Raising Capital--Track Record?

Hi all,

I started a discretionary, volatility-based strategy a little over a year ago that has performed quite well, both in absolute terms and on a risk-adjusted basis. However, the money invested is all my own and it is sub-$100K. I understand that this is unlikely to impress anyone when it comes to raising capital, so I have no illusions on this point. But say I continue to achieve similar returns for the next year or two (think 70%+ returns, sortino around 3.00, etc.), which, I know, is not by any means a given. Am I fooling myself by thinking that this will impress anyone and/or be useful for raising capital to launch a fund based on the same strategy? I am already registered, have a firm/website, write report templates, etc., but I don't have a traditional finance background or experience working at another buyside or sell-side firm (and I've tried to transition into the industry, but can't even get an interview anywhere). Anyway, curious to hear others' thoughts on this, including next steps I could take to have a chance of raising capital.

Thanks for your comments!

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Comments (47)

Feb 21, 2020 - 7:27pm

The problem is that running at small scale like that is completely different than running at scale. It's extremely likely your strategy will break. Not saying you should give up though.

Why not lever up with debt and try to scale? If you're returns are that good you should be pretty safe to do so and it's one of the first questions a potential investor would ask.

The other problem is that a hedge fund has to raise a lot of money to justify all the regulatory bullshit...and you're unlikely to be large enough for a while.

My workaround would be to get as much debt as possible and scale FAST!

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Feb 21, 2020 - 11:17pm

On the one hand, I understand what you are saying regarding the need to prove that a strategy works at scale, but on the other hand it seems fairly reckless to plunge headlong into using massive amounts of leverage. Given that it is a volatility strategy, this essentially sounds like a fast way to blow up due to a margin call. That said, I guess if I do manage to grow at 70%+ per year I'll eventually have enough to prove that I can operate effectively at scale. Also, to be fair, I don't have experience running massive amounts of capital yet, so a more organic growth trajectory would be more advisable perhaps? I do think that my strategy will scale simply because it mostly utilizes fairly liquid equity and macro derivative with trades predicated on qualitative/fundamental analysis; that is, its not micro-cap trading or something that would be impossible at greater levels of capital. Anyway, thanks for the thoughts! For now I'll just keep grinding away. I wouldn't mind getting some experience dealing with larger levels of capital if I could ever get an interview for a job/internship on the buy side!

Feb 21, 2020 - 11:35pm

Don't be a pussy, lever up. Worst comes to worst you BK at a young age. Not really risky. Read Black Swan and you'll stop behaving like a risk adverse 15 year old child.

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Feb 22, 2020 - 2:46am

Assuming you've found a real trading strategy which scales, maybe you could convince someone to run it at an existing fund, but they wouldn't put you in charge of a portfolio. People who claim to have found a genius trading strategy but yet have no finance background or institutional trading experience tend to be full of shit, lucky, or on the road to gamblers ruin. That's probably why no one wants to interview you. I advise you to find an entry level job by impressing a PM to give you a shot using your personal trade history and work your way up the ladder.

Feb 22, 2020 - 10:32am

This is something I'd be perfectly happy to do. I'll keep applying and see if anyone ever offers to interview me...also, I'm not saying I've found some genius trading strategy. It's pretty simple: my background is in international affairs, I read virtually everything I could find on value investing and taught myself how to trade various derivatives; I do mostly qualitative and fundamental analysis, take directional bets on the volatility of individual equities, indices, commodities, etc., and hedge my positions. I don't claim to have devised some "system" and I'm not a quant guy. I just read everything I can, do research, occasionally build basic models to understand the assumptions underlying existing valuations, and devise trades based on my analysis. Not sure if anyone is in the market to hire someone like that or not...

  • Analyst 3+ in HF - EquityHedge
Feb 22, 2020 - 11:48pm

Your problem at this point is that with no b/g headhunters will not approach you and PMs don't want to waste time/money on what could possibly be a dud hire. Compounded on top is that because its not systematic its hard to back test what you have. How long have you been running live, sharpe, max drawdown ?

Feb 24, 2020 - 11:41am

First of all, keep trading, The longer your track record the better your chances of attracting capital.

Be patient. If you're that good, success will come eventually. If you compound at 70% per year without any significant drawdowns for 5 years, you'll be independently wealthy anyway.

It's also worth bearing in mind that returns are really only one piece of the puzzle when it comes to getting an allocation. Think very hard about how to market your strategy and yourself to potential investors. The edge you're capturing and why you're best placed to capture it needs to be clear.

If you're serious, you'll probably need an operating partner to give you some credibility and take care of all the legal/compliance nonsense to get up and running. Remember, large investors are more concerned about catastrophic loss due to fraud or incompetence than underperforming. Convincing someone with experience to come on board will also be a good demonstration of how persuasive you can be.

If you haven't read Ted Seides or Lars Kroijer you should do so immediately.

Finally, you could approach a first-loss shop who might be interested. They'll give you a lot leverage and give you credibility but obviously you're on the hook for any losses. While generally more receptive to emerging managers, these investors do however apply a similar level of scrutiny as other investors so the pitch needs to make sense for them too.

Feb 24, 2020 - 9:08pm

What are some examples of "first-loss" shops that you'd think of for this kind of thing? I've talked to guys at T3 before, but I didn't really pursue it past initial emails because all they talked about was "education" and such. Would reaching out to them, pitching my strategy, etc. be what you have in mind with your suggestion? Thanks for the other information as well, I'll be sure to look into some of the other things you have suggested as well!

Feb 25, 2020 - 4:07am

In the Bloomberg article I linked to there are a few examples - Topwater, Prelude, Boothbay. They are serious shops, not really comparable to somewhere like T3 and they operate at scale.

Even well-established funds will use them for capital because they are willing to pay substantially higher performance fees in return for the manager assuming pretty much all the risk.

Feb 24, 2020 - 4:53pm

Not sure if this will be of value but it's an option -

  • Hone your pitch, craft a deck, strategy overview, historical returns, future ideas, and lever your $ a little bit to show you're committed.
  • Get warm intro to some HNW people who might be willing to write a small-medium check (ie angel investors)
  • provide them with great returns, impeccable customer service, and full disclosure transparency

If you can really provide substantial returns and get early investors to trust you they'll invest more and tell their friends. Voila.

Remember, there are levels to the game. Start small, grow big.

"Out the garage is how you end up in charge It's how you end up in penthouses, end up in cars, it's how you Start off a curb servin', end up a boss"
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Feb 24, 2020 - 5:00pm

2 ideas
1- move your account to interactive brokers, and advertise yourself as a money manager on their platform
2 - connect your IB account to collective2 which creates a realtime track record where lots of angel investors look for startup managers

if you had done this 2 years ago, then you would already be in a position to raise capital and possibly use the evidence to help you get a seat at a MM platform fund

Feb 24, 2020 - 8:37pm

I've actually already done your first suggestion, although IB's money manager platform is kind of confusing and I don't expect that to generate much. As for your second suggestion, I'd never heard of Collective2. It seems pretty interesting, although I'll probably try to call them to understand how it works exactly a little better. If you have any further insight or first-hand experience regarding Collective2 I'd be very interested to hear it since all I currently know is what I'm reading on their website. Thanks for the suggestion!

Feb 24, 2020 - 9:13pm

collective2 is pretty simple...you connect your trading account, and they get copies of your trades in realtime, for 2 reasons.
1 - creates a public track record for you of your returns and risk metrics
2 - if people on the platform like your strategy returns and risk metrics, then they can sign up to "copy" your trades, and you get paid a fee (that you set) for each "follower"

people don't get to see you actual trades unless they signup to "follow" you, and pay you a fee (that you set)...i think monthly. the fee is not based on AUM...its a flat fee per user.
the point of the fee is not to make $$ (you can make a little)...but its really to help with you creating a track record...which you can then use to shop around

Mar 10, 2020 - 7:06pm

Just as an update in any case, I'm currently up roughly 65% YTD. I guess it is at least good, given that I'm running a volatility-based, qualitative research-based strategy, that I can make money in both high and low vol periods, since I am now up 200% since inception in January 2019 with a sortino of around 4 last year and around 7 so far this year.

Mar 10, 2020 - 10:36pm

Less unfortunately because I started with much less than 100,000, although by employing the same portfolio in my ira starting late last year I have also managed to double that.

May 31, 2020 - 12:41pm

Just as an update on this, still going strong with solid returns through the pandemic volatility (up over 75% YTD). I also now created an RIA and am putting together quarterly reports. Nothing has changed in that I am still just putting together my track record (nearly 6 quarters now) and making money for myself. Hopefully it all still keeps going in the right direction and I can eventually raise some money to expand my AUM though. The strategy is definitely scalable, so who knows, maybe one day I'll be able to raise money on the back of multiple years of 70%+ returns? A lot can happen obviously, so I'll temper my expectations, but I guess all I can do is keep on grinding since I don't really have a traditional finance background and see what happens. Not really sure how raising money even works, so hopefully I can figure that out.

Sep 14, 2020 - 9:27pm

Drawdowns have been manageable. Usually the way it goes is days of fluctuation a few percentage points in a range in either direction followed by a larger move upward (when all goes as planned). When I am ahead big early in a quarter it is an opportunity to take on a bit more risk, so the fluctuations tend to be a bit bigger in that case. For example, at one point this quarter I was up over 60 percent, but am currently up only 25 percent. But generally my returns have been relatively uncorrelated to the stock market since I mostly focus on various futures markets (currencies, commodities, and some equity indices). Still going strong overall though.

Sep 15, 2020 - 11:12am

those % swings are too big on the downside.  many funds will expect you to use trailing stop of 5-10%...where if you ever drop 5-10% from your high point you are stopped out (and potentially fired).  Yes, this means that you will miss out on certain large moves....but large funds are stewards of capital, and their primary concern is "not losing" rather than hitting homeruns.

Sep 15, 2020 - 1:45pm

Usually, fluctuates a few percentage points in a couple of days? That's a lot of volatility; I respect that.

You're best bets are finding capital from a HNW individual or family office, as they're more likely to overlook the non-institutional nature of your operation. Otherwise, your next best bet is to join an existing fund and run its using their roof. This is unlikely though.

Also, these days there are basically no new ideas in trading. Therefore, don't be surprised if your strategy isn't as unique as you think.

Sep 15, 2020 - 11:20am

i suggest emailing David Abramson at  FirstNY.com

if you've been trading actively for a year and have a sortino ratio over 3, he might be interested.

professional firms (prop trading or hedge funds) will primarily be concerned with "what is your biggest loss"

i understand that you are thinking "i was up 60%...so i let it ride and when it got down to only up 25% i exited and took my 25% profits" but that's not the way a firm will see it.  They will see that you lost 35%.  From a prop firms perspective, they imagine you entered every trade fresh every day...because they are mark-to-market.

A single manager hedge fund might take the kind of big swings you want to take...but until you have millions in capital...nobody will be interested in letting you make those bets with their money....most investors are looking for stable returns...thats the holy grail...but of course for most people this does not really exist.

depending on your trading frequency, i would think that FirstNY might be interested (if you are a very active trader).  If you just hold positions for many days-weeks, then probably not....that would be more of a typical hedge fund strategy...in that case you could try getting a job as an analyst at a fund that invests in your type of securities....that would be a good starting point to get into the institutional business.

Sep 15, 2020 - 11:32am

I see what you are saying, but I don't really view investment that way (I.e. Every day starting over). While steady gains that justify the fees being charged are great, virtually no funds turning out not to be a fraud actually achieve steady annual 10-12 percent gains with low volatility without years with outsized losses. I just don't think that that mentality is realistic, and I would never give my money to someone promising me steady gains with relatively low volatility. I've seen enough snake-oil annuity salespeople to believe in that.

I'm with you that no prop firm would ever give me money. To be honest, at this point I'm mostly focused on making money for myself while building a track record, and I'm pretty sure unless I become a lot richer than I am now nobody will care about my track record anyway, so focusing on maximizing my wealth without losing my capital seems the most sensible approach. At the end of the day, if people say the drawdowns are too great and don't want to hire me or give me capital to invest, at least I'm richer than I was before.

But I do take your point, so I hope this doesn't come off as dismissing what you are trying to say.

Sep 15, 2020 - 1:32pm

the MultiManager funds like Citadel, Millenium, Balyasny, Schoenfeld, Tudor.....etc..because they have so many different silo teams with stringent risk mgmt, they can advertise a very diversified set of return streams...that over time generate consistent returns on very large sums of money...but of course you are correct that nobody can guarantee stable returns...they can however point to a combo of their business model that expects stable returns, and then their track record for delivering what their business model predicted.

The single manager fund business (what you are in) is a different animal.  While yes, you have been generating great % returns....you really want to get a higher AUM.

Are you managing capital for everybody you know, and their relatives?  If not...why not?

If you really believe in what you are doing, you should be convincing your family, your friends, their family, and every body they know, and everybody they know...to invest with you.  Your expanded circle....all the people who know all the people that you know...must include some people who could collectively invst 500k -1mm with you..even if its 50k here and 100k there.

Would you feel comfortable trading / investing all their money with your strategy?  You should feel so confident that the answer is YES...you are the BEST option for all these people to invest with....and then go do it.  Use interactiveBrokers Friends and Family manager account to invest on their behalf.  You can't charge fees for doing this....but that's not the point....you are doing it to create a track record of managing outside capital.  Then at some point in the future, you can ask for some reasonable % of the gains (10% maybe).  You can then use that track record to go raise real capital...10-20mm and if you perform well doing that...then you keep raising until you get to 50-100mm and then you are a real fund.  This will take many years...but that's just how it works.

I would stongly suggest trying to get an analyst job at a hedge fund in your space to speed up that process.

also, there are first loss funds like TopWater that will gove you 10x leverage on your money...but you need 1mm minimum of your own capital to start.

So, go raise 1mm of friends and family money...and then goto topwater to 10x that to 10mm...and then perform well for a year, and then topwater will help you raise more capital with your track record.

Sep 15, 2020 - 11:22am

So you think that at a large fund, if they were up 60 percent in a quarter and had a trailing stop for a 10 percent decline they would just stay out of the market for the rest of the quarter or year? What good is a stop if you hit it and then jump back in anyway? That said, I'm generally 60-80 percent in cash most of the time anyway, so mostly when I am up in a quarter I am investing mostly gains only. My whole general strategy is built around lumpy gains.

Sep 15, 2020 - 11:39am

i absolutely understand what you are saying...you just need to understand what the firm will see from their side...you are being interviewed by a risk manager whose primary job is to avoid losing money.  There are a number of funds whose entire strategy is making concentrated bets and making those big returns...but that requires somebody with a lot of money deciding that YOU are the person they want making those bets for them...that is a very hard thing to get....and typically goes to people with long track records of success in the institutional business...Bill Ackman or Carl Icahn for example.  Its not "fair" but thats just the way people with institutional money tend to think.

The way for you to do what you want is either find a way to communicate about your strategy ina way that doesn't scare people off...to get your foot in the door at a fund or firm like FirstNY....or...try to market yourself to HNW (high net worth) individuals.  HNW people are often not sophisticated and they will often be willing to invest in a strategy like yours...but that is a long and difficult process of raising capital.  It has been done before....there are conferences for people like you where the guys who have the rolodex of HNW potential investors will charge you $$ for access to their list and introductions...and then its up to you to convince the HNW potential investors that they should invest with you.  You will spend years collecting checks for 100k-500k until you build up to 10mm of AUM.  You might pitch 20-40 HNW people for every 1 who invests...and you will often need to travel to them to make your pitch.  Thats a lot of travel and it sucks...but thats how it works.

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