Starting your own fund.

[Evolveus]

There was a great discussion on VIC a while back about what it would take to start your own fund from admin, to compliance, to AUM, to having results audited.  I thought that one of the most practical suggestions that I found there was set up a Delaware LP, then an LLC to to be the manager of the LP.  Use the LP to open an account at say IBKR, then start tracking performance and eventually have it audited.  Also someone mentioned write quarterly letters as if they were actually going out to shareholders (whether you have any or not), ie. take it seriously.

 

To me that sounded like a good logical first step before getting into the minuate of backoffice support/compliance which it seems can be outsourced.  Then there is also the small issue of sucessful investing!

 

I'm waiting on my EIN for the LP and then I'll get started tracking.  To what extent do you think this is good / bad/ waste of time etc.?  Also, there won't be much money to start with.  How important is the AUM to credibility at the onset?

 

Thanks.

 

[oddballstocks]

This is heretical but I'll say it anyways.

 

Forget about results, forget them.  Go and raise money, sell yourself and your story.  Investors are investing in YOU, not your returns.  If you want investors who just care about returns you'll attract hot money.

 

Investors who believe in YOU don't care if you have the Delaware LP with 5 years of audited performance.  If they truly believe in you they will understand you're starting out and accept that.  You want to find those people.  Get the money committed first and go from there.

 

If you can't raise funds it doesn't matter how well you can invest.  Capital is the blood of a fund company, go get that first and worry about the rest later.  Figure out what makes you unique, why should someone invest in you?  What do you do differently?

 

There's a line about marketing I love: "Engineers build devices, marketers build products."  It could be adapted to: "Investors focus on returns, successful funds satisfy their client's needs."

 

Satisfying client needs might be operating a fund that's a diversifier, or invests in a niche, focuses on taxes, or does something unique.  Find that, sell that, raise money and you'll be successful.

[topofeaturellc]

I think you need to think about your personal situation.  If you can sit back 3-5 years with a small pool of capital you have personally or FNF , not take a draw from the business, and someone like IBKR fits your needs on the PB side - then yes - just go for it. If five years from now you have good (audited and custodied) numbers then it'll all work.  You can build the business side of your firm when you are ready to start marketing.  And the vendors will be jumping over themselves trying to help you out with the business side if you have years of good audited numbers and a mainstream enough strategy.  That's probably not the best way to do the biz thing, but its easy.

 

If you need to be able to sell yourself to folks right out of the gate the game is very different. In that case, yeah - figure out your niche, find the folks who want it, and figure out who is going to turn the lights on for you. Your short-term performance won't matter to the kind of folks you want as LPs to do this kind of launch.

 

Its really really hard to do.  A fund like that will require a CFO, a name auditor and a real PB right out of the gate. The cost of starting up and running that biz will probably run a few hundred K before you pay yourself- mostly based on your occupancy costs (Can't be a dude with a BBerg if you want that biz), market data, travel, marketing, and your CFO - who you'll have to pay in cash and some form of profit participation. Compliance is a non-issue at launch - although you need a plan.  Backoffice is why you have your CFO supported by your Admin and the PB. Legal will be a big start-up expense as well. 

 

 

And that assumes you find someone who wants to put you in biz.  My impression is that you can tranche the investor world into a few pools

Day 0- Folks who will help you turn the lights on in exchange for meaningful economics

Day 1 - Folks who will come in once the lights are on and there is a business they can underwrite but you've basically sold them your story investing wise - no results.  Usually want a fee break and capacity

Day 180 -  Day 1 guys who want to see you clear a trade, settle the books and write a letter.  Probably also want to see you can construct a portfolio that doesn't blow up on sight. Again - want fees, probably capacity

Day 365 - Day 1 guys who care more about #'s than they want to admit

100 mil AUM - Institutional guys - care about #'s. By the time you care about them - you've got a viable biz.

Etc,

 

and each tier on the pyramid grows exponentially. 

 

But yeah - if you are in that second camp - fund raising is the only thing that matters.  Figure out if you can come up with a big list of Day 0 and Day 1 guys and go from there.

 

But let me repeat  - this is really really hard. 

[watsa_is_a_randian_hero]

But let me repeat  - this is really really hard.

 

If you have a high enough net-worth to self fund the business and your personal expenses indefinitely, it negates the need for finding folks to turn on the lights for you.  This increases your likelihood of success...and is the route I'm trying to take...continue to save & increase personal resources to a few million before making the jump.

[writser]

In that case, why bother opening a fund anyway .. ?

[topofeaturellc]

Yes - absolutely.  But that number is going to be pretty high or you'll need to think a lot about how to make the argument that your strategy will scale.  Especially if you are doing anything esoteric.

 

 

[Guest deepValue]

Forget about results, forget them.  Go and raise money

 

I agree completely. I know an RIA who has managed separate accounts for 15 years and beat the S&P 500 by a substantial margin. Based on the size of his typical investments, he could manage $600 million without any hindrance to his returns. But he manages just $50 million.

 

Fayez Sarofim, meanwhile, manages $30 billion and is one of Houston's most coveted money managers despite trailing the S&P 500 after fees.

 

I don't know exactly how Sarofim outraised the aforementioned RIA (both are well-connected, but Sarofim's connections are more social/business and the RIA's are mostly political), but I know that performance alone is not a selling point for most large investors.

[Evolveus]

I agree that raising money is key. I also think there should be some sort of story/history/track record so you have something to show potential investors. That may just be my personality though. I like to have something concrete to back up what I'm selling. And I'm not a fan of sales.

 

This came about bc I'm currently a broker. And really that job is all about raising money and sales. It's mediocre products and constant activity and multitudes of unnecessary dilution and closet indexing. It's basically everything opposite of what I've learned from Buffett type investment philosophies over the last decade.

 

For me I think that having the LP/LLC framework, audited numbers and shareholder letters shows a level of seriousness and commitment beyond saying "hey check out out the returns in my PA."  That gives me a more solid leaping off point for approaching potential investors.

 

Like the fellow who has $30B and trails the market - clearly he is a great salesman and asset gatherer. I'd much prefer to be the more modest fellow with $50m kicking the market's behind. Also my current job will support me and I'd hope to transition into independence over a couple years. It's a definitive goal, but it doesn't have to happen tomorrow.

 

And thanks for the responses so far!

[merkhet]

I don't believe Sarofim trailed the market when he began. He was a very early investor of Teledyne. I think he just outgrew his ability to outperform.

[topofeaturellc]

There have been points in his career when he had really good numbers. Not to mention the stickiness of assets and just the benefits of starting out at a different time - 56 years ago. Path Dependency matters a lot for firms.  Once you get to a certain size not blowing up becomes more important economically than generating returns.

 

When Sarofim started this business was barely professional. Its just a totally different world.

 

But I agree - lots of folks don't appreciate how big a role being an effective marketer plays in asset gathering.  Its probably easier to get rich as an average investor with a great marketing approach than as a very good investor with an indifferent marketing approach.

[Ham Hockers]

I agree that raising money is key. I also think there should be some sort of story/history/track record so you have something to show potential investors. That may just be my personality though. I like to have something concrete to back up what I'm selling. And I'm not a fan of sales.

 

This came about bc I'm currently a broker. And really that job is all about raising money and sales. It's mediocre products and constant activity and multitudes of unnecessary dilution and closet indexing. It's basically everything opposite of what I've learned from Buffett type investment philosophies over the last decade.

 

For me I think that having the LP/LLC framework, audited numbers and shareholder letters shows a level of seriousness and commitment beyond saying "hey check out out the returns in my PA."  That gives me a more solid leaping off point for approaching potential investors.

 

Like the fellow who has $30B and trails the market - clearly he is a great salesman and asset gatherer. I'd much prefer to be the more modest fellow with $50m kicking the market's behind. Also my current job will support me and I'd hope to transition into independence over a couple years. It's a definitive goal, but it doesn't have to happen tomorrow.

 

And thanks for the responses so far!

 

The guy who manages $50M of outside money got there by being a great salesman and selling hard for a long time, regardless of his returns (unless he just knows a bunch of rich people).

[Evolveus]

I agree that raising money is key. I also think there should be some sort of story/history/track record so you have something to show potential investors. That may just be my personality though. I like to have something concrete to back up what I'm selling. And I'm not a fan of sales.

 

This came about bc I'm currently a broker. And really that job is all about raising money and sales. It's mediocre products and constant activity and multitudes of unnecessary dilution and closet indexing. It's basically everything opposite of what I've learned from Buffett type investment philosophies over the last decade.

 

For me I think that having the LP/LLC framework, audited numbers and shareholder letters shows a level of seriousness and commitment beyond saying "hey check out out the returns in my PA."  That gives me a more solid leaping off point for approaching potential investors.

 

Like the fellow who has $30B and trails the market - clearly he is a great salesman and asset gatherer. I'd much prefer to be the more modest fellow with $50m kicking the market's behind. Also my current job will support me and I'd hope to transition into independence over a couple years. It's a definitive goal, but it doesn't have to happen tomorrow.

 

And thanks for the responses so far!

 

The guy who manages $50M of outside money got there by being a great salesman and selling hard for a long time, regardless of his returns (unless he just knows a bunch of rich people).

 

 

I agree - no doubt capital raise / selling is mission critical. I will say however that there seems to be some inflection point and I wouldn't be surprised if it was near the $40-50m mark. I say that bc there are several brokers in my office who "manage" over $100m and they don't even know who Bruce Berkowitz or Daniel Loeb is. But they've told me that after a certain point, their book generates it's own referrals. I'm not trying to say its easy - because it's not - I simply find it interesting that these guys do no marketing whatsoever and still get referrals and AUM growth.

[Patmo]

What if you just want to help friends and family without necessarily making a profit? What would the best course of action be? Right now I have 2 family members and 1 friend that asked me to manage part of their money, and I have to meet with them, go into their account together, etc. I'm very prudent with their money and there's not much particularly worth buying or selling so they just have a couple 5% positions and tons of cash right now, so I don't really have to meet with them too often. But it's going to get annoying for me over time, plus they have a life themselves so meeting all the time is just not very practical for any parties.

 

They have each different tax status with their accounts (1 rrsp, 1 tfsa, 1 taxable - in Canada) so I don't know how that would affect anything. Any help would be appreciated, and sorry for kind of taking over.

 

 

[Packer16]

One thing you can do is take a look at there situation determine an appropriate AA (stock/bond mix) then put them in index funds until you see something that is clearly mispriced.  This way they are getting the market return while they wait for an undervalued opportunity.  I think this opportunistic approach makes much more sense than sitting on cash waiting for something to happen which has a high opportunity cost.

 

Packer

[Palantir]

Why even start a fund though? Why not go through the RIA route? It must be easier to get clients that way.

[Patmo]

One thing you can do is take a look at there situation determine an appropriate AA (stock/bond mix) then put them in index funds until you see something that is clearly mispriced.  This way they are getting the market return while they wait for an undervalued opportunity.  I think this opportunistic approach makes much more sense than sitting on cash waiting for something to happen which has a high opportunity cost.

 

Packer

 

I meant more regarding starting a fund (or other ways to solve the issue) than how to manage the money, but thanks for the suggestion it's not a bad idea. I'm still more comfortable sitting on cash for them, I'm just more comfortable that way, opportunity cost be damned. It's not staying like that forever anyway.

[topofeaturellc]

Why even start a fund though? Why not go through the RIA route? It must be easier to get clients that way.

 

There are pluses and minuses to everything.  The RIA route is a really good option if you are starting a long-only biz and you are funding with Friends and Family. At a certain point you can move to a more traditional sep account setup pretty easily.

 

But if you want to be long-short or do anything "exotic" or you want to solicit larger pools of capital you really need to go the fund route.  You could start out as a sep account biz and do anything you want, but the fixed costs are much higher.

 

You can also find mutual fund in a box setups as well.  And USCITS.  Higher fixed cost than an RIA but lower than a Sep Account biz. The USCITS in a box solution is a pretty good one if you think you can solicit funds from the EU.

 

I think that if you think your core client base is going to be retail folks the mutual fund in a box solution is a pretty good one.  I think break even on it is like in the 10's of millions.  But I'm not really sure to be honest.

[LowIQinvestor]

See another thread from a couple months ago----- "Topic: Question for those who manage a fund --(costs) "

[fwallstreet]

What if you just want to help friends and family without necessarily making a profit? What would the best course of action be? Right now I have 2 family members and 1 friend that asked me to manage part of their money, and I have to meet with them, go into their account together, etc. I'm very prudent with their money and there's not much particularly worth buying or selling so they just have a couple 5% positions and tons of cash right now, so I don't really have to meet with them too often. But it's going to get annoying for me over time, plus they have a life themselves so meeting all the time is just not very practical for any parties.

 

They have each different tax status with their accounts (1 rrsp, 1 tfsa, 1 taxable - in Canada) so I don't know how that would affect anything. Any help would be appreciated, and sorry for kind of taking over.

 

Have you looked into Interactive Broker's Family and Friends account? It's a basic but effective platform to manage SMA's (including different tax statuses) with some helpful trading procedures to manage allocations across the accounts evenly. I'm based in the US so not sure if its different for Canadian accounts, but I currently use to manage accounts for friends and family and am very pleased with it. Again, not familiar with Canadian laws, but as long as you fall under the de minimis exemption in your state for number of clients, you do not have to register as a RIA to open this account in the US.

[Evolveus]

What if you just want to help friends and family without necessarily making a profit? What would the best course of action be? Right now I have 2 family members and 1 friend that asked me to manage part of their money, and I have to meet with them, go into their account together, etc. I'm very prudent with their money and there's not much particularly worth buying or selling so they just have a couple 5% positions and tons of cash right now, so I don't really have to meet with them too often. But it's going to get annoying for me over time, plus they have a life themselves so meeting all the time is just not very practical for any parties.

 

They have each different tax status with their accounts (1 rrsp, 1 tfsa, 1 taxable - in Canada) so I don't know how that would affect anything. Any help would be appreciated, and sorry for kind of taking over.

 

Have you looked into Interactive Broker's Family and Friends account? It's a basic but effective platform to manage SMA's (including different tax statuses) with some helpful trading procedures to manage allocations across the accounts evenly. I'm based in the US so not sure if its different for Canadian accounts, but I currently use to manage accounts for friends and family and am very pleased with it. Again, not familiar with Canadian laws, but as long as you fall under the de minimis exemption in your state for number of clients, you do not have to register as a RIA to open this account in the US.

 

Is there a billing function in the IBRK friends and family?

[fwallstreet]

What if you just want to help friends and family without necessarily making a profit? What would the best course of action be? Right now I have 2 family members and 1 friend that asked me to manage part of their money, and I have to meet with them, go into their account together, etc. I'm very prudent with their money and there's not much particularly worth buying or selling so they just have a couple 5% positions and tons of cash right now, so I don't really have to meet with them too often. But it's going to get annoying for me over time, plus they have a life themselves so meeting all the time is just not very practical for any parties.

 

They have each different tax status with their accounts (1 rrsp, 1 tfsa, 1 taxable - in Canada) so I don't know how that would affect anything. Any help would be appreciated, and sorry for kind of taking over.

 

Have you looked into Interactive Broker's Family and Friends account? It's a basic but effective platform to manage SMA's (including different tax statuses) with some helpful trading procedures to manage allocations across the accounts evenly. I'm based in the US so not sure if its different for Canadian accounts, but I currently use to manage accounts for friends and family and am very pleased with it. Again, not familiar with Canadian laws, but as long as you fall under the de minimis exemption in your state for number of clients, you do not have to register as a RIA to open this account in the US.

 

Is there a billing function in the IBRK friends and family?

 

Yes and there is the option for both a standard management fees or performance fees. Again, just a reminder, the ability to charge these requires RIA registration and certain client status (eg qualified investors for performance fee) if you do not fall under the de minimis exemption in your state (more than 5 investors in my state). I spoke with a rep before setting up the account and they pointed me to one of their online video tutorials or something like that, which allows you to see many of the F&F's accounts features - its essentially the same as their professional advisor account. I'd look into finding that video demo to check it out for yourself.