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Ign1t0r


Total Posts: 1
Joined: Jan 2019
 
Posted: 2019-01-07 15:12
HI everyone,

I am looking for the advice of anyone who has worked in a large fund, started a new fund, or someone who is familiar with the seed funding process.

We are in the process of established a new volatility fund that trades short term with ML-based techniques, along with longer term tactical asset allocation.

We are on the outlook for initial investors. We have $3M commited through our immediate network, and the founders have each invested an additional $1M. Most of us come from outside the industry (machine learning, discrete optimization, consulting).
We have contacted some private placement agencies, however the majority only work with established funds of around $50M.

Each of us has had success in our own respective fields, however we do not have any industry track record. I myself have made over $1M with market making (non-hft).

Our current strategy is to try and network with high net worth individuals, however this is going somewhat slow.

Any advice from someone having seen the process would be appreciated

tradeking


Total Posts: 23
Joined: May 2016
 
Posted: 2019-01-07 15:20
What kind of strategy is it (sharpe/target return/capacity)? The type of capital you want would differ depending on the strategy type.

HitmanH


Total Posts: 478
Joined: Apr 2005
 
Posted: 2019-01-07 16:19
Might be easier to contact an established shop - and contact them about leveraging their infra.
We've been known to explore such solutions - drop me a note - email in profile

Rookie_Quant


Total Posts: 757
Joined: Jun 2004
 
Posted: 2019-01-07 20:50
To piggyback on HitmanH, almost no institution will touch you without strong infrastructure (even if it’s just to cover their arse). The idea of exploring a partnership where you receive middle/back office support is definitely worth pursuing in general and may accelerate your progress on the asset raising front.

It’s been a few years since this was relevant for me but your PB(s) should have at least some token services along these lines to help get your fund’s name out there a bit.

"These metaphors and similes aint similar to them, not at all." -Eminem

guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-01-09 17:58
My humble advice having been in a similar situation 5 years ago when I launched my fund: start small and focus on delivering strong returns. The money will follow; first from your existing investors then in bigger chunks as your track record and AUM grow. Don't try to go to big institutions( 100M AUM is an emerging manager to them), or placement agencies (will take 50% of your fees and aren't incentivized if they cant place you with big tickets).

I never went to any of those speed dating investor seminars you have to pay for, but my suspicion is that they are a waste of time and money.

To get the ball rolling, I raised a few mil from family offices and first loss providers. The risks were high, but I believed in my strategy and luck was on my side. This led to bigger tickets down the road. I bet there are more first loss shops now than when I was looking. Its not an ideal way to raise capital/leverage, but if you don't have a great network(as i didn't), i can say it worked for me.

good luck

DouglasP


Total Posts: 7
Joined: Jan 2014
 
Posted: 2019-01-09 19:17
What is generally the minimum capital requirement for first loss platforms? Do you need to put up at least 1M or could you potentially get started on 100K?

guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-01-09 19:44
The official minimum at the time where I went was 500K, but they ended up taking 300K. Be aware of the risks; they take your 100K, give you 1M in exposure. The first 100K of losses are against your capital. So a 10% drawdown will wipe you out. For the privilege of 10X leverage, you are paid 55% of gross profits. The idea is that the first loss providers may give you non first loss capital if you prove your strategy has good returns/risk profile. This is what happened to me.

FDAXHunter
Founding Member

Total Posts: 8372
Joined: Mar 2004
 
Posted: 2019-01-10 12:11
I second the notion of avoiding agents or consultants of any sort when you are starting out. It's a waste of time/resources... which especially in the beginning, you don't really have to spend.

HNW is one route to go, but it's tedious as you already experienced. Plus, they often don't understand what they are getting in to, which is a recipe for expectation mismatch.
Your most important task is building a track record, If you have a few million, roll with that.

Essentially echoing guy_incognito's sentiments.

The Figs Protocol.

DouglasP


Total Posts: 7
Joined: Jan 2014
 
Posted: 2019-01-10 12:44
guy_incognito: did you start out with 300K of your own money for the first loss provider , or was that part of the money raised from family offices? And did you just cold call those offices, or already knew people there?

I'm finding myself in a similar situation and feel a bit stuck as how to raise the initial capital, however small.

Strange


Total Posts: 1551
Joined: Jun 2004
 
Posted: 2019-01-10 14:35
> Your most important task is building a track record, If you have a few million, roll with that.

What are the advantages/disadvantages of gaining track record via trading your own capital vs working for a multi-manager shop as a PM?

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

anonq


Total Posts: 35
Joined: Aug 2018
 
Posted: 2019-01-10 16:22
At a multi-manager fund going to likely be managing a significant amount of GMV and so the results are directly applicable to well managing a large book.

Trading with a few million allows for severely capacity constrained strategies and the results are not necessarily applicable to managing a 500 M book. I've interviewed people who wanted to join us or get seeded who were trading their own capital but it was obvious that it wouldn't scale and trading at the small size had created some bad habits so we took a hard pass.

I think if the goal is to run a large book or start your own fund then a PM at a fund is a no brainer, even get a six figure salary and benefits. Also, as long as you don't blow up it's often possible to find another seat. There really aren't that many people out there that know what they're doing so moving around isn't terribly hard if you can get the seat in the first place.

DouglasP


Total Posts: 7
Joined: Jan 2014
 
Posted: 2019-01-10 17:18
> I think if the goal is to run a large book or start your own fund then a PM at a fund is a no brainer, even get a six figure salary and benefits. Also, as long as you don't blow up it's often possible to find another seat. There really aren't that many people out there that know what they're doing so moving around isn't terribly hard if you can get the seat in the first place.


Agreed it's a no brainer, but every PM I've met got their seat by being promoted from an analyst position after a long period when the previous PM left. Maybe my sample is skewed then...

guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-01-10 17:21
i put up 300K of my own capital. It ended up resulting in more allocations for me. It is risky. I was uncomfortable pitching to friends and family, but that is what some people do.

guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-01-10 17:30
In my experience if you have the appetite for risk and enough seed capital, going your own way is better than working as a PM in a multimanager shop, especially if your strategy is capacity constrained (and if you've never actually traded a 500M book, you really don't know if your strategy is constrained).

It also depends how much infrastructure you need. If it needs barra/dow jones news feeds/bloomberg/expensive alternative data sets/etc., it may make more sense to go to a multimanager shop to defray those upfront costs. Otherwise if costs can be kept low, the upside can have much bigger payouts.

On your own you can also dictate your strategy size. You can resist pressure to take the strategy up in size, potentially avoiding blowing up when you cross your capacity limit (either knowingly or unknowingly). the name of the game at these multimanager shops is to push the most capital possible into the winners. I suspect thats why you see so many "market neutral" equity groups doing well in bull markets; their alpha vanished after they crossed their capacity constraint and then they just bought the market and crossed their fingers.

TLDR: if you have the risk appetite, and the ability to raise a few million at the onset, going your own way doesn't have a lot of down sides.

anonq


Total Posts: 35
Joined: Aug 2018
 
Posted: 2019-01-10 17:34
> Agreed it's a no brainer, but every PM I've met got their seat by being promoted from an analyst position after a long period when the previous PM left. Maybe my sample is skewed then...

I've known a few people who have become a PM after a short period in the industry. Usually because they have exposure to some alpha on an existing team and then hire a head hunter who gets them a PM position elsewhere. Definitely a few different paths to become a PM at least in the quant world where I'm from, but granted not easy. No idea about long/short and the like. But per the question if the option is between running a few million of your own money or PM at a MM, then yeah, PM all the way especially if you're a QP cause then good chance can invest in the fund/strat depending on the place and make the real money with all that ever so sweet leverage.

anonq


Total Posts: 35
Joined: Aug 2018
 
Posted: 2019-01-10 19:06
> I suspect thats why you see so many "market neutral" equity groups doing well in bull markets; their alpha vanished after they crossed their capacity constraint and then they just bought the market
and crossed their fingers.

It's actually the opposite.. every group I know kills it when vol is high. I run a market neutral book and 2008 was our best year, flash crash our biggest day (didn't even believe the pnl thinking the market data was off) and the early 2018 vol was amazing, was so sad when it ended. The low vol bull markets tend to make things harder and that was when there was all the news of HFT suffering for example. Low vol pretty much by definition means lower expected returns and less need for intermediaries between other longer term market participants.

But to your point if you have a low capacity strategy then running your own money or going to a smaller hft shop where payout %'s are huge totally makes sense and being a PM at an MM really isn't even an option. If you think you can run size and have the opportunity then being a PM makes a lot of sense.

*edit* I think the less obvious choice is between say running your own money or being a quant researcher.. can definitely have a lot of upside as a researcher but also really easy to get screwed over

guy_incognito


Total Posts: 23
Joined: Apr 2016
 
Posted: 2019-01-10 21:23
interesting. I have heard this vol/performance correlation is true, but doubted it oct-dec 2018 when all hedge fund indices were down. maybe the averages are not indicative.

I think even if being a PM at Millenium is an option, going your own way has a higher ceiling and won't preclude you from taking that PM role if the winds shift.

Maybe someone else can provide hard numbers as to compensation as a PM; how does it compare to making 1/20 or similar running your own shop?

anonq


Total Posts: 35
Joined: Aug 2018
 
Posted: 2019-01-10 22:02
It varies a lot, and negotiated per PM and at least in the quant world a function of not only realized pnl/returns but sharpe as well. Also why as a PM less likely to get screwed over since have a contract with the payouts specified as opposed to researchers the bonus is typically discretionary and not only a function of your signals but also the whole team (shitty when your stuff does amazing but everything else is dying).

Having said that, running 1/20 with a lot funding is likely going to be better than being a PM at Millennium. But I do know of PMs with greater than 20% payout (of course no management fee) but tend to be higher sharpe strats or have a really good reputation/track record. Also have known of PM's that are given 5-10 M upfront guaranteed payouts (often split between sign on bonus/draw on future pnl) to bring them on the platform...

Running 1/20 with a few million... yeah I'd take being a PM any day, pretty common for people to get paid out multiples of that w/o taking any personal risk or having to deal with clients, and then once you're a QP and can invest directly in your strat/fund...

oct-nov 2018 saw some liquidations and we took some large losses but didn't cut and made it all back and some, ended at a high watermark, know of at least 2 big firms that were cutting size, that'll definitely drive under performance since all of us are effectively trading the same thing to varying degrees... so what's driving the vol matters, if it's market impact due to longer term market participants then I'd expect to do real well (early 2018), if it's due to liquidations from other quant funds then will probably get hurt to some degree, like aug 07, was on a stat arb desk that lost 100M+ in a few days

sharpe_machine


Total Posts: 18
Joined: Feb 2018
 
Posted: 2019-01-11 00:01
> But I do know of PMs with greater than 20% payout (of course no management fee) but tend to be higher sharpe strats or have a really good reputation/track record.

Could you please elaborate on which pairs of (sharpe, capacity) are typically considered good for higher payout %?

prikolno


Total Posts: 43
Joined: Jul 2018
 
Posted: 2019-01-11 00:44
The highest payout I've seen in a PM silo farm is 70%. But that comes with a host of caveats like bring-your-own-capital, much worse infra, and so on.

Most of the respectable, top tier infra, prop PM silo farms will have a Sharpe waterfall at around 5. This waterfall is either explicit, meaning built into your compensation formula, or implicit, meaning you get fired if you fall short. An explicit 35/55 waterfall at 5 with a bunch of expense gotchas is probably midpoint at these firms. There's top tier prop firms that don't have a siloed structure, pay more base/guaranteed, foot more of the infra and development bills. Apply a discount on payout for these perks.

Pretty much voicing the same opinion as fdax and anonq.

@anoq Actually 17 CFR 270.3c-5, together with SEC's ABA and MFA guidance letters, practically lets any PM bypass the QP requirement as a "knowledgeable employee". You may want to look into this just in case you weren't aware and have employees that are eligible to invest.

anonq


Total Posts: 35
Joined: Aug 2018
 
Posted: 2019-01-11 03:13
to add a little to prikolno.. payout structure is important but as he's saying more to it than that, how much of employee salaries are top or bottom line, what are the contractual draw down limits and gmv allocation... lots of trade offs

and thanks for the heads up on that, wasn't aware. I have a friend that has some employees invested that I was pretty sure weren't QP's and I guess that's how.

Strange


Total Posts: 1551
Joined: Jun 2004
 
Posted: 2019-01-11 03:25
> explicit 35/55 waterfall at 5 with a bunch of expense gotchas

Well, realistically, you can either manage a lot of capital or have high Sharpe, it's rare to get both in the same bucket shop. From what I've seen, a place the would let you run a fair amount of capital would have payouts that are fairly low (from 10 to 25 depending on the shop), some places would also give you a separate high Sharpe bucket that has a better payout. This said, my prior is that expected value in the medium term is still higher as a PM but I might be missing some important bits of the picture.

I don't interest myself in 'why?'. I think more often in terms of 'when?'...sometimes 'where?'. And always how much?'

prikolno


Total Posts: 43
Joined: Jul 2018
 
Posted: 2019-01-12 00:59
@anonq
Yes, and no problem, cheers.

@Strange
Yes, I see similar effects regarding size and capacity. To add to my earlier point, these are numbers at prop firms, given OP's background in MM. Obviously will be much lower if we're referring to a PM role at Fidelity. I would also more probably take the PM route if I had to start over in 2019, unless OP places a really strong premium on autonomy. Firms have become more operationally efficient these days.

gaj


Total Posts: 41
Joined: Apr 2018
 
Posted: 2019-01-12 17:06
> There's top tier prop firms that don't have a siloed structure, pay more base/guaranteed, foot more of the infra and development bills. Apply a discount on payout for these perks.


Curious about this kind of firms. Do they also have PMs? What's the payout structure like?

anonq


Total Posts: 35
Joined: Aug 2018
 
Posted: 2019-01-12 21:05
> Curious about this kind of firms. Do they also have PMs? What's the payout structure like?

pretty sure all of the following aren't siloed and don't have PM's in the traditional sense.. HRT, Quantlab, Rentech, Virtu

my understanding is that payout is typically discretionary with a higher base salary, I've known people who have made 8 figures at those places and others who got effectively screwed over.. so i guess as always very situation specific
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