Starting a fund / raising capital

[OddTrader]

Quote from heech:

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.

I'm curious for the statement that "I'm always 2-3 months away from closing my business depending on how the market behaves."

How practical is that?
Is that a norm in the industry (very critical to most investors) or only for yourself?
Why 2-3 months and not 5-6 months (due to serious DD?)?
Do you specifically mention this statement to your prospective clients?
Is that a kind of systemic stop-loss to your clients?

 

[FrankSlaughtery]

Quote from sf631:

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

it is possible - not sure on the specifics. ray dalio at bridgewater is prob the most famous hedge fund that does exactly this.

 

[Busta21]

Quote from OddTrader:

I'm curious for the statement that "I'm always 2-3 months away from closing my business depending on how the market behaves."

How practical is that?
Is that a norm in the industry (very critical to most investors) or only for yourself?
Why 2-3 months and not 5-6 months (due to serious DD?)?
Do you specifically mention this statement to your prospective clients?
Is that a kind of systemic stop-loss to your clients?

That is a pretty sketchy statement. The way stocks are moving, equity trading anyway, today im not sure how that would even come into mind. I can see if tax/back office issues come in to play but I don't understand that statement.

 

[sf631]

I don't think he's saying 2-3 months to blowing up the account. Just that when you're relatively new and unproven you're on a shorter leash than if you're Paulsen who can apparently lose money for multiple years without consequence. Investors may not stick thru past a 20% DD or whatever.

Don't let me put words in your mouth but that's the way I read it

 

[heech]

Quote from sf631:

I don't think he's saying 2-3 months to blowing up the account. Just that when you're relatively new and unproven you're on a shorter leash than if you're Paulsen who can apparently lose money for multiple years without consequence. Investors may not stick thru past a 20% DD or whatever.

Don't let me put words in your mouth but that's the way I read it

That's exactly what I mean.

A significant DD, and you might as well hang up your gloves. You will forever be explaining your DD and how/why your risk management changed. Every investor will be wondering what precludes you from having the same loss (or even doubling it) the first month they invest.

Now that I have 3 years of track record, maybe I'm generous enough to say I can survive 6 bad months. But for much of the past 3 years, always been very clear to me I better deliver just about every month... And 2-3 bad months would be all it takes to erase whatever credibility I hoped for.

 

[doublet83]

I will share some learnings I've had on the tax front.

For someone with substantial income and limited deductions, there isn't a clear cut option. As a disclaimer, I'm no tax professional, so my understanding can be wrong.

Treating myself as unemployed:

No self employment tax. +
Can't deduct expenses - (but not a big deal since I don't have much)
Can't contribute to IRA -

Professional Trader Status

No self employment tax +
Can deduct busineses expenses +
Can't contribute to IRA -
Must quality for trader status and may be subject to greater IRS scruity
Can not deduct certain expenses such as healthcare (?)

LLC - S Corp

Self employment tax and payroll taxes on the amount your self desginated salary -
Can deduct busineses expenses and health insurance+
Can contribute to IRA, I believe 41k annually +
More complicated returns and I believe significant reporting costs -

I've talked to two tax professionals. Generally an unpleaseant experience. I got the feeling that I was being squeezed after they heard my income, and was being overcharged and perhaps sold services I did not need. These accountants are salesmen first, and accountants second. I paid for a 30 minute consultation with Robert Green for $150, and he seemed knowledeable, although I didn't like how he liked to talk a bunch rather than directly answering questions that I wanted answered. The other tax accountant was much worse and pretended to be proficient with trader specific issues and got some things wrong that even I was able to identify.

Given that my strategy is largely focused on medium to long term investing, I decided to focus more on this tax efficient strategy in an attempt to realize more longer term capital gains: If a long position runs up to a point where I can normally inclined to sell, instead, I would consider holding and writing a moderately to deep in the money call. This sort of locks in my gains up until a certain amount as I attempt to hold the long position for long enough to benfit from favorable capital gains tax rate. I would consider this a form of tax arbitrage, as I do not believe the options are priced for this enabled tax efficiency. Certainly an imperfect strategy, and not the same as locking in your gains, but I do complement it with a view on volatility pricing based on bottom-up analysis.

 

[Epic]

Quote from heech:

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.

I advertise my program as offering customizable leverage, but I run mine in managed accounts so it isn't a headache at all for me.

If a client wants normal leverage, there is not special requirement. If they want higher leverage, they sign a notional trading agreement and we agree upon a nominal value. If they want lower leverage then they are allowed to do that, but I recommend something like you. Rather than me trading it at a lower leverage, I just set them up in some treasuries and trade the rest normal leverage.

The only requirements are that if they trade notional I don't allow more than 2X leverage. If they trade lower leverage and don't want to use the excess cash elsewhere, I require that they choose a 2/20 fee structure as opposed to my typical 0/30. This is usually small accounts anyway. Guys who barely meet my $200K minimum. They don't have $400K for this program to split in half but still want half the risk of a normal $200K.

Problem is, the break even between my two fee structures is at about 20% ROI. That is where the client pays basically equal fees whether 2/20 or 0/30. At that target return, I don't really care which they choose, but would still slightly prefer the 0/30. Much different on a $200K account @ half leverage. Now the break even between the two fee structures is up around 40% which is a much more difficult target return. So I tell them they have to do the 2/20 structure or it isn't worth my time.

 

[Epic]

Quote from heech:



In my case, it also helped that I got some positive press this year. I had a couple nice features in magazines this year.

Good job Heech. Can you link the articles, or are you staying anon here? I totally understand if not, cause I prefer to stay anonymous here too. Just interested because my group is trying to get me to go more public and do features and spotlights. Wondering how it is working out for you.

 

[Epic]

Quote from heech:

That's exactly what I mean.

A significant DD, and you might as well hang up your gloves. You will forever be explaining your DD and how/why your risk management changed. Every investor will be wondering what precludes you from having the same loss (or even doubling it) the first month they invest.

Now that I have 3 years of track record, maybe I'm generous enough to say I can survive 6 bad months. But for much of the past 3 years, always been very clear to me I better deliver just about every month... And 2-3 bad months would be all it takes to erase whatever credibility I hoped for.

+1

2012 was tough for me in that I had two negative months (3 negative net of fees for the 2/20 clients). The largest was 2.7% which was also my Max DD peak to valley. I outperformed the broader indexes, but I still had clients calling during the drawdowns. And it sounds crazy, but I still had clients asking me what happened this year.

When you have less than 5 years history you are a gamble to your clients, regardless of your numbers. You are the riskiest allocation in their port, and a 3% DD from you is much worse than a 10% DD from a large established group. If you are negative for three consecutive months, you'll start dropping clients guaranteed. There is no room for error for the small startup.

Not to mention how hard it would be to run the business if you ever had a negative quarter with a 0/30 structure. That means no rev for that quarter AND you gotta beat the watermark for any rev the following quarter. If target returns are anything less than 25% annual and you suffer a >5% quarterly loss, you are on the razors edge.

 

[Epic]

Quote from doublet83:

I will share some learnings I've had on the tax front.

For someone with substantial income and limited deductions, there isn't a clear cut option. As a disclaimer, I'm no tax professional, so my understanding can be wrong.

Treating myself as unemployed:

No self employment tax. +
Can't deduct expenses - (but not a big deal since I don't have much)
Can't contribute to IRA -

Professional Trader Status

No self employment tax +
Can deduct busineses expenses +
Can't contribute to IRA -
Must quality for trader status and may be subject to greater IRS scruity
Can not deduct certain expenses such as healthcare (?)

LLC - S Corp

Self employment tax and payroll taxes on the amount your self desginated salary -
Can deduct busineses expenses and health insurance+
Can contribute to IRA, I believe 41k annually +
More complicated returns and I believe significant reporting costs -

I've talked to two tax professionals. Generally an unpleaseant experience. I got the feeling that I was being squeezed after they heard my income, and was being overcharged and perhaps sold services I did not need. These accountants are salesmen first, and accountants second. I paid for a 30 minute consultation with Robert Green for $150, and he seemed knowledeable, although I didn't like how he liked to talk a bunch rather than directly answering questions that I wanted answered. The other tax accountant was much worse and pretended to be proficient with trader specific issues and got some things wrong that even I was able to identify.

Given that my strategy is largely focused on medium to long term investing, I decided to focus more on this tax efficient strategy in an attempt to realize more longer term capital gains: If a long position runs up to a point where I can normally inclined to sell, instead, I would consider holding and writing a moderately to deep in the money call. This sort of locks in my gains up until a certain amount as I attempt to hold the long position for long enough to benfit from favorable capital gains tax rate. I would consider this a form of tax arbitrage, as I do not believe the options are priced for this enabled tax efficiency. Certainly an imperfect strategy, and not the same as locking in your gains, but I do complement it with a view on volatility pricing based on bottom-up analysis.

Green Trader Tax is aimed at a certain niche of traders. Essentially, that niche is guys who trade equities and are not professional managers. They specialize in "trader tax status" because the niche there is rather large with the advent of online trading for the masses.

They aren't as much of a standout if you are a professional or if you trade 1256. If you can, do yourself a favor and take your skills over to futures. Then these tax issues aren't a problem anymore. Bottom line tax reporting. No wash sales. 60/40 treatment. No need to claim trader tax status if you are profitable.