Paths Forward for Raising Capital

tnatrader said:
This is not a "I have this great strategy, how do I get money to back me" type of thread. The assumption is that you already have a verifiable track record which traded real money and shows the product(s) being traded to show the liquidity.

Let's suppose you have a three year track record, but no Wall St pedigree. Where should you go from here? I see 4 major routes, each with their own pitfalls and would love for some feedback and discussion:

1. Ask friends and family then referrals from them. This is slow and conflicts of interests abound. Whether you do it with managed accounts as a RIA or hedge fund, it does not see like the most efficient or optimal way to do things, at least as a career. However, it is the most "safe," especially if you pass the series 65 and become a RIA. You collect your 1-2% AUM fee and maybe 20% of gains, but you need a lot of capital before this becomes lucrative.

2. First loss capital providers as explained here. This seem a bit better, provided you have at least some capital to start with. Economically, this is somewhat like providing you higher leverage on your capital, but because you get first dibs on gains after a recovery, it's not exactly the same. This is higher risk/reward than the friends and family model. Typically, the trader keeps 50-70% of profits, although I'm unsure whether they are a profit allocation or 1099 income where you will have to pay self-employment taxes.

3. Prop trading with first loss. Very similar to #2, but prop trading has a terrible reputation in general. Highest risk/reward where payouts are in the 80% range. Holding the first loss in an actual third party escrow rather than just as a deposit on the prop firm's books is crucial.

4. Give up this pipe dream and work as a lowly analyst at a hedge fund/FO to build up connections with UHNW individuals/institutions and get backing after 5-10 years of building up relationships.

Are there another avenues for capital raising that I'm missing? There are places like Collective 2, Covestor (now Interactive Advisers), Fundseeder etc, but they don't seem to be very popular overall, at least for raising substantial amounts of money (or small amount of money, but you keeping the lion's share of profits).
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You have missed a very important 5th option. Continue to trade and build your own account until you won't have the need for additional capital. This is the route I am taking unless a really good situation falls in my lap.
 
dozu888 said:
Scenario sounds purely hypothetical no? In my experience after a few years people start to ask me if I can manage their accounts.

OP did say 3 years. Should be enough if he just let people know. Family friends investment clubs. Nowadays there is too much money out there!
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Unfortunately this is a real world example
 
I spoke to a dear friend of ours, Bob Morse, a few nights ago after he saw this thread. He pointed something out that should've been obvious to me, but wasn't: why go first loss when you can just use portfolio margin or even better, futures. It struck me that margin is basically the broker (or CME) being your backer where your capital is first loss. You get to decide how much reserve you want to put up and can leverage ~10x on ES if you wish.

All roads seem to lead back to risk-adjusted returns. I used to try to balance a smooth equity curve with high returns, but I realized the answer should have been just to strive for a high sharpe, even if the overall returns are low. I could've always turned around and levered that sucker up. Of course, that's typically how everybody blows up so take this with a grain of salt.
 
tnatrader said:
I spoke to a dear friend of ours, Bob Morse, a few nights ago after he saw this thread. He pointed something out that should've been obvious to me, but wasn't: why go first loss when you can just use portfolio margin or even better, futures. It struck me that margin is basically the broker (or CME) being your backer where your capital is first loss. You get to decide how much reserve you want to put up and can leverage ~10x on ES if you wish.

All roads seem to lead back to risk-adjusted returns. I used to try to balance a smooth equity curve with high returns, but I realized the answer should have been just to strive for a high sharpe, even if the overall returns are low. I could've always turned around and levered that sucker up. Of course, that's typically how everybody blows up so take this with a grain of salt.
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that was i said previously in the thread.
 
trend2009 said:
that was i said previously in the thread.
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You're right, but it wasn't until Bob spoke me through it that I realized just how much margin was available for retail traders. For some reason, I kept thinking margin topped out at Reg-T for retail guys if we wanted to hold overnight.
 
tnatrader said:
why go first loss when you can just use portfolio margin or even better, futures.
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There is some protection for the first loss model that you are not on the hook for the debt if some black swan occurs and lose more than your account equity.

If you leverage over 3x (or maybe even 2x) with portfolio margin things get rough quickly in a downturn.

Also with index futures you don't get to pick your stocks, although the financing is very efficient.
 
Is there any First loss providers based in Chicago? I have noticed they are primarily on the east coast, but I am more interested in Chicago. Thanks
 
fan27 said:
You have missed a very important 5th option. Continue to trade and build your own account until you won't have the need for additional capital. This is the route I am taking unless a really good situation falls in my lap.
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:thumbsup::thumbsup::thumbsup:.

Welcome to the club. This is the slow road but with a lot higher probability of success because of less pressure and profits can compound over time to build trading asset base.
 
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