Ideal Investment Fund Terms

C

CPTrader

Hello,

I am trying to seek people's opinions on ideal investment terms for a Fund that will balance the investor's interests with the Fund Manager's interests.

On one extreme you have some investors these days who want zero lockups, daily liquidity and minimal management fees. On the other extreme you have Fund Managers with multi year lockups, semi-annual or annual liquidity and >2% management fees.

Please feel free to suggest ideal terms that reach a good balance between Fund Mgr & Investor in the following categories:

Investment Term

Minimum Investment

Redemption Frequency

Notice Period for Redemption

Redemption Penalty (for early redemption i.e. soft lock-up)

Lock Up Period

Additional Subscription Amount

Minimum Account Balance (amount that must remain invested after any withdrawal to prevent mandatory complete withdrawal)


Hurdle Rate?

Sales Fee (front-end fee to be deducted from investment amount to pay 3PMs and marketers)

===

Thanks
 
Hi,

I can't imagine there's a single set of ideal terms. It really depends on the returns you're generating, as well as the instruments you're trading. If you're trading exchange-listed instruments, and if you're not a billion dollar fund... you really have no excuse for having any sort of extended lock-ups.

That said... I come from an angel investing background, and as an investor I was always looking for the right set of parameters such that everyone's interests were aligned.

So, for my commodity pool:

- monthly redemptions (with 45 day notice),
- no lockups,
- 0% management fee,
- 30% incentive fee.

In other words... I don't get paid unless you get paid. Furthermore, if I return less than 20% a year, the investor's gross fees paid are cheaper than 2/20. If I return more than 20% a year, then fees paid are higher. I'm also heavily invested in my own pool, to boot.
 
Quote from heech:

Hi,

I can't imagine there's a single set of ideal terms. It really depends on the returns you're generating, as well as the instruments you're trading. If you're trading exchange-listed instruments, and if you're not a billion dollar fund... you really have no excuse for having any sort of extended lock-ups.

That said... I come from an angel investing background, and as an investor I was always looking for the right set of parameters such that everyone's interests were aligned.

So, for my commodity pool:

- monthly redemptions (with 45 day notice),
- no lockups,
- 0% management fee,
- 30% incentive fee.

In other words... I don't get paid unless you get paid. Furthermore, if I return less than 20% a year, the investor's gross fees paid are cheaper than 2/20. If I return more than 20% a year, then fees paid are higher. I'm also heavily invested in my own pool, to boot.
More...

Thanks, heech

Your CPO's terms seem fair for a futures fund. As an investor I would have no issue with this. I particularly like the )5 mgmt fee. If you had a hurdle rate, then it would even be perfect!

What do you hear from investors concerning monthly redemptions. I am hearing from a lot of people include a 3pM I spoke to earlier todya who says investors are now clamoring for WEEKLY and in some cases DAILY liquidity. I personally think anything less than MONTHLY liquidity is insane and puts the investment strategy at risk.

Your thoughts on monthly liquidity. Also on the notice period is this 45 cal days or 45 biz days?? I'm curious why did you choose 45 days as opposed to say 10 biz days or 60 cal days??

Thanks for sharing.
 
None of the investors I've spoken to have had issues with monthly redemption. But since my fund was (officially) only initiated 8 months ago, perhaps I just haven't spoken to enough investors. I wouldn't do daily redemption either... not worth the operational head-ache.

As far as 45 (calender) days, this is just something that's convenient for my strategy. I want to stay diversified across multiple instruments. With 45 day notice, I have enough time to reduce my desired weights in advance without having to liquidate any positions at all.

But all of this can be waived with manager's discretion anyways... I really don't expect to have any major disputes about this.
 
Thanks, heech.

What have you encountered as the major obstacle to investors - - any of your investment terms or the strategy or just the general market environment??

I am hearing investors are very "scared" these days, hence the demand for ridiculous terms. Are you seeing that in your universe?


Quote from heech:

None of the investors I've spoken to have had issues with monthly redemption. But since my fund was (officially) only initiated 8 months ago, perhaps I just haven't spoken to enough investors. I wouldn't do daily redemption either... not worth the operational head-ache.

As far as 45 (calender) days, this is just something that's convenient for my strategy. I want to stay diversified across multiple instruments. With 45 day notice, I have enough time to reduce my desired weights in advance without having to liquidate any positions at all.

But all of this can be waived with manager's discretion anyways... I really don't expect to have any major disputes about this.
More...
 
The major obstacle would probably just be length of track record. Most larger investors want 3 years before they'd invest. The key is just to get those people on my distribution email list, and if I'm still around in 2 years... look them up.

That said, as I think I mentioned in a previous thread... I really haven't put a lot of time into fund-raising. I'm fortunate that I have enough of my own assets in the fund that I don't feel any urgency.

I'm trying to get to more conferences in the next few months, and I'll be happy to share what I find after I get out there in front of more people.
 
Quote from heech:

The major obstacle would probably just be length of track record. Most larger investors want 3 years before they'd invest. The key is just to get those people on my distribution email list, and if I'm still around in 2 years... look them up.

That said, as I think I mentioned in a previous thread... I really haven't put a lot of time into fund-raising. I'm fortunate that I have enough of my own assets in the fund that I don't feel any urgency.

I'm trying to get to more conferences in the next few months, and I'll be happy to share what I find after I get out there in front of more people.
More...

Thanks again for sharing, heech.

I've never understood the magic of 3 -5 yr track records. In the pure sense it only provides false comfort and proves not much.

So are you just marketing via databases?
 
Quote from CPTrader:

Thanks again for sharing, heech.

I've never understood the magic of 3 -5 yr track records. In the pure sense it only provides false comfort and proves not much.

So are you just marketing via databases?
More...
Oh I disagree, re: 3-5 yr track record. I think it's hugely significant.

There are a very large number of funds being founded every year... for the sake of argument, let's say 500 (new funds ranging from $10k to $100mm). Let's say all of these fund managers are actually poo-flinging monkeys, making buy/sale decisions based on where their poo lands on a target.

Just statistically speaking, assuming i.i.d. , 250 monkeys will out-perform the market... 13 of them will look like poo-flinging geniuses, out-performing the market by two standard deviations! Is my fund really great, or am I just lucky? Stay tuned.

If an investor is going to look at track record at all, they should absolutely wait at least 3 years. I personally wouldn't invest a large amount of money in an "emerging" fund on the basis of a 1 year track record, either.
 
Quote from heech:

Oh I disagree, re: 3-5 yr track record. I think it's hugely significant.

There are a very large number of funds being founded every year... for the sake of argument, let's say 500 (new funds ranging from $10k to $100mm). Let's say all of these fund managers are actually poo-flinging monkeys, making buy/sale decisions based on where their poo lands on a target.

Just statistically speaking, assuming i.i.d. , 250 monkeys will out-perform the market... 13 of them will look like poo-flinging geniuses, out-performing the market by two standard deviations! Is my fund really great, or am I just lucky? Stay tuned.

If an investor is going to look at track record at all, they should absolutely wait at least 3 years. I personally wouldn't invest a large amount of money in an "emerging" fund on the basis of a 1 year track record, either.
More...



Yes, I agree. Another example of this weeding out process is demonstrated through Futures magazine profile every October of emerging CTAs. Looking back at the 2-3 CTAs profiled each of the last 4 years, several are no longers registered CTAS or have essentially blown up with large drawdowns and can't increase AUM.

My pool is going on 23 months, but clearly the demand for our firm has been on the managed account side.
 
Quote from Biog:


My pool is going on 23 months, but clearly the demand for our firm has been on the managed account side.
More...
Can you give a little more color on this? What's driving that demand? Is it transparency due to Madoff, or something else?

I have had a couple funds tell me they can only allocate to CTAs via managed account, since regulation for true fund of funds is different. Not sure how common that is.
 
You must log in or register to reply here.
Back
Top