And The Winner Is…

This article is the first of a monthly series IBusinessperson Signing Cheque‘ll be doing for Opalesque NewManager – an online news publication focusing on the global emerging hedge fund manager and CTA space.

Landing an allocation of capital has become akin to winning a beauty contest, according to Frank Pusateri, co-founder of CTA-Expo.  The competition is downright fierce and any small misstep can cause you to lose.

For emerging managers, it’s even tougher out there.  There’s an abundance of good traders and good track records; just look at any trader data base.  And, as in a beauty contest, where a contestant has to have qualities beyond beauty such as a unique skill, a great presence and a winsome personality, emerging managers need to be able to show that they understand and utilize best practices in their business in addition to having a sound trading philosophy and good, consistent performance.  Being able to demonstrate this can be the difference between winning and losing.

Bobby Schwartz, co-founder of RCM Alternatives, says that, for them, looking at the institutionalization of a manager – their checks and balances and risk management – is key.  Sure, they need great trading but right after that, he looks at how they run their business and how they do their marketing.  He emphasizes that a manager has to utilize credible third party vendors to attain efficiency and accuracy with core processing so he can rely on the numbers he gets and so he knows that the manager is focused on what he needs to be focused on – trading.  As he puts it, “You’d better get it right because if you get it wrong, you’re done.”  RCM tracks hundreds of managers yet narrows down the possibilities through rigorous due diligence and only allocates to 20-40 managers on an annual basis.

Frank echoes this sentiment.  With the expansion of the number of traders in the world, allocators, like judges, are looking for reasons to eliminate traders from their universe of possibilities; to whittle the roster down to the “best of the best”.  Therefore, a trader has to maximize their opportunity at their first chance because, as he puts it, once you get put into the “No” pile, getting out of it is very difficult.

Peter Borish, Chief Strategist of Quad Group, sits on both sides of the aisle.  His firm tries to accelerate emerging managers but also builds multi-strategy funds, utilizing those managers.  They’ll start with 500 manager profiles, meet with 100 and allocate to only about three.  He says he spends a lot of time looking at bad numbers.  Every successful trader, he says, has a near death experience.  How they handle it is key to him.  The biggest items his firm focuses on are volatility and whether a manager owns up to their performance.  “You are what your track record is”, he says.  “No excuses.” He feels that a manager has to have self confidence, but that it has to be tempered by reality because the markets are very humbling.  He also echoed there’s a lot more to building a business than raising money and trading.  You can get up in the morning and trade in your shorts and your socks, he says, but that doesn’t make you a manager.  You have to have a real business, with a real infrastructure and it’s very different managing your own money than other people’s money.

As shown above, different allocators focus on and emphasize different things but, for each of them, it comes down to an elimination process.

The biggest issue with emerging managers is knowing what they need to know.  That’s where this column comes in.  Over the next several months, I’ll take each of the below topics and try to help you understand what allocators want to see, including what you should be doing, internally, as an emerging manager utilizing best practices, so that when speaking with allocators, you have the best possible chance of success with them:

  • Business Rationale And Structure – How and why did you get started?
  • Human Resources – Allocators shy away from a one-person shop.
  • Company Relationship Management – From  administrators, accountants and attorneys to compliance personnel, clearing firms and technology vendors, credibility is key and outsourcing a must.  But if strapped for money, which ones do you hire first?
  • IT And Security – Cybercrime and breaches are hot sound bytes. Is your firm protected?
  • Financials – Both for the company and for your trading performance
  • Operations – Processes and procedures, from the initial trading signal through allocation and valuation
  • Risk Management – This applies to both trading and inadvertent risks. Leslie Rahl, of CMRA, has identified over 70 risks in her Galaxy of Risk.  http://www.cmra.com/galaxy_of_risks.php  
  • Marketing – Your elevator pitch, your Emerging Manager Profile or Tear Sheet; what makes them compelling?
  • Investor Relations – When the going gets tough, do you get going?
  • Business Flow And Organization – Is everything documented and able to be located when the allocators come in?
  • Compliance – This affects every area above because compliance weaves throughout the very fibers of your firm.  And your #1 goal – besides good, steady performance – is to embrace and demonstrate a culture of compliance and corporate governance.

I’m here to help you navigate what it takes so you can get into the “Yes” pile.  I also encourage you to send in your own questions to ckaufman@alternativestlc.com and I’ll answer them with my team of experts – industry vets that are ready to help and want to foster the “best of the best”.

Attending a conference is a good way to find out more about the industry and to meet the players.  The next conference for doing this is the CTA-Expo/Emerging Manager conference in New York, on April 20th and 21st.  I’m the pre-conference chairperson and I’d be happy to help you meet some of those players.  You can register at http://ctaexpo.com/new-york/.

Allocators want to know that you’re running a real business, no matter how small an allocation they consider making to you.  They want to know this isn’t just a hobby, that you’re not just a trader and that their investment is in sound hands.  They need to know that you put in just as much time attending to the details of your business as you do attending to the details of your trading.  You can have the greatest track record in the world, but if you don’t have the right processes and credible people to check your trades, resolve discrepancies, oversee your clients and employees and ensure that you have proper backup procedures in place, you can end up putting your allocator’s money at greater risk due to operational errors and even compliance issues.  And yes, allocators do pull money from managers that stray from their stated rules.

With money getting harder to obtain, compliance rules escalating  and new managers continuing to enter the alternatives space, the bar has indeed, been raised.  Are you up for the challenge?

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