Me and my friend has pooled together about 10M dollar proprietary capital. My friend wants to start a prop shop trading our own strategies using the 10M dollar. We plan to offer 150k - 200k base salaries to hire one quant and one trader. Is this enough money to start a prop shop ???? Should we start a prop shop or should we just open a shared personal brokerage account ???
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Based on previous WSO threads, here are some key points to consider:
Capital Requirements:
Advantages of a Prop Shop:
Disadvantages of a Prop Shop:
Alternative - Shared Personal Brokerage Account:
Conclusion: - With $10M in capital, you have a solid foundation to start a prop shop, but you need to carefully consider the additional costs and regulatory requirements. - If you prefer a simpler setup with lower overhead, a shared personal brokerage account might be a better option.
Ultimately, the decision depends on your long-term goals, risk tolerance, and willingness to handle the complexities of running a prop shop.
Sources: Why Not Start Your Own Shop?, Setting up your own Prop firm?, Prop Trading - how much money do they give you to trade?, Brokerage: Why not start your own firm?, Boutique prop trading firm?
What types of returns on capital do you anticipate?
If you think you can get a 40% return (probably unlikely), that means you’ll have $4m in profits, you’ll keep 20% of that so you’ll keep $800k. Of that $800k you’ll have to pay for all salaries/bonus/rent/computers/technology/etc. and still hopefully have enough leftover to pay yourself.
I dont think you’ll have enough capital to achieve the returns necessary in absolute terms to provide sufficient compensation for you and the team. I think if this is something you seriously want to do then you should try to find a big backer like Bain Capital who will be able to ramp you up to $100m-$1b in capital after you demonstrate a successful track record under their partnership.
Plus you might need to look into rules regulating acceptance of outside capital, which might put you in the SEC domain of hedge funds rather than the more lax family office/prop trading environment.
Where are you getting the 20% from? I understood the OP to mean he and his friend had 10MM of prop capital either in a fund or in a shared personal trading account not 10MM of investor assets which as you noted is clearly too low when accounting for the not insignificant fixed costs of running a fund that accepts outside money. 10MM is not a lot but I could see it being enough for two guys. Depending on their experience if low fixed costs 10-20% returns on 10MM might be easily achievable and a pretty decent outcome. Whether 10MM minus fixed costs is enough capital for the style of trading OP and his friend have in mind only they can answer.
For this sort of setup and capital I am not sure if hiring a quant and a trader are necessary or desirable but I am guessing if you want to hire people setting up a firm is likely more tax efficient as I am not sure how you would otherwise deduct their compensation and other fixed costs from gains for tax purposes. I don't have experience with this setup but I I am not a tax expert so likely best to consult one as this may also depend on product traded and investment horizons.
Again I am not sure whether it is really advisable to setup a small prop firm with multiple other employees on this capital base and not sure how you plan to get these presumably relatively junior employees to add value quickly but I don't think it is impossible either. Starting slow and ensuring you and your partner can make steady profits might be a first step before hiring several employees which could be a medium term goal. Recruiting experienced employees might also be easier once you have some track record.
Thanks a lot !!
Should I not spend money on hiring anyone yet and just trade our strategies with the friend and then start hiring people when we have grown the 10M into 15-20M ??
As others said there is no reason to hire people for this type of firm until you are profitable, and even then it's not clear how a junior person would add value. $10m is plenty for a small quant strategy, and if you don't need very low latency then you can use mostly off the shelf tools and infrastructure. The main challenge for a small firm is just managing the costs (data sources, broker fees and hosting) and getting the strategy pnl to exceed that consistently. The firms I've seen that did this successfully essentially never hire anyone at all.
interesting perspective.
Follow-up question: if we have decided not to hire anyone, and the employees of this firm are just me and my friend, then what would be the benefit of setting up a prop shop vs just opening a shared brokerage account ?
I've found that having it on an LLC is easier for tax purposes if more than one person is involved. Also a few exchanges require institutional accounts to be on an LLC.
An LLC would make the formal structure easier legally and allow you to expand should you desire to hire additional employees more smoothly. I think the biggest drawback would be FICA taxes. Trading in a (taxable) brokerage account is considered unearned income and is exempt from FICA taxes, but in an LLC you'll likely be subject to high self-employment taxes.
I am planning something similar but with prop + external money, if we had 10m between me and my mate we would start straight away (but this means 5m each, which we do not have!).
We need to pool money from family, friends and possible clients, I think the bare minimum (being realistic and humble at the same time) to start would be 10m for each person involved, so for 2 people we would need 20m. This would not allow us to earn as much as we earn during our current job, but at least we should not be losing money and could cover our expenses for a couple of years until ideally, we can raise more capital.
If you do HFT it's another conversation, but I think if you can do around 15% gross is already a more than a good result, you can also lower it to 10-12% but then it needs to be super stable so you can still do 8-10% net and keep the spread to yourself (+ return on prop money)
Does anybody know the bare minimum set-up and annual cost to run a fund (assuming some "cheap" location like Cayman or Bermuda)?
I have heard around $300k to set it up properly through a law and accounting firm. It only makes sense if you already have gotten the pnl up to a certain level.
Sounds reasonable, thanks for the answer!
People are way too conservative in here. Since this is your own money and you’re not bound to a vol target for clients, it’s simple math
if you have a real strategy with a sharpe of 2, and you run a 20% annualized vol target on 10mm of capital, you should be making 4mm per year before costs
I actually worked for a firm that was founded with 1mm, and we were making 10-15mm a year with 5 employees. Didn’t keep more than 7-8mm in our account at any given time since we only traded intraday futures
The real problem is that this is only going to work if you’ve already been trading the strategy at an established firm and know that it actually works. Just based on your post it on don’t sound like someone who’s done millions in PNL at an established firm as you wouldn’t be asking this question
This is spot on, the capital is not the issue. However it seems there is no incentive to hire anyone after the strategy is profitable. It just means less money for the existing people unless the person brings new alphas that directly fit into the existing strategy, but these types of firms tend to focus on one niche and not try too many different things.
A firm funded with 1M dollar and 10-15M profit, how many year did you take to reach that profit and by the time you start to make 10-15M, how much AUM do you have and are those AUM all proprietary capital or client money ?? How did it work out ? Did you use large amount of leverage and get insane return ( something like over 100% ) ?
The founders came from a top prop shop and were already trading the strategy.
like I was saying, if you’re not already making money/trading professionally it’s most likely not going to workout.
There are tons of college students building mm bots on crypto exchanges with a rusty Toshiba laptop and 500$ on their account, if you are not sure if 10 mil. is enough to start you have no business whatsoever, don't do it.
If you are looking to start a prop shop I assume that you have some idea of what you want to trade. In that case you can get a good idea of how much capital you would need for the strategies by building out your positions and checking the margin requirements from the exchanges. You can download the risk models that ICE uses to calculate margins from their website to do this quickly. This will also give you a good idea of the VaR you will be running (although at a high confidence interval, believe energy for ex is 99%). Once you have the margin requirements you can scale that up to include your drawdown limits; this number will be a decent starting point of how much capital you would need just to run the strategies. Once you have that you can take the expected pnl and determine of thats enough given your expected costs.
Well it depends on the kind of strategy used but there can never be a general rule to it. For example in Trend following strategies the minimum capital is related the contract sizes of future contracts. I remember 6- 7 years back in India the Gold contracts where smaller in lot size but later the regulations changed. However you could read a book on position sizing by Vantharp. Which will give you some technical direction
I think the most crucial component that people are missing entirely here is the ability to leverage. With 10mm capital, you should easily obtain 5x - 10x leverage giving you 50mm - 100mm exposure for futures providing much higher returns and yearly pnl to play with. Many prop firms go much higher leverage but it depends on the type of strategy you are running and your risk profile as a firm.
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