Starting a fund / raising capital

So I would agree with Market Surfer on articulation of the strategy. That really is the most important thing. As for how they would know that you were not lying, the P/L track record with explanations of the trades (analysis, execution) would answer that.

Hard to say. I mean, if you are going to go after outside money other than friends, family, I would create an incubator fund for 13'. You could always show the retail account past performance as well but it can't hurt to be professional with an LLC based account showing the exact strategy as it plays out.

Here is a site that might help:

http://www.greencompany.com/HedgeFunds/HedgeFundIncubatorFunds.shtml

The track record from the past should matter, at least it has in my dealings.
 
Right, I get what you're saying, thanks. After all, I was an investor myself in the past few years so I know what I looked for, but perhaps my priorities were different to that of other investors... I'll think about it in the next few months but taking into account everything I know now, I might just be better off staying on my own + friends/family until I grow past 1 or maybe even better, 2MM.

The last thing I want to do is take the fun out of my job, even if it pays (potentialy) so much better. Maybe this changes when I get older and kids start kicking my a$$. *shrug*
 
Quote from Busta21:

So I would agree with Market Surfer on articulation of the strategy. That really is the most important thing. As for how they would know that you were not lying, the P/L track record with explanations of the trades (analysis, execution) would answer that.

Hard to say. I mean, if you are going to go after outside money other than friends, family, I would create an incubator fund for 13'. You could always show the retail account past performance as well but it can't hurt to be professional with an LLC based account showing the exact strategy as it plays out.

Here is a site that might help:

http://www.greencompany.com/HedgeFunds/HedgeFundIncubatorFunds.shtml

The track record from the past should matter, at least it has in my dealings.
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no doubt, busta. I also second the green & co recco--- Hannah T. is another one that will work with start ups:

http://capitalmanagementservicesgroup.com/startahedgefund.html
 
Quote from braincell:

Right, I get what you're saying, thanks. After all, I was an investor myself in the past few years so I know what I looked for, but perhaps my priorities were different to that of other investors... I'll think about it in the next few months but taking into account everything I know now, I might just be better off staying on my own + friends/family until I grow past 1 or maybe even better, 2MM.

The last thing I want to do is take the fun out of my job, even if it pays (potentialy) so much better. Maybe this changes when I get older and kids start kicking my a$$. *shrug*
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Oh ya, when you take outside capital the game DEFINITELY changes. You really have to make it worth your time, run the numbers and see if the performance fee really makes up the difference for the extra stress and liability you are taking on. If you do take on clients, only advise I can provide from personal experience is to ensure that they do not need the money from investments to live off of and to make sure that goals and risk of the capital is clearly defined prior to trading.

Best of luck, shoot me a DM if you have further Q's
 
From what I've learned from asking similar questions to lots of different sources of fact/opinion:

* Any account performance track record can be disclosed as relevant (as long as it belongs to you and you're not prohibited from sharing it by employer etc...), but it's a question of how much perceived credibility it has, and is a sliding scale
* Fully functional HF with outside capital is greatest, and bigger is of course better from a credibility POV
* Incubator HF would be next
* Single Member LLC which owns your account is next most "airtight"
* Personal account would be last
* For any of the above, having a very high % of your net worth invested would be important to (1) show alignment of incentives, and (2) to cut off fears that you ran 4 portfolios and cherry-picked the best one as your track record

I think either the SMLLC or Incubator HF is worth the effort for a couple of reasons (in addition to above)
(1) it gives you a much easier way of claiming trader tax status (see GreenCompany for more on that) and
(2) it allows you to cleanly segregate what's in and what's out of your strategy. Have 50 shares of apple stock that you hold on to because you believe in the company, but your strategy is a market neutral arbitrage? Should you consider the daily markings of Apple as part of your markings? Logically no, but it's a slippery slope and you can understand why a potential investor would question how solid your track record is after you make lots of "reasonable" exceptions. Kind of like pro-forma earnings, you can never trust them quite so much.

Also, I think traditionally Incubator HFs (or any HF, for that matter) are set up as Delaware (or offshore) LPs, not LLCs, though I know there are exceptions to this convention.

Just my $0.02
 
Thanks sf, that's by far the clearest answer I was looking for. You should post more often, the other stuff you wrote before was useful too.

edit: I had a few more questions but I'll probably contact some of the service providers in the future and ask, that's all from me, so thanks for the free tips guys.
 
The more I go through the process (wrapping up my 3rd year now)... and as I find some success (tripling my AUM in the past 12 months, doubling over the past 3-4 months alone)...

I really see it from both sides. The rewards are so obvious, but the challenges are also huge.

My first piece of advice to up and coming managers is: don't force it. If you talk to 10 prospective investors and none are interested, then you simply aren't ready for that class of investors yet. Don't waste your time trying to pitch to more people until you address whatever your deficiency is.

What I have found is, if a couple from a particular category actually invest... then you will find probably EVERYONE from that category will be equally interested . For example, for years I've been trying to pitch to smaller FoF and family offices (even attending a family office conference). Zero success; some due dil calls, but no serious interest. Total waste of time.

In contrast, just a few months after I finally got one investor from that category... I now have 5-8 invested, and probably another 6-8 in the pipeline. And I'm reasonably confident that I'll get a steady supply of investors in this category if I maintain my performance. Why? They're not lemmings, few know others are investing. It's more just a function of, most investors work with very similar criteria. If you are attractive to a few, then you will probably be attractive to many. (And the inverse is also true.)

So, how do you get started from zero (or any number < $1 mm)? I really don't know. I think that's incredibly difficult. Other than a risk-seeking gambler (who probably exist - but I haven't run into), I really don't know any investors with real money who are looking for managers in that category. Why should they, when they can find excellent managers with established track records?

Quite simply, no one with millions in assets is looking to get 100% returns... they don't need 100% returns to improve their lifestyle. They just need to make sure they don't LOSE their existing assets. If I have $10 million to invest, and I can find a dependable manager who makes me 15% a year (with low probability of draw-down)... that's great. Who wouldn't be happy with $1.5 million a year? Would they really be happier with $3 million or $5 million a year, if those 30-50% returns brought with it the risks of losing their nest egg, and having to *work* again? (And you will hear that again and again from wealthier investors... their financial goals often boil down to a simple concept: how can they never work again.)

I'm not trying to be pessimistic, these are just my thoughts at this point in my career. I'm very fortunate to have started with what I did, and even then I found it rather difficult to *want* to persist to where I am now. Things are looking up right at this moment, but I'd be the first to tell you that I'm always 2-3 months away from closing my business depending on how the market behaves.

Best of luck to anyone pursuing this as a career.
 
Great comments Heech.

Should we infer that the turning point for you (with the small FoF and family office folks) was in ratcheting down your returns and volatility/drawdowns? If so, did you just do that with your leverage ratio?

One dilemma that I've considered is that, while it may be true that investors would rather have 15% return with 2% drawdowns, I would rather have 45% returns and 6% drawdowns on my capital, largely because it allows compounding of capital and critical mass. Is there any clean (pooled fund) structure that enables different investors to have different leverage? I know this could be done with SMAs, maybe that'd be easiest
 
Quote from sf631:

Great comments Heech.

Should we infer that the turning point for you (with the small FoF and family office folks) was in ratcheting down your returns and volatility/drawdowns? If so, did you just do that with your leverage ratio?

One dilemma that I've considered is that, while it may be true that investors would rather have 15% return with 2% drawdowns, I would rather have 45% returns and 6% drawdowns on my capital, largely because it allows compounding of capital and critical mass. Is there any clean (pooled fund) structure that enables different investors to have different leverage? I know this could be done with SMAs, maybe that'd be easiest
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I would say that there is certainly better risk management, and learning what investors need to hear from me. But really, what was needed more than anything else is just time. If you can deliver performance for an extended amount of time, while other managers/strategies are seen as struggling, then that's the best selling point.

In my case, it also helped that I got some positive press this year. I had a couple nice features in magazines this year.
 
Oh sorry, neglected your question about different leverage levels in the same fund.

It must be possible, since I know other funds do something similar; many CTAs advertise a 3x type leveraged program. But when I wanted to explore the option, my legal, admin, and audit teams all balked. They made it sound extremely complicated... fee sharing, valuation, high water marks, etc. Ultimately I decided to just create multiple funds, one for each leverage. I launched with an "aggressive" fund, as i wanted max leverage for my own capital too, just like you.

Three years later, still haven't created the institutional fund I envisioned long ago. I think partly because I charge zero management fees. If someone wants lower leverage, they can just put $1mm with me and $1mm in treasuries... voila, half leverage.
 
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