Looking for seed money but no idea on the how/what/who

Hey all,

Before diving into this I think it makes sense to at least give some context and background on me personally just so we're all on the same page. The general gist of what I am curious about from anyone with experience is the goal of getting seeded to start a small fund. The goal would be $2mm-$50mm. I'll get into why in a second.

As way of background, I am 34, C-suite exec (think VP of Corp Dev/Treasurer/CFO) at a mid-cap public company on the east coast. I have an MBA and CFA and have done pretty well for myself being outside of the 'high' comp / 'high end' NYC finance world. I started in a Fortune 50 and moved on up the corp ladder quite quickly. I am happy in what I do but not where I am company wise. We're a struggling company, PE backed and in knee deep of a turnaround situation.

Throughout that entire time I've traded my own account. Specifically, I've been trading since I was 16. I am obsessed with trading and have read every and any book on technical analysis and the market. I got serious on the topic in 2014 and started to actually hone in the strategy to the point of creating an algo and several scans.

The account was up 190% in 2017 and is currently up 30% YTD in 2018. I can get into as much detail as people need/want but for now let's say it's a L/S mid to large cap algo based on 4 technical analysis criteria that can, and are, used to find both L and S positions. I literally just flip the criteria for the TA pieces to find shorts. I trade both the underlying and 30-90 day vanilla call/puts as the primary piece of the strat. Win rate is 50%-60%. The account isn't a huge multi million dollar book. Think sub $250K. Nonetheless, I am happy with the results.

I know the strategy can be scaled up to a larger size. Without question the trades can take on additional size as both the underlying and a laddered options approach can be applied to the technical analysis. Trade allocation and risk management are just as important as the technical analysis pieces to me and the reason I haven't gone broke in the early years.

Playing devils advocate, I know 12 months is not enough of a track record. I get that completely and will keep trading this forever if I have to until I can start something. That is the end goal. I've been asked well why don't you just trade your own money and dump more money into it. Personally, I may do that soon. My wife and I are expecting our first baby soon so while I am laser focused on making this fund a reality I can't say I am in a position to dump more cash into it right now. In 6 months? Maybe. I know.....seems silly. Estate planning can do that to you I guess.

So, to the WSO Monkey brethren, what should I do? How can a nobody in the hedge fund world go out, convince anyone that I am not a jackass, that this track record is real (I obviously have the account statements and scans as backup) and raise $2mm - $50mm to start something. I legit know nothing about getting seed money, emerging manager platforms and the like. From what I've researched thus far, when seeded the back office, legal, accounting are all taken care of. So I am not worried about that part of it.

I thank any and all guidance and comments before hand.

Best,
Fellow Monkey

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Comments (46)

Most Helpful
Jun 12, 2018

People aren't going to take you seriously if your alpha signals are purely technicals. Your track record isn't going to be your biggest issue. Maybe if you have good relationships or network/pitch well you could land some dumb HNW money but few prudent investors would invest in a pure technical analysis play.

    • 2
Funniest
Jun 12, 2018

mmmm yes pump your alpha signals into me

    • 6
Jun 12, 2018

Thanks for the response. The technicals are the starting point to scan for a universe to work with. From there it's a matter of personal selection based on the technical setup, fundamental story, options pricing and volume over specifics time frames.

What's the difference between this and any HFT or quant driven strategy trading on a multi month/quarter timeframe? They're using inefficiencies in the market on some level with technicals as the back drop to enter/exit, no?

Thanks again for the input and feedback.

Jun 12, 2018

-HFT firms mostly make money off the spread and by being a market maker. For the most part, they aren't exactly making speculative bets. I'm not an HFT guy though.

-Maybe I am incorrect but it sounds like your current setup is completely rules based? Doesn't sound like there is a statistical process involved. Rules based processes will pretty much always blow up in your face eventually.

-The basis of quantitative/systematic strategies is to use some method to forecast future returns/prices and then rank stocks by the forecasts to determine long and short portfolios. Forecasting methodology obviously varies strategy to strategy. These forecasting methodologies never rely purely on technical indicators as their usefulness is not robust without fitting against macroeconomics and fundamental factors.

Disclaimer: I do research for a quantitative market neutral global equity strategy so I don't know very much about options.

    • 2
Jun 12, 2018

Would you mind if I PMd you to take this off line? I can go into more details.

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Jun 12, 2018

sure

Jun 12, 2018

Sounds good and thanks. I'll message you shortly.

Jun 12, 2018

Haha. You are fairly clueless. Technical and statistical are not that different. A chart pattern is nothing more/nothing less than the sum of the statistics.

No clue on his algo on whether it's math in lines on charts.

Also sounds like more of a prop strategy than hedge fund but the lines blur.

Returns aren't that great for small size. That isn't uncommon. If there's a difference between stats and old school stuff it's that using stats can be a lot more scalable.

Array
    • 1
Jun 12, 2018

By statistical, I mean a statistical process.

Jun 12, 2018

You can raise 1st loss capital and get 9:1 leverage pretty easily. 1st loss capital typically pays 50%...so you are essentially just hyper leveraged. If you have the confidence that you'll never lose 10%, then this is a good deal. If your strategy can't stand 10x leverage...then this is not a good deal.

just google it...you're welcome

Jun 12, 2018

Thanks. Can you elaborate on how it's done or thru who?

Jun 12, 2018

google for Topwater Capital

just google it...you're welcome

Jun 12, 2018

Thanks. I'll check them out

Jun 13, 2018

Also check out Prelude Capital

Jun 12, 2018

Why would you want first loss capital? I'm going to assume they stop you out if the trade goes wrong. So you give up half the profits and take the full loss? Which in an algo world anyone can be wrong.

Could you just add leverage thru options or Margin? The only advantage I see to first loss would be you can't go negative.

Array
Jun 12, 2018

if your trading strategy has small losses in the beginning (say, risk 0.2% to make 1%) then you can use the leverage offered by 1st loss capital to build up a capital cushion, and then you can scale up the risk.

if you don't have very high confidence that your strategy will make money, then why would an investor ever give you their money to invest? When you don't have a track record, either you trade your own money with no leverage an you grow slowly...or you trade your own money with leverage. No large investor will give you money without a track record. I would suggest you build your track record both in your trading account, as well as posting your trades and strategy publicly. Collective2.com and FundSeeder.com are examples of places where you can build a track record. Also, InteractiveBrokers.com has a platform for traders to build a track record that you can shop around, and they will help connect you with investors looking for up[ and coming managers. However, you need to run your strategy on their platform...nobody will believe what you say about your history...because that can always be faked. However, if you consistently make good market calls in real time on a public platform, that is really the only way to create a track record when you are not working for an institutional firm.

just google it...you're welcome

Jun 12, 2018

This capital wouldn't work for anything besides a Day trading strategy. And it's not that hard to get 5 times leverage so why would I take more risks and give up profits. The only thing you are getting is a "promise" to help raise if you perform. You can build up the same capital cushion on a margin account as a first loss account and you don't have to share profits with anyone.

The only thing first loss is giving you is some guy at their office is staring at your position all day ready to hit the bid if your down 9%. Which is another problem your giving up control of the position. Worse economics for the manager and loss of control. You would have to be desperate to take those terms. If your good enough to make money on those terms then your good enough to self fund without their help and build capita by taking it out of the market.

And I doubt they would even let you do something like go into amazon earnings ten times leveraged. So going cowboy wouldn't even work.

This is basically very expensive margin capital. It really deserves about a 5% interest rate if that. Enough to pay the investors the risks free rate plus have some computer program to auto puke.

Array
Jun 12, 2018

i'll agree that 1st loss capital is not for everybody...but the same could be said for managing outside money. In this scenario, you would aim much lower (instead of shooting for 100%...you shoot for 20-30%)...and so this type of capital is only valuable for strategies that need lots of leverage to make 20-30% returns (equity long/short, interest rate arb, etc...). However, merely by the fact of managing that outside capital, you create a track record that can help you raise capital from other investors on "normal" 2/20 terms.

just google it...you're welcome

Jun 12, 2018

There's plenty of firms to let you do interest arb with leverage. For 10-year treasuries you can get 20-25 leverage backing yourself.

I don't know how equity-short finances. Not in repo so maybe need the cash though I still have a feeling there are far better spots to get these economics.

I think my fidelity personal savings account gives me 5 times leverage intraday and that's nothing fancy.

Array
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Jun 12, 2018

You will need to do tons of research and networking that you clearly have not done. Raising money is very competitive across asset classes and even experienced guys have challenges these days depending on the strategy. Rather consider doing this next to your actual profession. If lucky, some family / friends give you a bit of money. I would not run a "strategy" like this with their money though.

Jun 12, 2018

Thanks. I've done plenty so far which led here, and other places, and to my specific question on emerging manager platforms and other avenues outside of a pure fund; some of which have been mentioned in some responses. Raising capital is obviously difficult.

Any substantive reasons why you wouldn't pursue raising family/friend money or just not a fan of the minimal details offered in the thread so far and you wanted to add that in?

Jun 12, 2018

Fund economics don't make any sense for anything under 30M or so just FYI. Your returns get eaten alive by compliance...

Jun 12, 2018

I would second this. Setting up a fund managing institutional money requires a very large fixed cost base that normally needs 30M or even 50M to make economic sense. Otherwise, for at least the first 12 months, expenses will go out of your own pocket. Hopefully you make some ridiculous return from then on to not burn whatever that is left in your savings. Another challenge in raising institutional money is track record, at least a few years or preferably throughout a cycle to assess your strategy.

With the size you're thinking, only makes sense to raise through friends / family or private HNW individuals. Btw your strategy sounds a lot more technical analysis heavy than systematic or quant trading. Plus, you're exercising your judgement in selecting the final securities to invest in, which kind of defeats the systematic framework in place. More like quantamental to me than anything else.

    • 1
Jun 12, 2018

Not to mention his strategy likely won't scale. Managing 30m is totally different than 6 figures.

Jun 13, 2018

If it's not day trading then just about anything scales to 30 million.

Array
Jun 13, 2018

day trading scales to 30mm...heck...it scales to 100mm...the problem is when you get above 100mm that liquidity becomes a problem in all but the deepest markets like Futures, FX, govt interest rates, energy, etc...

just google it...you're welcome

Jun 13, 2018

want2trade / traderlife / cantainaesus / m_1

Thanks again for the multiple responses and feedback here. I'll try and respond to as much as possible.

I'll look into the Interactive Brokers track record options as that's the broker I am using anyway. That said, is that really needed to post the ideas publicly? I have no issue doing that but it seems like overkill. I would have the account audited by DT, KPMG, GT or whoever as way of proving the trades, results and the strategy. I have every internal IB report they have. So when someone said results can be faked; how? An audit of the account would be more than enough proof of a track record. What am I missing?

Regarding timeframe - the strategy is not day trading. Think 30-90 day holds using vanilla options and then trading in and out of the underlying around the core position.

The statement that I am making the final judgement is completely correct. I start at the marco level for direction, run the algo/scans, then dive through the universe 1 by 1. I have a very systematic approach to the risk management and capital allocation. "Quantamental" is probably the best way to describe it.

I'd see no reason it couldn't scale to $30mm but agree there's a limit.

1st loss capital is something I will definitely look at but unless I am missing something it sounds like I am better off growing the account organically.

I guess the next question is could a track record like this get me into any existing shops?

  • HFT
  •  Jun 13, 2018

Check you PM, maybe we could work something out.
Cheers

Jun 13, 2018

Trading as a whole scales but the execution side changes dramatically when you're managed $30M VS six figures. You run into all sorts of execution related issues and it gets way harder to get good alpha. There's a reason that larger funds typically perform worse...way harder to manage more money.

Jun 13, 2018

At 30-50 million size of fund would not be an issue for performance.

Truth is most managers (and investors) won't run money in a way that puts up 100%. Maybe they 80% index and 20% alpha etc. worse case you can get into position at 1% slippage both ways, but that would seem extreme.

Array
Jun 13, 2018

That's my thinking as well. If on $30mm the dedicatation to the strat doesn't have to be the full amount. I assume that is not common to go all out 100%.

I can't be the first person outside the industry to run something on their own, do it for some form of extended timeframe and have a track record to use as the baseline for starting off.

Said differently, is it the small size of the track record that's the issue here or something else? If that's the problem I think the answer is to go prop shop and get some scale behind it first.

What do you think?

Jun 13, 2018

It's just not that impressive of performance. Plenty of guys put up those kind of numbers on focused actively managed positions.

Array
Jun 13, 2018

Lol just no, stop.

    • 1
Jun 13, 2018

Good thread, good comments.
I looked at starting a fund - your returns will be eaten alive if you are sub $10m.
Someone mentioned sub $30m even, I think at 10 you should be alright if you carry a lot of the weight yourself in terms of back office, legal shit etc...
Regardless - I have given up this idea and now just trade on my PA.

Jun 13, 2018

Thanks all.

So, what's the general consensus then on prop shops as the starting point instead of going all in on trying to start a fund?

Jun 13, 2018

There are a couple places that will give you a sit and a bit of cash - if you lose money you'll be out fast. They tend to come to campus and try to recruit, they churn through people like crazy and I wouldn't recommend giving up my job for this...

Jun 13, 2018

names?

just google it...you're welcome

Jun 17, 2018

Depends on the shop you approach. I know a few and they are pretty hard to get in with unless you have something really promising and scalable.

Jun 18, 2018

Thanks m_1. Any names in particular?

  • HFT
  •  Aug 31, 2018

Still interested in starting a fund?

Aug 31, 2018

Your odds depend on...a lot. It's certainly good that you are highly experienced in your industry. So there's that. But it's basically impossible for anyone to make a guess as to your chances of getting seed funding without more detail.

If you want a couple meaningless statistics, according to https://www.entrepreneur.com/article/230011, "...0.91 percent of startups are funded by angel investors...0.05 percent are funded by VCs...57 percent of startups are funded by personal loans and credit...38 percent receive funding from family and friends."

    • 1
Aug 31, 2018

Its all about the audience.
You only have a chance if you are pitching to the right crowd.

Aug 31, 2018
Aug 31, 2018
Aug 31, 2018