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Starting a fund

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  #21 (permalink)
 
Blash's Avatar
 Blash 
Chicago, IL
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Wow great post! Nice work... @Bladesmith ....more like Wordsmith! Please post more in... Swinging a hammer - the smith's musings...

Ron


Bladesmith View Post
Starting a fund is an interesting and worthwhile topic. I believe that this can be a very constructive discussion; a great opportunity for many of us to learn more about the laws, logistics, advantages and limitations of institutional vs. individual money management.

Let's not squander that opportunity by making this all about @katalyn, and whether or not we wish to believe her claims. Let's instead treat it as a hypothetical, and simply build from there. I believe we can all benefit.

I've actually done a bit of research on the HF model so can share a few experiences and observations of my own. And in starting a fund, there are numerous important things to consider.

The first, and perhaps most important comment I will make is this: trading your own account and managing a hedge fund are two completely different things. Most people who are good at one will not be good at the other. This is borne out by thousands of individual examples over many decades of industry experience.

One critical consideration is the scalability of a given trading or investment strategy. A successful scalper or day-trader might be able to profit consistently with 5, 10, or even 50-lot trades, but can he expect the same success rate with 500 or 1000 lot size? At which point does execution begin to suffer, and to what detriment to performance?

Earning 15% annually before fees on $50mm in assets means you need to earn $30,000 per trading day. If you can squeeze out 5 points on ES on average after commissions per trading day (roughly a third of its recent average daily range - something extremely few traders might actually be able to do consistently), that means you'll need to trade 120 lots. If you can earn 5 points only every other day, double your size. If you can earn only 2.5 points every other day, double it again.

The minute you start slinging 100, 200, or 500 lot size, you become a target for HFTs and other scalpers, and it will cost you. Understand that. There's a very good reason the vast majority of funds operate on much longer time frames than the typical day-trader does.

Another important consideration is expenses and the viability of the actual business model. The moment you agree to manage other people's money, you need to devote significant legal and accounting resources to ensure compliance with securities laws, tax legislation, etc. This can become very expensive, very quickly. It is in many instances the biggest barrier to entry. Simply drafting your fund docs can easily cost $50 - $100k and that doesn't cover one bit of the ongoing expense. Any potential investor - especially in the post-Madoff world - will need to know that their money is safe from fraud and mismanagement. In most cases this requires an independent third party auditor and other risk management, accounting, and compliance officers keeping tabs on every position and every trade placed by the fiduciary. Again, this can be quite expensive.

On top of that you'll need tech support, operations support, analytical support, travel and marketing expenses, office space, records storage, equipment, data fees and subscriptions, etc. This, too, will add up quickly.

It's therefore quite likely that you'll need to raise at least $50 million or more just to cover the startup costs and ongoing expenses of managing a hedge fund. A 2-and-20 fee model will bring in base revenues of just $1 million on $50mm AUM, but will your seed investors even be willing to pay that? More and more funds these days are moving to a reduced fee model, so why would any investor pay a no-name startup the full 2 and 20?

Prospective investors willing to pay the full expense load will need to see an established track record on critical asset mass before even considering it. One or two years would be a bare minimum. This isn't field of dreams where "if you build it they will come." That only works for well established industry pros - guys like Alan Howard, Michael Platt, Louis Bacon, Boaz Weinstein et al who already built an impressive track record on the street before striking out on their own.

Indeed, for an individual trader to successfully launch a hedge fund is exceedingly rare. No matter how good you are, you'll never get a chance to manage assets if you can't first attract the assets. Again, probably $50mm or more to start.

So unless you're good friends with a billionaire, you'll probably need to find a professional fund seeder, and the moment you step onto that playing field you'll once again be competing against a lot of guys with wall street pedigrees, whom most investors would consider a far safer bet than the guy day-trading piker-lots out of his parent's basement. Quite frankly, it will be nearly impossible to pull it off going this route. You'd be much better off getting a job at a prop-shop style fund like Millennium, and then maybe after a couple of years breaking off to start your own fund, where you could successfully leverage your institutional experience and investor contacts to tangible benefit.

Still, if you're serious about this, I'd suggest you reach out to the Prime Brokerage departments at U.S. based securities firms. Ask them to send you some materials and start doing some real in-depth planning and research. Spend a year or more drafting a business plan and putting together some initial presentations and marketing materials. Do all of this while continuing to trade your own book and building your individual track record. Then, and only then, will you be ready to make your first follow-up call.

That's when the real work begins.


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  #22 (permalink)
katalyn
Gyor,Hungary
 
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Pedro40 View Post
I have to call BS on this poster, I am sorry...




First, you are saying you make 4K or so per day, and you mention compound interest, yet you don't realize that you could be at millions in less then a year if you were actually compounding profits.

Second, you post from a country where you can live like a king on 4K per month, and you make that in a day. What do you need so much money for???

If you are for real, you don't need a fund at all....

Do realize as long as one is able to make money in market,she doesn't have to depend on others' belief on her part of ability, it's true of any trader.

I post some of my recs just to ensure that those who will be answeing can know that she knows it's incredibly difficult to make money in market & she paid her due diligence in market & meet the bare criteria of the task she's aiming for.

Appraise,approval or disapproval-I was seeking for none of the reactions.Just facts regarding issue-be it hard or soft.

The environment I grew in is very different than most USA people.As such,most can't understand the drive to make as much money as possible.

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  #23 (permalink)
katalyn
Gyor,Hungary
 
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Bladesmith View Post
Indeed, for an individual trader to successfully launch a hedge fund is exceedingly rare.

I'm well aware of the fact-the reason I opened a thread.I was pretty sure being good isn't enough,there are a whole lot of subtleties have to be covered too.

That was a quite helpful post,the kind of posts I was looking for in the first place.At least some can cut through the chase & directly go to the main point.

I don't feel discouraged though.Everything is feedback-nothing is either good or bad.

I think I've to chunk down my entire position in multiples of 50 lot or 100 lot size.I can enter just one or two lot at first signal & keep adding chunks on additional signals.Or just enter full position at once & then scale out once reaching one to four times my risk-though it's the lesser attractive alternative.

Higher timeframe charts will definitely be of my interest.

I realized I've to rely on swings more to make two to four times my risk-so mostly catch a trend just when it breaka out or an early ride on a trend reversal.

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  #24 (permalink)
 
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 Schnook 
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@katalyn - one other thing to consider is partnering up with other professionals. You'll find that very many, if not most successful hedge fund launches in recent decades were started by partners, groups, or entire teams of individuals. This approach allows for a pooling of resources, a larger network of contacts and prospects, increased visibility, and much greater credibility. It means a lot more to prospective investors when they see that not one, but several smart and successful people are all willing to stake their time, money, and professional reputations on a venture.

Moreover, adding portfolio managers with complementary strategies and skill sets can broaden your universe and help smooth returns over time. If your strength is in trading trends, then perhaps adding someone whose strength is in trading reversals would improve your return profile.

Obviously it's critical that you add the right people. Their skills, personalities, and resources should be a good fit. But once you do, you'll probably find a lot of synergies, and realize that together you can accomplish much more than you could individually.

By the way, one of my most memorable trips in recent years was my visit to Budapest in the fall of 2014. A lovely city with kind, strong, and passionate people. Having read a bit about your nation's history, and spending some time with some of your countrymen, I can begin to understand just a little about your motivation and ambition.

I wish you the best of luck on your endeavors.

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  #25 (permalink)
Pedro40
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katalyn View Post
The environment I grew in is very different than most USA people.As such,most can't understand the drive to make as much money as possible.

Oh I am sorry, I didn't realize you grew up in Saudi Arabia as part of the royal family. Making 80K dollars per month must be really hard for you now that you are an adult and has to pay for expenses.

You are trading the most liquid future that is easily scalable, you have enough money to grow it already, yet you are trying to raise money. Sure that makes sense.

I'll tell you what. Just increase your contract numbers by 1 each week and you will be at gazillions by the end of year, no fund raising needed...

----------------------------

Going back to the hypothetical of raising money, I say it is much easier than people make it to be. Karen, the supertrader needed only 2 years of real money profitable record and money started pouring in, first from friends, then from others. In no time she was managing a 100+ million portfolio.

So you only need a good broker statement and I am sure you already have one. Have you? What was your return in the last 2 years?

-------------------------------

There are 2 things that are more important than money and that is time and health because money can't buy those, at least not time for sure. So assuming you are healthy, try to use your time more wisely, and if you already have enough funds, I would try to switch to a trading style that requires less time so you can enjoy you money better...

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  #26 (permalink)
 
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 Schnook 
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Pedro40 View Post
Going back to the hypothetical of raising money, I say it is much easier than people make it to be. Karen, the supertrader needed only 2 years of real money profitable record and money started pouring in, first from friends, then from others. In no time she was managing a 100+ million portfolio.

Interesting that you chose Karen Bruton as your example. Last I heard, she was shut down by the SEC and accused of engaging in massive fraud.

She may have been able to dupe some people into giving her their money, but I'd hardly call her a hedge fund success story.

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  #27 (permalink)
Pedro40
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Bladesmith View Post
but I'd hardly call her a hedge fund success story.

I call her a raising funds success story. She increased her fund from low 6 digits to 8 digits in 3 years. This thread is about RAISING capital, not trading profitably.

On other forums people also claim that they have been contacted by backers after talking about their good performances. If true (probably not), that is also a quick way to find founding. I suspect this thread's goal is similar to that....

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  #28 (permalink)
 
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 Big Mike 
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Pedro40 View Post
Oh I am sorry, I didn't realize you grew up in Saudi Arabia as part of the royal family. Making 80K dollars per month must be really hard for you now that you are an adult and has to pay for expenses.

With this type of attitude, you are not welcome here.

Mike

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 bpr0 
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@katalyn

I don't understand. if you are making half a million or more a year then what is the rush.Just slowly compound.
Why work for others money and loose your freedom it does not make any sense.

Also market has liquidity limitation you cannot expect to keep same return when you increase your position size to crazy levels.Market will detect and punish excessive greed.

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