Growing AUM with "first loss" funds

[Cache Landing]

Quote from Maverick74:

Heech, I'm very familiar with these deals. I may know who you are talking to if they are based out of CT. For me the deciding factor would be the reputation of the group you are dealing with. The guys I know in CT that are doing this are managing several hundred million. What you want to ask them is how much money have they already placed with other managers with the same setup. That goes a long way. Also see if you can talk to them to get a reference.

Not sharing in the losses is pretty standard actually. It looks bad on paper but "if" you are dealing with a reputable group, they should be able to raise you 50 to 100 million in a few years getting a standard 2/20. That would be very hard to do on your own. Also, the deals I have seen like this don't require you to use all that leverage. So I would just scale down the strategy and aim for high single digits return with drawdowns under 5%.

Also, get a firm commitment from them that after the deal expires that they will commit a minimum amount of funds if certain returns are realized.

The only reason someone would take this deal is to tap into their network and resources. If you could raise 100 million on your own you would have done it already right? So this might be your best chance. It all comes down to their reputation man. If they are reputable guys and they have followed through on their word on past deals, then it's a great opportunity.

He's already got $5MM AUM and on paper there isn't much difference between $5MM and $20MM. Both are considered small funds. Likely scenario seems to be that he might get a conventional fund started 3 years down the road with a 2/20 and about $50MM. I'm assuming he is talking annual returns of about 25%, which would give him a take home of about 2.5MM in the future fund. With his current acct size, he'll already be making more on personal capital by then.

IMO, deals like these are for standout traders who are just very under-capitalized (AUM approx $200K) and need a kick start. A good trader with $5MM AUM hardly needs a kick start.

 

[Maverick74]

Quote from Cache Landing:

He's already got $5MM AUM and on paper there isn't much difference between $5MM and $20MM. Both are considered small funds. Likely scenario seems to be that he might get a conventional fund started 3 years down the road with a 2/20 and about $50MM. I'm assuming he is talking annual returns of about 25%, which would give him a take home of about 2.5MM in the future fund. With his current acct size, he'll already be making more on personal capital by then.

IMO, deals like these are for standout traders who are just very under-capitalized (AUM approx $200K) and need a kick start. A good trader with $5MM AUM hardly needs a kick start.

Well, here's the thing. He is right about how hard it is to raise funds when you have less then 25 to 50 million. It's really hard man. The only reason to do this deal is if there is the possibility of getting over the 100 million dollar barrier. I agree with you and that is why I said the deal is a no go if you are only interested in getting them to put in 20 million of "their" money. That's a shitty deal. He can do that on his own just by growing his existing fund.

 

[CPTrader]

Quote from Maverick74:

Well, here's the thing. He is right about how hard it is to raise funds when you have less then 25 to 50 million. It's really hard man. The only reason to do this deal is if there is the possibility of getting over the 100 million dollar barrier. I agree with you and that is why I said the deal is a no go if you are only interested in getting them to put in 20 million of "their" money. That's a shitty deal. He can do that on his own just by growing his existing fund.

OK. We agree on something...the truth is...there is NO WAY for Heech or his "investors" to guarantee that they can raise Heech money even if he meets pre-defined metrics. Even if they signed an agreement saying they would raise for him or invest $25M in his fund if after 1year he meets some metrics, how does Heech enforce that? This makes the over-arching point, that most CapIntro guys are charlatans. They really can't help you when you need them and can only "help" you when you do not really need them ...just like bankers and loans!

Heech, keep on doing what you are doing...in time, you'll meet a trueInvestor wh will invest $10-$20 with you to kick start your rapid growth. Just be patient. These deals are toxic in many ways. Run!!!

 

[Cache Landing]

Quote from CPTrader:

OK. We agree on something...the truth is...there is NO WAY for Heech or his "investors" to guarantee that they can raise Heech money even if he meets pre-defined metrics. Even if they signed an agreement saying they would raise for him or invest $25M in his fund if after 1year he meets some metrics, how does Heech enforce that? This makes the over-arching point, that most CapIntro guys are charlatans. They really can't help you when you need them and can only "help" you when you do not really need them ...just like bankers and loans!

Heech, keep on doing what you are doing...in time, you'll meet a trueInvestor wh will invest $10-$20 with you to kick start your rapid growth. Just be patient. These deals are toxic in many ways. Run!!!

Ditto

 

[heech]

Great brain-storming session, guys. You all pretty much hit every point, from every angle, I can think of.

I'm a risk-taking guy (have to be to get to this point, yes?)... so I *am* attracted by the idea of "go big or go home". I know Maverick74 feels me on that point.

And I'm a little disappointed by the fact I'm not yet being bombarded with investors. I know, that sounds silly... but with a 2.5 Sharpe, 55% annualized returns, 9% max drawdown over 16 months ... I thought I *would* be.

However, I also agree with those of you guys that there's really no rush getting into a deal that binds my hands under unfair terms. My conclusion is: this offer will still be here in a year. If I can maintain my current performance and still am not growing satisfactorily after 24+ months... then I will start looking under every rock for investors, period.

 

[CPTrader]

Good decision, Heech.

Are you reporting to all the HF databases?

Are you on the conference circuit, meeting investors?

Do you have many names on your distribution list?

Quote from heech:

Great brain-storming session, guys. You all pretty much hit every point, from every angle, I can think of.

I'm a risk-taking guy (have to be to get to this point, yes?)... so I *am* attracted by the idea of "go big or go home". I know Maverick74 feels me on that point.

And I'm a little disappointed by the fact I'm not yet being bombarded with investors. I know, that sounds silly... but with a 2.5 Sharpe, 55% annualized returns, 9% max drawdown over 16 months ... I thought I *would* be.

However, I also agree with those of you guys that there's really no rush getting into a deal that binds my hands under unfair terms. My conclusion is: this offer will still be here in a year. If I can maintain my current performance and still am not growing satisfactorily after 24+ months... then I will start looking under every rock for investors, period.

 

[heech]

Quote from CPTrader:

Good decision, Heech.

Are you reporting to all the HF databases?

Are you on the conference circuit, meeting investors?

Do you have many names on your distribution list?

All the major databases. IASG, not previously because I thought they might not be LAMP compliant, but I should revisit. Haven't made much of an effort on hitting the conferences; two young kids at home and a wife in md residency. I'd prefer to pay a marketer to do that for me. Probably a good 150-200 people of varying quality on distribution list.

Oh, on wether they'd live up to a promise of cap intro.... I'm not that concerned. I just want the size to show on more radars. It's like if you're a wanna-be actor, you have to get down to Hollywood. No matter how good you are at community theater, it's hard getting proper recognition.

 

[heiasafari]

From my understanding you have a few investors already so just out of curiosity Heech, what kind of legal setup do you currently have?
Regulators tend to be a pain in the a$$ so I wonder how you got them off your back

 

[Hydroblunt]

Quote from Maverick74:


The only reason someone would take this deal is to tap into their network and resources. If you could raise 100 million on your own you would have done it already right? So this might be your best chance. It all comes down to their reputation man. If they are reputable guys and they have followed through on their word on past deals, then it's a great opportunity.

Sounds like an incubator firm. It's still just leverage, at a crappy rate. But if the future potential is there, it can make sense for some.

 

[heech]

Quote from heiasafari:

From my understanding you have a few investors already so just out of curiosity Heech, what kind of legal setup do you currently have?
Regulators tend to be a pain in the a$$ so I wonder how you got them off your back

I dotted every I and crossed every t. I didn't cut a single corner, and paid for good professional support from legal/admin/audit. I have zero concerns.

To answer your question, its a Delaware LP with a California LLC as management company. Registered as a CPO with the NFA, appropriate filings with SEC and blue-sky regulators in every state I do business in.