Author Topic: Attracting Capital for an existing Investment Partnership (U.S. Based)  (Read 3215 times)

jmp8822

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In January 2015, I started a value-based fund.  Fund performance has beaten the S&P 500. (Prior personal returns are good too, but not as relevant and not marketable) I haven't attracted investors well via traditional methods with people I know - there seems to be too much catching-up to do with "what is an investment partnership, why would I do something different, etc., etc."

All that said, does anyone have any experiences, or suggestions based on adding my fund to an online database, where perhaps investors would inquire about my fund? Which databases should I look into? Or other methods of attempting to raise capital, i.e. has anyone ever been to "fund raising happy hours" (suggested by my audit firm, could be a sales pitch to use the other third-party service providers that host the happy hour, I would also have to fly there). Is anyone on the IB fund list, and been able to raise money via IB investors?

Thanks.


Jurgis

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You mean you started a hedge fund?

Go to some meetings with CoBF folks (like DJCO, Fairfax, maybe Berkshire). Get them to know you and like you. If oddball or someone recommends you on the forum, you might get a bunch of investors. Or maybe various parties in SYTE orbit would invest directly...

I can't speak about the limitations of advertising. If you write good letters with good results and they are posted here by people who get them and there's interest, you might get some investors too.

Good luck.  8)
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winjitsu

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Big investments banks hold fundraising conferences + weekly events, but capital raising will come at a fee. I've sat on the other side of these cap-intro events, most are large funds or new funds with pedigree (former big fund partners launching their new strategy, new products from mega funds). Honestly, for a small fund, I don't think its worth your time and costs to institutionalize [get the right GP/LP offshore structure, get the expensive audit firm etc etc.... you set yourself to fail unless you get $50mm AUM+].

Sumzero has a database of LPs and you can put your fund info / write-ups on their platform waiting to be discovered. You can publish your quarterly letters on Harvest. You can cold email endowment funds.

Tons of people with experience starting their own fund on twitter. Check out this tweet storm from Artko Capital: https://twitter.com/ArtkoCapital/status/832347726679453696


LR1400

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Go for it! What do you have to lose?

I’ve raised some money for real estate purchases. The money is tied up for multiple years. The main driving factor for success was some credibility (from me and experienced partners), preferred returns, and a prospectus tied to my “customer”.

I probably hit 20%-30% success rate and I wasn’t raising millions.

ScottHall

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You need to build some character and I don't mean that in the usual way. Stories run the world and you can make money rain from the heavens with them. The best hedge fund managers know how to market themselves as characters to stand out from the crowd. Vanilla Value Version V doesn't do anything to get people excited. Even returns matter only so much in a way; there's seemingly hundreds of minor league hedge fund managers out there with great track records, with way less AUM than they "should have."

Way I see it there's two kinds of fund managers. The ones who try to make a buck through portfolio returns and the ones who try to make a buck from attracting more assets. I think too many of the smaller hedge funds don't understand enough about storytelling. Copying Buffett's letter only means something to the in-group, and there is a market there. But for the wider world you might need something that is more of a spectacle. Bill Ackman has been great at that. A lot of little league fund managers think he is a laughingstock now because his AUM is shrinking.

But even with the bad returns, he's still collecting fees on HOW MANY BILLIONS? Oh.
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oddballstocks

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You need to build some character and I don't mean that in the usual way. Stories run the world and you can make money rain from the heavens with them. The best hedge fund managers know how to market themselves as characters to stand out from the crowd. Vanilla Value Version V doesn't do anything to get people excited. Even returns matter only so much in a way; there's seemingly hundreds of minor league hedge fund managers out there with great track records, with way less AUM than they "should have."

Way I see it there's two kinds of fund managers. The ones who try to make a buck through portfolio returns and the ones who try to make a buck from attracting more assets. I think too many of the smaller hedge funds don't understand enough about storytelling. Copying Buffett's letter only means something to the in-group, and there is a market there. But for the wider world you might need something that is more of a spectacle. Bill Ackman has been great at that. A lot of little league fund managers think he is a laughingstock now because his AUM is shrinking.

But even with the bad returns, he's still collecting fees on HOW MANY BILLIONS? Oh.

I'd log into Amazon and start buying books on marketing and sales.

Traction
Spin Selling
Pitch Anything
Tested Advertising Methods

You just had an 'ah-ha' moment, and if you embrace it you will do well.  You just realized you are running a business, but have no idea how to do the thing that keeps a business alive, selling.  You also learned that the whole "returns matter" is a myth and that the academic theory about commodity businesses is false as well.  I mean why aren't people beating down your door?  You charge the same and have a better product than competitors?  Hmm, maybe a commodity business doesn't exist.

Build out your unique value proposition.  Why am I investing with you?  What's different?  Why are you unique?  This is why we have so many niche funds, because this is how they sell.  The problem is everyone thinks selling Buffett works, it doesn't, there are too many doing it.  Sell something different. 

Unless you're doing 50% a month, or flipping houses, or doing real estate courses, or some options trading program you don't sell returns.  If you sell returns money flows when it's hot, and by hot you need something that will pack an venue because people are greedy.  But....even then returns don't sell, they get people interested, in any of these return based scam things they get people there then they have hard closers working like dogs to convert people.  The pitch is mostly the same, the product is good and you'll miss out if you leave.  How will you feel if you miss out?  That's a very basic psychologial mechanism, the feeling of losing out.  It won't create long lasting customers, but if all you want is $5k for a seminar who cares?

Why did you start a fund?  What's your background?  Here are some concrete examples.  You used to be a doctor, but now you're a fund manager.  You'll be using the scientific method to discover investments.  You are great under stress, and can handle extremely complicated situations.  You have an edge in bio-related stocks.

Think unconventially.  I talked with one guy who marketed himself as follows.  He joined the nicest country club where he lived.  He went and golfed EVERY DAY.  He would go alone and join up with anyone looking for a partner.  Then he'd give them stock tips.  His strategy was that 99.9% of the people would forget the stock he named.  He didn't care.  If a stock went up in a few weeks when he was with them again he'd mention that fact.  "I mentioned XYZ last time, it's up 15%"  He obviously never mentioned ones that went down.  This got people interested in him.  And they were his perfect clients, doctors, lawyers, executives.  He grew his fund from $1m to $40m like this in a year or so.  He runs a vanilla value fund, but he marketed and sold.

This is your greatest challenge right now.  I'd put 100% of your energy into it.
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racemize

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Alternatively, you could just get good returns, have a small fund, and have a salary that increases with your ability to compound capital.  You have to get to $2.5 or so for your overhead to be low, and your salary is decent at $5 to $10--good enough to live on as a value investor anyway (or have enough savings to get there). 

So I would ask why do you need to be a big fund?  I'd rather have a small quiet fund with great partners (not just the hot money your likely to get, that won't stay during periods of underperformance) that pays enough for me to live on and compounds rather than just trying to get rich by collecting assets. 

But maybe you want to collect assets and be rich.  Then performance doesn't matter and selling does as Nate and Jurgis said.  I know a guy who had a small fund (I think around my size but maybe a bit bigger) and switched to long volatility, as in, his fund only invests in long volatility products.  He has $300 AUM now.  It's a good story and isn't too hard to sell people on the niche of "historic low volatility" and "you need insurance for this market!"  He's fun to talk to.
« Last Edit: April 17, 2018, 06:24:47 AM by racemize »

oddballstocks

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Alternatively, you could just get good returns, have a small fund, and have a salary that increases with your ability to compound capital.  You have to get to $2.5 or so for your overhead to be low, and your salary is decent at $5 to $10--good enough to live on as a value investor anyway (or have enough savings to get there). 

So I would ask why do you need to be a big fund?  I'd rather have a small quiet fund with great partners (not just the hot money your likely to get, that won't stay during periods of underperformance) that pays enough for me to live on and compounds rather than just trying to get rich by collecting assets. 

But maybe you want to collect assets and be rich.  Then performance doesn't matter and selling does as Nate and Jurgis said.  I know a guy who had a small fund (I think around my size but maybe a bit bigger) and switched to long volatility, as in, his fund only invests in long volatility products.  He has $300 AUM now.  It's a good story and isn't too hard to sell people on the niche of "historic low volatility" and "you need insurance for this market!"  He's fun to talk to.

Yes, if you're already wealthy and can live off your returns when why bring in partners?  I agree with that.  If you have a few million of your own cash forget partners.

But if this is $2.5m of partner money you'd be better off working at Costco.  At $2.5m you'll have $25k in management fees, and let's say you earn 10%, the historical market return (being realistic, not pie in the sky) so the fund earns $250k.  You get 10% of that, another $25k.  You're at $50k before expenses.  You have to pay for healthcare, compliance, legal fees.  You can earn $23/hr at Costco today with set hours, and healthcare.  After tax you walk away with more.

The problem is there is a rubicon here.  If you have the ability to do this professionally for someone else you might make $80k-120k at some fund.  To do that on your own you need $10-15m in assets.  And suddenly $10-15m isn't hobby money anymore.

As racemize said, if you're content being a hobbyst that's awesome, live off your own capital and enjoy life.  But if you're wondering how to grow your business then you need to learn to sell, like the vol guy, the country club guy, like anyone else who sells.

And let me say, selling isn't bad.  When I want to go to the park on a sunny day but my wife wants to mulch I am selling her on my idea.  As an analyst/PM you are SELLING others on your ideas.  When you interview for a job you're selling yourself.  When you're trying to win an argument you're selling your ideas.  When you try to get accepted into a college you're selling your ability.  Once people accept and realize that we all are in sales things get much easier.  This isn't some slimy door to door vacuum thing.  And when I see so many people against the idea of selling it makes me realize that most people have no idea how sales and business actually work, and second why some people are successful and others aren't.
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racemize

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Well, if I were going to compound at 10% in your scenario, I'd rather be the guy with the fund than Costco.  You've described a $50k salary--sure it's low that year, but in 7 years, it's 100k.  In 14 years it's 200k.  That's assuming absolutely no one adds money, which won't be the case. 

E.g., I spend a minimal effort on attracting capital (a few meetings a year), but I'd say I have a decent network of friends/family.  I started with $700k outside capital (my GP partner and I added more).  We ended up with $2 million more additions from those and other partners, adding more of our own capital along the way.  After 4 years, we are at $6.5 million. 

Maybe we are inadvertently decent at selling though.  When we do sit down with someone, I think our conversion rate on meetings to partner is 60% or so.  I've thought about why that is the case, I'm guessing it is:

1) We don't actually care if the potential partner joins or not; and
2) We're so straight-forward/honest that people just tend to trust us.

Or maybe just that my GP partner is really tall, certainly doesn't hurt...

stahleyp

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If any lurkers (or others) have a solid track record (I'm not talking about a 1% or 2% outperformance vs the S&P 500) with most of their own money invested in the fund (and reasonable expenses), I'm happy to hear from them.
Paul