Just to clarify, there is no such thing as "claiming" trader status, it is a simple matter of choosing or not choosing to deduct your expenses. Mark to Market on the other hand is an official election with the IRS. Some firms claim sending a letter of some sort stating you are a full time trader and that is why you are deducting expenses is some sort of official thing - it is not anything official, if you feel like sending a letter go ahead but you are not "claiming" anything.
Starting a fund / raising capital
- Thread starter doublet83
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Ha! I can relate to this entire paragraph. I introduced a weekly options volatility strategy to a few of my clients but with the caveat of 40% of the P&L. Less capital (Minimum $50,000) but it makes investing/money management with smaller amounts of capital (and anything less than a $100 mill is small) more feasible.
You are correct. "Trader status" isn't something that needs to be claimed, it is just something that needs to be qualified for. Anyway, the bigger issue is electing mark-to-market. A trader must qualify for trader status in order to elect the M2M option. If a trader makes the M2M election and it is determined later that his actions don't qualify, that is bad news.
IMO, the only time you'd ever want to elect M2M is if wash-sales are a significant problem. Otherwise, the only reason to make that election is if you are planning on losing lots of money. Because the only real advantage to M2M is the ability to carryover large losses in a single year.
For that luxury, a trader gives up huge advantages like 60/40 treatment of 1256 contracts and the built in tax deferred compounding of long term positions. Almost never worth it, but that is just my opinion.
Tough to justify facilitating deposits less than $200K. Just isn't worth the hassle. In fact, most of the time if I'm meeting with someone and $200K is something to think about then I just tell them that the program probably isn't for them. Typically, the people I meet with state that the "low" $200K minimum is enticing. They are willing to "throw $200K at it, just to test the waters".
Ya, I agree with you, im in my mid-twenties though so I'm just checking it off as necessary cost of doing business until I can meet the right clientele. You know though, I think the real route is having to put in $3-$5 mill of your own cap into a fund to actually get heads to turn? Who knows...just taking this one quarter at a time.
Agreed, MTM makes perfect sense for stock traders, and zero sense for profitable futures traders. No one know what qualifies for trader status since so few cases have gone to court. I think anyone who honestly believes they trade for a living, don't have other income, and claims reasonable expenses should be fine.
Just for the benefit of others, since this thread is about fundraising.
IMO, the reason that Heech is having better success with fundraising now is purely because of his history. To sum it up, it pretty much goes like this.
Any fund less than $20-30MM won't be able to target institutional money by default. Qualified plans can't invest if they are more than 10% of the fund anyway, and most institutions also have internal procedures that are similar to that. Institutions typically aren't looking to invest <$2-5MM because if they were making a bunch of small investments, operations become much more difficult.
So small managers are targeting HNWs and family offices. HNWs are pretty much a crapshoot. You never know what they are thinking. With only 12-24 months of history, you might get a couple of them to bite. Family offices are a bit different. It is pretty commonplace for them to want to see 36 months of performance. That seems to be a magical threshold where they will start listening to you. Heech just recently passed that mark and consequently things are getting easier for him.
I largely agree with Epic's comments.
Just to add a few more thoughts, which I may have also put elsewhere:
- I am generally very flexible with my pool / fund, in terms of accepting investors of any size. This is one of the obvious advantages of a fund structure versus managed accounts... I can't do SMAs for less than $1mm, but I happy to do fund investments of just about any size.
I do this not because it's necessarily good financially... My costs for accepting a new investor + AML background search can be pretty high. But I think it's good marketing. Nothing better than to have a broad pool of existing investors; they can act as references and will definitely spread the word. I have one guy who initially came in with $40k of his own money 2 years ago.... but is now starting next month with a $1mm SMA.
- If you aren't getting investors, then you just aren't "there". Don't worry about marketing or buying databases or cold-calling people... if you've talked to 10 potential targets and none have invested, then calling 100 isn't going to help. This isn't like selling Avon. Focus on the problems in your strategy / fund / product instead.... And sometime the only fix is better performance, lower DD, longer history.
In contrast, once you are "there", I think raising money becomes almost automatic. I would say of all potential investors who find me thru introduction / website / press... 50% will now want to move forward to a deeper conversation after looking over my pitchbook / PPM. Of those who look deeper, probably 50% will now invest... So 25% of leads are converting.
Just 6 months ago, those ratios were probably 20% and 10%... Or about 2% of leads were converting. And how huge of a difference is a 2% vs 25% conversion rate!?
Just to add a few more thoughts, which I may have also put elsewhere:
- I am generally very flexible with my pool / fund, in terms of accepting investors of any size. This is one of the obvious advantages of a fund structure versus managed accounts... I can't do SMAs for less than $1mm, but I happy to do fund investments of just about any size.
I do this not because it's necessarily good financially... My costs for accepting a new investor + AML background search can be pretty high. But I think it's good marketing. Nothing better than to have a broad pool of existing investors; they can act as references and will definitely spread the word. I have one guy who initially came in with $40k of his own money 2 years ago.... but is now starting next month with a $1mm SMA.
- If you aren't getting investors, then you just aren't "there". Don't worry about marketing or buying databases or cold-calling people... if you've talked to 10 potential targets and none have invested, then calling 100 isn't going to help. This isn't like selling Avon. Focus on the problems in your strategy / fund / product instead.... And sometime the only fix is better performance, lower DD, longer history.
In contrast, once you are "there", I think raising money becomes almost automatic. I would say of all potential investors who find me thru introduction / website / press... 50% will now want to move forward to a deeper conversation after looking over my pitchbook / PPM. Of those who look deeper, probably 50% will now invest... So 25% of leads are converting.
Just 6 months ago, those ratios were probably 20% and 10%... Or about 2% of leads were converting. And how huge of a difference is a 2% vs 25% conversion rate!?
First let me just thank you for this thread and for everyone who has posted - I rarely use forums because of the info but this is great. - To comment on your post; That is great to hear about the $40k account converting into something larger and that is what I have generally found myself as well. Can I ask if your initial investors were friends or business associates? I am curious as you mentioned cold calling and do know that people raise capital that way, just I have never even considered that route.
Very few were friends / colleagues. I dont think it's because they dislike me.... I like to think its because I've always been coldly professional about the fund. I've never been one to pat them on the shoulder, wink, and tell them I'll make them rich / take care of them. Instead I'm more likely to tell them the full risk, discuss all of the ways they can lose money in dramatic detail. Of course I launched with $2-3mm of my own money, so I never felt like I needed their financial support anyways.
You know, some people would see my 2% vs 25% conversion rate and say... See, if I can generate 10x the number of leads / meetings thru cold calls or whatever else, then I'm good to go. But that's not how I roll.... Nor do I think it's an efficient way to work. I don't want to do 10 calls a day, or travel to Chicago and NYC once a month. I'll do 1-2 calls a day, max. I'll hit up NYC / Chicago once a year, if even that.