raising funds

[heech]

Quote from Swan Noir:

I am very curious to know a definitive answer to this. Anyone have any information or a direction to look in?

I checked with my friend, a securities lawyer working primarily in fund formation. Not the kind of case she sees very often, but basically.. if you: a) aren't holding yourself out as an investment advisor / CTA, b) aren't working for compensation... regulators shouldn't bother you. She suggests that we keep in mind that the standard anti-fraud provisions still apply.

But really, at the end of the day... as an investor, I have to ask why anyone needs that kind of an arrangement. Why can't you work/save money for a few years, and lever up your own money via any number of paths? Unless you're dying of some terminal disease, why should I believe you *have* to trade other people's money today, rather than saving up to trade your own? (I personally would be more inclined to provide leverage for someone, than to just write them a check. At least that way their skin is also in the game.)

Quote from traderwann
is there really not ONE, not ONE less deserving candidate?!

No, you're quite right, I clearly misspoke. There are probably literally millions, if not tens of millions of people on this planet who are less deserving of help than you. Few of them are on this thread, unfortunately.

I also don't think there's any reason to *criticize* you. I'm not your dad, I have no motivation to set you right and fix you. My comment was just intended to mean that you appear beyond help, and an attempt to continue this conversation with you in a constructive manner is a waste of time. All of the answers that could be given have already been given.

 

[sharpe]

"But really, at the end of the day... as an investor, I have to ask why anyone needs that kind of an arrangement. Why can't you work/save money for a few years, and lever up your own money via any number of paths? Unless you're dying of some terminal disease, why should I believe you *have* to trade other people's money today, rather than saving up to trade your own? (I personally would be more inclined to provide leverage for someone, than to just write them a check. At least that way their skin is also in the game.)"

 

[HFStartup]

Quote from heech:

But really, at the end of the day... as an investor, I have to ask why anyone needs that kind of an arrangement. Why can't you work/save money for a few years, and lever up your own money via any number of paths? Unless you're dying of some terminal disease, why should I believe you *have* to trade other people's money today, rather than saving up to trade your own? (I personally would be more inclined to provide leverage for someone, than to just write them a check. At least that way their skin is also in the game.)

Heech,

It took me three years to raise US$100k to start my incubator fund. And by incubator fund, I mean a fund where I cover all of the costs, charge no fees and do not represent myself as an RIA. Also, I have no pedigree or direct connections to Wall Street. Most likely, it will take me another 2-5 years before my track record can attract enough AUM to convert to a fully functioning hedge fund and start charging fees. Why would I possibly want to stretch this out any longer?

Leverage always comes up as some kind of solution to this situation. In reality, high degrees of leverage only add additonal risk and exposure to a portfolio in the event of unforseen market moves. To ask a new fund to sabotage their chances for success by taking on the kind of leverage they most likely need is counter-productive for all parties involved (including investors) and is (hopefully) not representative of how the fund will be managed should it be lucky enough to survive its first years. Personally, I would not want someone managing my money that is willing to jeaopardize their AUM in this way to get ahead.

In addition, leverage is a completely different issue than having skin in the game. Most emerging fund managers such as myself are going to spend a great deal of what they would normally invest into setup and maintenance costs to develop a track record. Do I have skin in the game? Yes, most of it was spent on getting the incubator fund operational and maintaining it. Is it reflected as AUM? Probably not to any great extent.

Heech, I apologize if this comes across as inflammatory, as I do not mean it that way. I have learned a lot from your posts and comments. But sometimes, it just seems like people are quick to forget how tough it is, especially in this industry where having a successful trading methodology is not enough.

 

[sharpe]

Heech,

1. In addition to my trading I have a job and family to maintain so saving the 25k to overcome the pattern day trading rule is a huge hurdle. It has taken me ten years of trading to produce the 6+ months of consistent results I posted. I am not impatient but I am not getting any younger either so I would like to start today.
2. I have "great" numbers now without leverage so why introduce it to my strategy. Leverage is dangerous.
3. Is having skin in the game necessary to market my trading plan? If I can produce the numbers without skin in the game why change just to establish a track record?

 

[Swan Noir]

In 95% (or 98%) of the instances where the trader DOES GET FUNDED he has skin in the game. You may not like the logic of that reality but before you spend another decade you should accept that reality. System or discretionary they know that traders frequently pull the plug on their own trades and deviate from the stated rules when cash is on the line. And, since there are those seeking funding that do have skin in the game, they put up a simple screen -- no skin, no deal.

It also pays to understand that those with capital are not there to execute your business plan and meet your goals. They are there to execute their plan and in turn meet their goals.

 

[sharpe]

Agreed
I will take your suggestion and put some skin in the game.

 

[traderwann]

Quote from heech:No, you're quite right, I clearly misspoke. There are probably literally millions, if not tens of millions of people on this planet who are less deserving of help than you. Few of them are on this thread, unfortunately.

I also don't think there's any reason to *criticize* you. I'm not your dad, I have no motivation to set you right and fix you. My comment was just intended to mean that you appear beyond help, and an attempt to continue this conversation with you in a constructive manner is a waste of time. All of the answers that could be given have already been given.

Few are on this thread, but at least some are right? Ok, so you mispoke and half-heartedly non-apologized. Frankly, I will take what I can get.

As for the rest of your comment, thank you for sharing one aspect of your your personal human nature. I will gladly say I am the opposite by nature and proud of it. Not through the words you used, but more in general I care more about my fellow human beings than you allude to by your words. As for constructive conversation, I am not the one avoiding points I make, nor am I acting like a troll. Certainly, I look forward to anything constructive and I am the one asking for it, yet you are the one saying it isn't possible. Hmmmmm, it appears these are mutually exclusive so one of us has to be wrong.

Here's the interesting part. The main point of contention appears to be whether the status quo is ideal and if there are ways to change it. I have touched on ideas (aka solutions) and been attacked for it. One fact is that the status quo gives investors a wider field to choose from and reduces opportunity for others. True, not by any significant amount but every little bit adds up and marginally increases the "freeness" of a market. Somehow all this adds up to "being beyond help". Well at least you allowed one insight into your process of thinking and reasoning.

Thanks for sharing.

 

[traderwann]

Quote from Swan Noir:
It also pays to understand that those with capital are not there to execute your business plan and meet your goals. They are there to execute their plan and in turn meet their goals.

And those who are the most well rounded will often take a more cooperative attitude realizing all stakeholders have vested interests, working together produces better results than constantly trying to take advantage and squeeze everyone everyway everywhere. I'm talking about the kind of people who are trustworthy enough to do business on hand shakes, meaning very few.

 

[heech]

Quote from sharpe:

Heech,

1. In addition to my trading I have a job and family to maintain so saving the 25k to overcome the pattern day trading rule is a huge hurdle. It has taken me ten years of trading to produce the 6+ months of consistent results I posted. I am not impatient but I am not getting any younger either so I would like to start today.

No disrespect intended, but the above statement is *exactly* why investors want to wait and see 3-4 years of solid trading results, before joining their money to *yours*.

See it from a typical investor's point of view. What I need, is to know that you will deliver 10 *years* of consistent results looking forward, not six months. Let's say you're on a hot streak that continues... so what if you beat the market by 20-30% over the next year? That does little for me, it's the longer time horizon that matters. If I invest in you, I would be expecting you to beat the market by 5% a year for the next 2 decades.

If you've really been trading for 10 years but have only had 6 months of consistent results... unless you have a tremendous story explaining your recent epiphany (hit by lightning?), what's my motivation for believing you've turned the corner? Why the cherry-picked last 6 months, and not the previous 10 years?

If there's one thing I want to really get across: everyone needs to be extremely clear this isn't a game, where you're automatically receiving bonus points for performing really well on a level. No one will award you anything for your past results. Investors are motivated by one thing, and one thing only: greed, a hope that you will make them money in the FUTURE. And that future wealth only comes about due to consistent compounding over a very long period of time (while avoiding large portfolio-killing drawdowns). Before trying to raise funds, you need to look at what you bring to the table, and figure out whether you're giving investors a reason to believe you can do that for them.

3. Is having skin in the game necessary to market my trading plan? If I can produce the numbers without skin in the game why change just to establish a track record?

You can market anything to anyone, there's no prerequisite there. The real question is, is having skin in the game necessary to *convincing an investor*?

In your specific situation (having a family, not having capital to risk)... the right answer probably is: don't do this. Don't expect to get into this as a career. Understand that I don't say this to be a jerk; I don't get pleasure out of bursting bubbles. And I'm fully aware that it's "unfair" that idiots with trading results worse than yours are probably making millions of dollars this very year.

None of that changes the facts. Don't expect to raise outside money without risking years/decades of your own money and time. If you are in a personal/family situation where that's not viable, then just don't go down this path.

 

[heech]

Quote from HFStartup:

Heech,

It took me three years to raise US$100k to start my incubator fund. And by incubator fund, I mean a fund where I cover all of the costs, charge no fees and do not represent myself as an RIA. Also, I have no pedigree or direct connections to Wall Street. Most likely, it will take me another 2-5 years before my track record can attract enough AUM to convert to a fully functioning hedge fund and start charging fees. Why would I possibly want to stretch this out any longer?

I'm not offended by your questions at all, don't think it's inflammatory. I don't have a problem with people disagreeing with me, as long as it comes from the right constructive place.

As far as your situation goes... this kind of goes down to the point I made earlier... why are you doing this at all, after raising $100k? (Which, by the way, I would absolutely acknowledge you managed against all odds.)

If you had a great year and brought in 30% a year, and are charging 2/20 fees... you would've taken home $8k in fees this year. Is that *really* worth your time? And you would need to maintain that level of returns for probably the next 3-4 years before you really start to get any attention. And you would really need to deliver 30% a year for the next 10-15 years before you start making millions.

How confident are you that you can meet that performance metric? Can you really deliver 30% a year for 10-15 years? And if so, why aren't you just trading your own money prop!? It kind of comes down to this for someone wanting to do this from scratch:

- you have to expect to be TREMENDOUSLY good for a TREMENDOUSLY long period of time to really make money off of other people's money,

- and if you really expect to be TREMENDOUSLY good for a TREMENDOUSLY long period of time, you'd probably be better served just trading your own money leveraged up 10x.

Most folks on wall street looking to launch their fund wouldn't even make the effort unless they had $50-$200 million in initial investment circled. Think about the reason *why* behind that, and wonder why it shouldn't apply to you.

I feel bad trying to talk people out of this when I myself just launched a fund 2.5 years ago (with absolutely minimal trading experience before doing so). But there are a few differences here:

- I had a very specific reason, with my background + approach, why I thought/expect I'd be able to outperform. (Sharpe ratio still hanging in there at 1.6.)
- More importantly, I had $2.5 million of my own money that I was willing to put behind my idea. And even if I don't raise a penny from outside investors, I'm very happy with my returns off of that own money.

To be perfectly honest, if *one* of the two above factors didn't exist in my situation, I absolutely would not have gone down this path. It just doesn't work.