Starting own shop vs working for someone else
Curious about people's thoughts on raising money from investors and starting your own fund vs working for someone else. I have had several rounds of meetings and have zeroed down on potential investors as well.
At present, I work in commodities as a physical trader and get a fixed base plus pnl from the shared book (between 10-15 cents) every year. We put good numbers each year and can count on a steady bonus if I choose to stay.
However, I can triple my comp by starting out on my own as there are limited barriers to entry besides posting collateral with different counterparties. While it appears to be too good to be true, I would definitely be working more hours (75+ a week) and risk walking away from a good setup that I have at the moment.
Given most of it is very subjective, what are some points I should think about before making this switch. Appreciate all inputs.
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We have helped established traders go out on their own.
Bumping this thread for more *helpful* responses unlike Clay Art (sounds like some scam guru). While I'm at the point of my career where I'm still learning, I see myself one day striking it out on my own.
Sorry for not being elaborate. I meant to say that my company has helped traders create GP-LLC structures and get help with regulatory fillings with state securities regulators and the SEC(only required above $100MM in most states, except for the ones with no state securities regulator ex. Wyoming) and help with fund auditor and administrator introductions.
It usually costs nearly 70-100k USD to get started and it is only feasible if you have at least a couple of million in your own money to start, otherwise the management cost would not be covered with the AUM or the management fees you would generate if you don't have sufficient investors capital. Also most new managers are charging substantially less management or performance fees than the old standard of 2/20. Now the average is more like 1.6/14.
Coupled with the additional psychological burden of having to deal with investor relations especially during a drawdown.
And considering you are in commodity trading if you want to start a commodity fund, it's better to go the CTA(Commodity Trading Advisor) route where the custody of the funds remains with the Client's brokerage account rather than a CPO(Commodity Pool Operator) where the client's transfer the fund to the pool under your custody.
A very concise answer.
It's worth exploring in detail with other people who have done the same.
Thanks. Happy to answer more questions.
Thanks Clay but this is very different from public equities and not a business where more money means more fees or pnl. There is a sweet spot of how much money you need and what you can actually make (not a scalable business but decent enough to meet my financial goals!) But appreciate your comments and feedback
I am not close to the commodity / macro style funds and strategies but will try to take a stab at the idea and notion of launching a fund broadly. The piece of utmost importance is edge. What edge do you have on your own that you feel your existing workplace does not have as a trader/investor? Is it better access to data? Is it process? Is it some sort of risk management tool? Is it trading strategy? Largely in this environment we've seen funds be exposed for actually having no edge in the L/S equity world, and being an exacerbated beta vehicle. Those guys don't have an edge anymore and their funds may not survive this (in publics, remains to be seen what happens w/ their private portfolios).
I'd be curious how you plan on "tripling your comp" - unless you have LOIs and investors have committed sub docs then you still 1) have tons of start-up costs assuming you outsource back-office / accounting and 2) you don't have steady fee income from management fees yet.
Again I have limited context but starting a fund is ferociously difficult and most people don't just fall into it guaranteed triple their existing comp. Obviously the reward ceiling is much higher as you noted but just from the get-go that seems a bit rich. Apologies for my skepticism if it's at all misguided.
Thanks for your response. Not going to give specifics but "edge" lies in the business model of trading physical commodities where we only act when it's profitable or have a reasonable estimate of being profitable and sit on our hands doing nothing when it seems unfavourable.
Basically, the way you triple your comp is keep a higher cut of what you produce and work more "hours" than you do when you work as an employee. Tripling comp after taxes is a factor of being able to work more and having more flexibility in padding expenses/tax planning when receiving your bonus/base comp overall.
Yeah I totally understand that it might seem like a moonshot and I am probably underestimating my cost of capital but the only limitation for me to walk away from my employer and doing this on my own seems to be the ability to post a bunch of collateral and jump through annoying regulatory/compliance loops. I guess the beauty of being young, broke and naive where I believe I can pull this off and get decently wealthy on my own haha
No hey props to you - makes a lot of sense in terms of how you can dictate/get to a higher comp calc. Totally makes sense there.
Think from an edge perspective though try to nail down what it is you can do better than your current shop. Why aren't they only trading/acting when it's profitable? I guess by edge I mean what can/will you do that they aren't currently? And then why wouldn't they do that themselves if it's such a good strategy?
I'll give an example. These long levered tech equity guys thought they were identifying incredibly strong companies with insane growth potential and their edge was essentially moving up and up the ladder in access to be able to invest at earlier and earlier valuations - hence why Tiger / D1 / Coatue have venture arms but never used to. Their edge was both A) access to companies at attractive terms and B) being designed to invest in a specific sector (tech) like a Citadel/Point72 were not, while C) taking directional mkt risk in a LT bull market. At one point in time that was a real edge.
Citadel/Point72's edge is access to information and talent, being able to identify pure idio "alpha" whilst hedging out all other factor/market/vol risk, and then levering that appropriately because of scale. As an LP you're betting that Citadel has the best talent and quickest information and best tools for analysis to harvest the purest form of alpha.
My point in this is: regardless of what you're willing to share on a forum about your actual edge is benign but you need to focus on why you can and are doing what you do and why I can't replicate it. If everyone could run a platform they would! If everyone can make outsized returns by being patient in trading commodities they would. Why is your process better than the rest and what about it differentiates you from competitors?
Looking to eventually do something similar. Have experience in the phys commodity space as well.
PM me!
Starting your own fund? Mind telling what commodities you traded in physical?
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What the f is this haiku sht?
man appreciate your comment but what does it even mean lol
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I think what is saying is that you need 3-4-5 different things to line up for it all to work.
1) investors need to actually be there with you. Not soft promises and verbal conversations. Real capital truly ready to commit to a start up fund from someone whose historical returns come from a team.
2) in equities (may not be true in commodities because of margining at the exchange level), you need the buy-in of a prime broker or two. For big well known launches, they all compete but for smaller ones, they may not.
3) you need to get legal, compliance, technology, operations, etc all set up and functional.
4) you need a favorable environment in your first 12-24 months to build your track record. Any wobbles in those first few months and it could go off the rails.
in my opinion from many of my friends launching (I’ve never wanted to go down that path), #1 is where it most often falls down. Investors say they’re ready to invest and then when it’s actually time to write the check, they don’t want to be the first, or they need the fund to be bigger, or to have a 3 year track before they invest, etc. etc.
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