Outside capital an advantage?

[illiquid]

Assuming the following:

1. You have a proven system/edge which has shown excellent gains over a relatively short period of time (6 months).

2. You are confident that you are capable of continued geometric gains at a smaller account size (up to mid-six figures), and smaller but comparatively good returns thereafter.

3. You are confident that, given a few years, you would be able to continually expand your capital until you reach the optimal maximum limits for position size (all trades are intraday on the eminis) on your own.

4. The current gains on the smaller account size provides more than enough for your living expenses/material needs

Given the above, would there be any reason to seek outside capital? What are the advantages of trading a larger account size in exchange for just a cut of the profits (20% the standard), instead of trading only personal capital and keeping all the gains? The main reason I can see for outside capital is to minimize personal risk and free one from trading "scared" -- but is this advantage worth the hassle of dealing with outside investors? Opinions would be appreciated!

 

[Free Thinker]

the problem is that the only outside money you are likely to get is friends and family money. that creates the maximum amount stress. are you ready for that kind of pressure when you go into a drawdown?

 

[illiquid]

I've been trading family money for 4 years now, that has never been a point of stress. But I suppose the question is moot at this time for soliciting institutional capital without a longer track record.

But say that you had a few years of good returns under your belt, and by that time the gains you could make on your own capital would be roughly the same as the incentive fee on a larger account funded from the outside -- would there still be some advantage to getting capital from other sources?

 

[lescor]

I've mentioned this many times when similar questions come up, but why not just go with an outfit that gives you leverage, cheap rates, and lets you keep 100% of your profits?

If your system produces low drawdowns and you have enough of your own capital to handle them at leveraged sizes, why not just do what you are doing and juice it with someone elses money, but keep all the profits?

 

[Foz]

Quote from illiquid:

the gains you could make on your own capital would be roughly the same as the incentive fee on a larger account funded from the outside -- would there still be some advantage to getting capital from other sources?

Why not trade both and double your returns? When traders become hedge fund managers they invest their own money in their funds.

 

[alfonso]

Quote from illiquid:



Given the above, would there be any reason to seek outside capital? What are the advantages of trading a larger account size in exchange for just a cut of the profits (20% the standard), instead of trading only personal capital and keeping all the gains? The main reason I can see for outside capital is to minimize personal risk and free one from trading "scared" -- but is this advantage worth the hassle of dealing with outside investors? Opinions would be appreciated!

To make more money.

For many people, especially, I dare say, the hedgefund types, it overrides all.

 

[tzheng]

Quote from vhehn:

the problem is that the only outside money you are likely to get is friends and family money. that creates the maximum amount stress. are you ready for that kind of pressure when you go into a drawdown?

That is so true.

 

[CalTrader]

Given the above, would there be any reason to seek outside capital? What are the advantages of trading a larger account size in exchange for just a cut of the profits (20% the standard), instead of trading only personal capital and keeping all the gains? The main reason I can see for outside capital is to minimize personal risk and free one from trading "scared" -- but is this advantage worth the hassle of dealing with outside investors? Opinions would be appreciated! [/B]

First of all if you are ever "trading scared" then this should be taken as a sign that you are undercapitalized: If you feel true anxiety that interferes with clear thought then your position sizes and/or markets/techniques need to be modified.

THe other point to consider is once you start taking outside money a whole host of other expenses come into play related with financial reporting, and investor support. Do not underestimate this expense. Unless you have a complete infrastructure in place that you can leverage - I do from other businesses - then the expenses of establishing the infrastructure and staffing it is non-trivial and subtracts from margins.

 

[illiquid]

When trading futures, I am technically always trading "scared", because I know that one can blowout on any given day (try losing 50% or more of your capital intraday in a stock account, would be pretty difficult -- in futures that possibility exists every single day). So even with the most stringent loss-cutting methods, given that I'm primarily a discretionary trader, sublimnally the possibility of a large drawdown is always on the back of my mind -- who knows, perhaps this fear keeps me on my toes and the attempt to try to elimimate it could be detrimental to performance?

As for maintaining a staff/infrastructure, what would be the minimum if one is to be doing all the trading himself? Accounting can be outsourced, someone to answer the phone perhaps? In any case, I appreciate everyone's thoughts and welcome more.