Thread starter heech
- Start date
A 50/50 split of losses is somewhat similar to the idea mentioned earlier: I take up to 10% of assets as losses, but they can't pull out until I break 20% loss cap.
No, has nothing to do with HedgeCo, very poor impression of them as well. I still havent talked to the fund itself yet, but the party bringing us together is a well known institutional firm doing cap intro. Anyways, this is all good info going into my call with the fund in a few hours.
Edit: I should also clarify, the firm doing cap intro approached me (they're on my distribution list), not the other way around.
I still think you should ask for a 50:50 split of losses and profits, that way, they don't have the risk that after you lose your 10% , you now trade recklessly - becuase you have nothng else to lose. It's better to have the losses split pari passu as they occur.
I also think you should limit it to a 5X leverage....just my thoughts.
Plese let us know how it goes. Good Luck!
There has been a thread on this before.
This is nothing more than a skewed leverage agreement masked as an institutional investment. The reality is that you are not exactly being trusted with investors' moneys. Additionally, there may be covenants to using this leverage, such as which software & clearing firm you have to use (most likely theirs).
The benefit? Superior leverage available as opposed to going to your standard prop firm. Although you may be able to get better terms & similar amounts at Bright, these types of arrangements are hard to come by at the average prop firm, particularly the amount of leverage.
I don't think it's a worthwhile arrangement and I also do not think that the supposed "investment" will make it look like you're actually managing >$20mm.
By the way heech, I don't think you're a newbie in these matters. You're getting experienced in the industry, I like reading your posts.
Could you elaborate on this point? The only reason I'm doing this is to legitimately claim to have a $20mm fund for further fund raising purposes. If you don't think this passes muster, then I should pass.
Thank you for the compliment. I've been around the block in business, just not this industry. There's still a lot of expertise to pick up, and everyones been very kind in sharing insights.
Well it's not an investment that is equity based. They don't share in the losses and want half the gains. It's really a debt investment backed by your capital. So you can't really claim that you have a $20mm fund, more like a special leverage agreement.
Also, the funds they may be extending to you may not even be equity but leverage from their own clearing & prime broker agreement. I know of a few entities that get 10x-20x leverage on their actual equity through a prime broker, which they can distribute to start-ups. However the clause is that everything has to be traded through the prime broker. It's the TARP funds at work, lol.
Finally, many investors looking at you will want to know the terms of this institutional investor. They may simply find out who this firm is and right away know the arrangement you have. I may be wrong and this may all be masked very well, but these are the other concerns I would have. This is all aside from the fact that if you want 10x-20x your actually equity, there are better deals out there.
At 19% lost away 1% drom funds being pulled out, maybe. However, at 10% loss any dollar the manager makes on 20mln goes to the manager's pocket (as recouping losses but whatever). It's very advantageous situation to be in because the role size of capital shouldn't be underestimated.
If a manager ran a fund without any of his or her money, would he/she gamble recklessly from the first trade? Same goes for the situation after drawdown,
Further, this depends on the personal psychological profile of the fund manager. Imagine you sign up for a casino and get $100 dollars joining bonus to play with. You can't cash and take away the bonus but you can take away any money you win playing with this $100. One person would put everything on the black in the roulette because $100 is free and the (unlikely) win will be very substantial. The other one would do a large number of small best in an attempt to take away as close as possible to full sum minus statistical edge of the casino. It's a personal choice
So, after the call, the terms are more clear... and it really comes down to preference, weighing the risks/rewards.
- They have no problems with my strategy/fund, are interested.
- Very firm on 10% draw-down. Cross your equity buffer, you're out. They will not take losses, period.
- It's actually a 55% payout.
- 15%-20% of their managers get follow on money from a larger FoF that backs them.
- Not at all exclusive, they have no problems with me using this as the "institutional track record" (their words, not mine).
So, back to where I was before. Chug along with my $5mm AUM, and hopefully cross that $10mm boundary in a couple of years? Take a chance and grab the larger fund now, and grow more quickly? I don't think there's a clear/simple answer.
I'd love my fairy godmother to show up and just give me $10mm.
- They have no problems with my strategy/fund, are interested.
- Very firm on 10% draw-down. Cross your equity buffer, you're out. They will not take losses, period.
- It's actually a 55% payout.
- 15%-20% of their managers get follow on money from a larger FoF that backs them.
- Not at all exclusive, they have no problems with me using this as the "institutional track record" (their words, not mine).
So, back to where I was before. Chug along with my $5mm AUM, and hopefully cross that $10mm boundary in a couple of years? Take a chance and grab the larger fund now, and grow more quickly? I don't think there's a clear/simple answer.
I'd love my fairy godmother to show up and just give me $10mm.
Another issue to look at is whether this may have any effect on rights of existsing and future investors.
When you give special terms to the people who invested in the fund on day one, it's a common practice they get preferencial terms, which will not be available for investments in teh fund made at any later date.
However, if the fund already has other investors than yourself, you may find that you have fiduciary duty to offer the same terms to any other investors (either in the future or to the current investors who may find the terms offered to the new investor more desirable).
When you give special terms to the people who invested in the fund on day one, it's a common practice they get preferencial terms, which will not be available for investments in teh fund made at any later date.
However, if the fund already has other investors than yourself, you may find that you have fiduciary duty to offer the same terms to any other investors (either in the future or to the current investors who may find the terms offered to the new investor more desirable).