Quote from Ghost of Cutten:
This sloppy semantics can't go unchallenged. "Institution" just means any legal entity that is not an individual person. 2 friends who form an llp in their garage with 20k is an institution. An offshore money laundered slush fund from 3rd world oil ministers or narco-traffickers is an institution. Some rich guy's vanity fund is an institution.
You need to stop assuming that your particular tiny subset of the world's capital represents all the investment funds that can be tapped. If Madoff, Stanford, and other con artists can raise billions with nothing but a tight-lipped smile and hot air, then a genuinely good trader with a sound track record is only one skilled sales team away from raising millions. I have met and looked at the books of people who CAN'T trade for a living and who have raised multiple millions. So people who actually can trade profitably and consistently in a scalable way, can definitely raise money, so long as they don't listen to ill-founded naysaying from people who couldn't sell ice cream in the Sahara. No offence but the main true barrier to starting a fund is being able to make money trading the markets - everything else is a piece of cake, in comparison.
Actually a very good point but but I think it has to be something of an affinity pitch - the Palm beach set were outraged that he had ripped off his own. Also Madeoff had credibility from being head of NASD(?) in his presumably bona fide market making days used that Austrian woman married to an Aristo and the French (?) aristo who killed himself among others as feeders to tap their networks. There was one major Swiss Private bank as a major investor.
Unless you are a brilliant salesman/conmen or can hire one I can't help but wonder if you pretty much have to be part of a certain social strata/network e.g raising money from Harvard classmates/parents. People who can sell know what a minority they are and extract stiff terms - the idea that you can find someone who can actually sell and will run around making you not he rich is flawed.
From what I know of Madeoff it was sold as a nudge nudge wink wink deal and the technique of a "takeaway" which any Timeshare salesman will tell you about was used. The feeders would set up a meeting, Madeoff would grimace throughout as if only meeting to appease the feeder and then shortly after there would be a breathless 'phonecall saying a slot had opened up but they had to have your agreement now. The real story behind Madeoff is known in a certain 'tribe' but they are not saying anything about it to non tribe members it seems. I got stony faced looks from asking.
I know "of" these tactics, most people don't. But perhaps in contradiction to my previous point, agree a straightforward sales pitch can work - people with belief but no sales training can sell like crazy because they answer objections from the heart not a pitch book.
Someone I know started from nothing (actually 300k) and has USD200m under management but his key investors were people from his business circle and they WAITED "to see how he did" before committing. He told me you have to have core investors if you are to run it as a business (which you maybe now have to do due to "infrastructure" requirement - Read: salaries).
One thing that has not been discussed as an option is 'managed accounts' I turned down an offer of 500k on the basis of what it would cost me to set up e.g. contract vs 20% of doubling 500k in a good year. Afterwards I realised I could maybe have done it as managed accounts. Goes without saying if I was trying to raise money the out of the blue 500k offer would have stayed under a rock.
The other thing to consider is knowing your clients are liveable with - they can drive managers crazy with their suggestions and "how could we have missed that" and "how come we are not finding the 'Chinese Angry birds'. Remember, people invest with hedge funds usually after finding they can't do it themselves and HNWI expect to tell others what to do and they know it is THEIR money.
The last - clients, is one of the things that has put me off investigating further than I did. I would rather 'live simply and answer to nobody'. Anyway, my sole motive for starting a fund would be to make a big enough nut to live like a fund manager by trading my own book with no clients. If I was a billionaire I would buy forests and live simply anyway.
Another thing is trades/investments have to sit right with key clients. The old joke about being proved right in the end but there are no clients left to applaud is not a joke. I should point out I am talking about the stock/investing end of the spectre and this thread is more about trading - there are after all black box funds that disclose not much other than presumably their numbers. To quote a fund allocator "everyone sounds great until you start asking about their numbers" - tends to reinforce GoC's point.
