Starting a fund / raising capital

[Busta21]

Quote from doublet83:

I did say peak to through draw down was 8 to 10%, I think that's a good sized draw down that I wouldn't necessarily characterize as too low.

In my long term strategy I do not use leverage for the most part. I use leverage opportunistically when I feel like a short term trade is to be made. Even then I do not get anywhere close to the 7x portfoilo margin I already have access to via IB.

IB gives out 7X leverage? What amount of capital do you need to have in the account to get that rate?

8%-10% draw down on that size of capital is not that big of a deal. I would think the investors need to understand that you are trying to grow that account to start a fund not using it as a model for a future fund. Now that 8-10 percent on $100 Mill is a different story.

 

[doublet83]

Quote from Busta21:

IB gives out 7X leverage? What amount of capital do you need to have in the account to get that rate?

8%-10% draw down on that size of capital is not that big of a deal. I would think the investors need to understand that you are trying to grow that account to start a fund not using it as a model for a future fund. Now that 8-10 percent on $100 Mill is a different story.

Yeah you get up to 7x with portfoilo margin with a 100k+ account but only if you have a diversified portfoilo. I'm not quite sure how the calculations work but its not a simple 7x.

Well, the draw downs have been 8 to 10% because I've been right (or lucky, probably some have both). I actually spend so much time pondering how about my own returns and my own abilities. How much of it is luck? Am I really good enough a great portfoilo manager that can outperform the market over my lifetime (very few can do this)? When a stock goes my way, how much was due to analysis that was correct versus developments that I didn't foresee?

Anyway, 2 years of great returns doesn't mean you're that great. I still feel I am generally taking on risk and position sizes that are appropriate.

 

[Busta21]

Quote from doublet83:

Yeah you get up to 7x with portfoilo margin with a 100k+ account but only if you have a diversified portfoilo. I'm not quite sure how the calculations work but its not a simple 7x.

Well, the draw downs have been 8 to 10% because I've been right (or lucky, probably some have both). I actually spend so much time pondering how about my own returns and my own abilities. How much of it is luck? Am I really good enough a great portfoilo manager that can outperform the market over my lifetime (very few can do this)? When a stock goes my way, how much was due to analysis that was correct versus developments that I didn't foresee?

Anyway, 2 years of great returns doesn't mean you're that great. I still feel I am generally taking on risk and position sizes that are appropriate.

Interesting. I'll have to check them out a bit more. Agreed on those thoughts, I've had them as well, plus, when you are trading OPM they get even worse. Are you a technical trader or fundamentals type?

True, but those are some really solid numbers. Why not try and work at a fund or shop it to a small fund in attempts to become a PM at that fund working under someone with more experience in the industry?

 

[clerk]

Quote from Busta21:
talking about e&o/d&o:
That seems worth it though, esp. if one is serious about growing and creating a real business out of this.

This is relative.

Doublet can double his investors money, and his 20% cut puts his insurance hurdle at a mere $50k AUM. For him to spend $10k out of pocket is in effect him investing in his prospective clients. I can see him doing that when he registers because other RIA's would be happy to allocate money to him.

Again, this is relative. $10k is a huge hurdle for me. For me, raising $1M-$2M is hard, and getting returns north of 5% is tough. That puts my insurance hurdle (at 20% carry) at $1M. I can't leave my dayjob just to break even doing this.

Interestingly (just thinking aloud) if I can raise $2M and allocate it to Doublet, and use my sales skills to negotiate a 15/15/70 profit split between adviser/subadviser/client, we both will earn $300,000 each gross if Doublet Double'sIt. Neither of us would flinch at spending $10k on insurance and $10k on RIA disclosure docs. But of course, if Doublet's returns are for real - he probably will have more offers of money to manage than his strategy can handle, and he is going to pick the advisors able to allocate $10M+ to him over me.

If Doublet can take the risks inherent in managing separate accounts (ie clients withdrawing funds during a drawdown), he can get registered as an RIA with excellent disclosure documents for less than $3k. If he sticks to trading stocks (other than penny stocks) in US markets, his insurance expense can be kept below $3k/yr as well.

 

[doublet83]

Quote from Busta21:

Interesting. I'll have to check them out a bit more. Agreed on those thoughts, I've had them as well, plus, when you are trading OPM they get even worse. Are you a technical trader or fundamentals type?

True, but those are some really solid numbers. Why not try and work at a fund or shop it to a small fund in attempts to become a PM at that fund working under someone with more experience in the industry?

Fundamental.

I did used to work at two small hedge funds in the past before I got laid off. I did look for work a year ago but couldn't really find anything decent. My background is not impressive enough to work at a high quality investment firm and I'm not experienced enough for a portfoilo management role at a fund.

I find it pointless now to work at a medium to low quality fund for a huge pay cut. That's basically where I used to work and I didn't think my PM was very smart (eventhough he gradulated from Princeton as Valedictorian - I think you just need a special mental framework to be a good PM).

As to shopping my strategy to a fund..well I really don't think these funds put my value on these types of "track record." I can tell you that last year I had my personal portfoilo management experience on my resume and it was largely ignored, perhaps even seen as a negative as it was incongruent with the rest of my experience.

 

[doublet83]

Quote from clerk:

This is relative.

Doublet can double his investors money, and his 20% cut puts his insurance hurdle at a mere $50k AUM. For him to spend $10k out of pocket is in effect him investing in his prospective clients. I can see him doing that when he registers because other RIA's would be happy to allocate money to him.

Again, this is relative. $10k is a huge hurdle for me. For me, raising $1M-$2M is hard, and getting returns north of 5% is tough. That puts my insurance hurdle (at 20% carry) at $1M. I can't leave my dayjob just to break even doing this.

Interestingly (just thinking aloud) if I can raise $2M and allocate it to Doublet, and use my sales skills to negotiate a 15/15/70 profit split between adviser/subadviser/client, we both will earn $300,000 each gross if Doublet Double'sIt. Neither of us would flinch at spending $10k on insurance and $10k on RIA disclosure docs. But of course, if Doublet's returns are for real - he probably will have more offers of money to manage than his strategy can handle, and he is going to pick the advisors able to allocate $10M+ to him over me.

If Doublet can take the risks inherent in managing separate accounts (ie clients withdrawing funds during a drawdown), he can get registered as an RIA with excellent disclosure documents for less than $3k. If he sticks to trading stocks (other than penny stocks) in US markets, his insurance expense can be kept below $3k/yr as well.

While the results are real, I would never promise or hint to potential clients that they should expect anywhere near these level of returns. Certainly I do not plan my life around being able to return 100% a year.

 

[Busta21]

Quote from doublet83:

Fundamental.

I did used to work at two small hedge funds in the past before I got laid off. I did look for work a year ago but couldn't really find anything decent. My background is not impressive enough to work at a high quality investment firm and I'm not experienced enough for a portfoilo management role at a fund.

I find it pointless now to work at a medium to low quality fund for a huge pay cut. That's basically where I used to work and I didn't think my PM was very smart (eventhough he gradulated from Princeton as Valedictorian - I think you just need a special mental framework to be a good PM).

As to shopping my strategy to a fund..well I really don't think these funds put my value on these types of "track record." I can tell you that last year I had my personal portfoilo management experience on my resume and it was largely ignored, perhaps even seen as a negative as it was incongruent with the rest of my experience.

The last part in regards to your resume is interesting, I've found that as well, though I imagine my resume is not nearly as nice as yours.

Anyway, those numbers are solid, best of luck with it all coming together.

 

[gmst]

Quote from doublet83:

I did say peak to through draw down was 8 to 10%, I think that's a good sized draw down that I wouldn't necessarily characterize as too low.

In my long term strategy I do not use leverage for the most part. I use leverage opportunistically when I feel like a short term trade is to be made. Even then I do not get anywhere close to the 7x portfoilo margin I already have access to via IB. However, my % returns are so high because I've aggressively taken advantage of these short term opportunities. It is almost impossible to get these % returns with long term buy and hold.

You have an excellent track record. Given the fact that you are taking short term opportunistic trades, over 2 yrs maintaining this kind of track record is very good. You don't have to be correct on direction only, but managing a portfolio your beta exposure to market also has to make sense. Plus your risk management needs to be top class. I just don't see a guy with a 2yr track record like this as luck. Agreed, in future your performance might go down couple of notches. but in any case this is a very good track record - at least in my eyes. But then who am I

I still think you are truly under-leveraged given your performance. Go educate yourself on Kelly, optimal f and others - before deciding arbitrarily to bet 1%-1.5%-2% of your equity on a particular trade. Do some Monte Carlo on your historical performance. Position sizing is an extremely important subject and most of the people don't give enough importance to it. With your track record and the kind of money you have, I would personally be happy to take a 50% DD for the chance to make myself 5-10M in 2yrs.

I know everyone's utility is different, but you can't remain a rabbit and hope to make it big in this world. Use excel and see what using a little bit of higher leverage does to your DD and returns.

Lets say worst case happens, you lose 500k out of your 1M, you will still remain a piker - as you are now But if things do pan out as expected, you will make 5-10MM and have a reasonable shot at having your own fund. You may differ this is just my 98 cents. Good Luck

 

[doublet83]

Quote from gmst:

You have an excellent track record. Given the fact that you are taking short term opportunistic trades, over 2 yrs maintaining this kind of track record is very good. You don't have to be correct on direction only, but managing a portfolio your beta exposure to market also has to make sense. Plus your risk management needs to be top class. I just don't see a guy with a 2yr track record like this as luck. Agreed, in future your performance might go down couple of notches. but in any case this is a very good track record - at least in my eyes. But then who am I

I still think you are truly under-leveraged given your performance. Go educate yourself on Kelly, optimal f and others - before deciding arbitrarily to bet 1%-1.5%-2% of your equity on a particular trade. Do some Monte Carlo on your historical performance. Position sizing is an extremely important subject and most of the people don't give enough importance to it. With your track record and the kind of money you have, I would personally be happy to take a 50% DD for the chance to make myself 5-10M in 2yrs.

I know everyone's utility is different, but you can't remain a rabbit and hope to make it big in this world. Use excel and see what using a little bit of higher leverage does to your DD and returns.

Lets say worst case happens, you lose 500k out of your 1M, you will still remain a piker - as you are now But if things do pan out as expected, you will make 5-10MM and have a reasonable shot at having your own fund. You may differ this is just my 98 cents. Good Luck

My position sizes in my long term portfoilo are typically 1.5% to 10% of account value. Position sizing for my short term (intraday) opportunistic strategy can be 5% to as high as 50% of my account. So yeah, I consider myself to be appropriately sized for risk. Even with positions occasionally as high as 50% of account value, those are only in situations were conviction is high and I have evaluated risk of capital loss is low.

DD has been low and returns have been high because I've correctly accessed risk/reward and sized accordingly. However, just because you have been right, doesn't mean you will be right forever. That's risk management.

 

[doublet83]

While I'm happy to answer more questions about my individual results, what I'd really like to hear about is the process of raising capital and starting a fund.

One big question I have in my mind..is what are the advantages of a hedge fund versus a managed account structure (busta..I sent you a message).

Given IB seems to cap you at 5 accounts for non-RIA's that charge fees, it seems that the only viable way to raise serious money using managed accounts is to become an RIA. Therefore, how easy is this process of getting registered from a registration process, and on an ongoing basis?

If I manage a hedge fund structure, I suppose do I no longer need to be registered, with the trade-off being that I can only market to accredited investors?

I would really like to understand this part of the process better, and if anyone has some insights, it would be much appreciated.