Chicken or Egg?

(Originally published April, 2016)

When working with emerging managers, at some point during the engagement I’m inevitably told “I really can’t afford an attorney/accountant/compliance person/ [fill in the blank] yet.  I’ll just have to wait until I get an allocation of capital and start to get some revenue, first.”

This is the Catch-22 for managers.  They can’t afford the help to get properly set up to receive an allocation, yet they can’t get an allocation until they’re properly set up.

Below are the harsh realities that emerging managers need to accept:

  • Allocators won’t give money to people they don’t trust
  • Allocators won’t give money to you just because they like you
  • The barrier to entry in the alternatives industry is high because of the ever evolving regulatory environment
  • The regulatory environment has evolved because of the risks associated with trading AND running a trading business

I tell clients that, if they can’t afford to spend at least $50,000/year for two years, with no revenues coming in, they need to rethink their business strategy.  Being an emerging manager is not for wimps because it’s not all about the trading.  It’s equally about identifying and mitigating the associated business risks.  Below are typical services that are minimally needed for a new manager:

  • Trade Reconciliation
  • Daily Net Asset Value
  • Track Record
  • Back Office Support
  • Reporting
  • Risk Management
  • Compliance
  • Legal
  • Marketing
  • Capital Raising

Allocators look at all of these areas.  At the end of the day, they give money to traders they trust.  No allocator is looking at just one trader.  Professionalism can help separate you from the crowd.

So what are your options if you believe you’re a brilliant trader yet don’t feel that you have the money that it takes to get properly organized to market to allocators?


  1. Start with doing what you do best – be a trader. If your trading is that good, you can cut a deal with an incubator that will roll you under their umbrella and provide you with all of their operational help.  You can negotiate a percentage of the fee and the use of your track record for when you part ways.  By paying close attention, it’s also a great way to learn what you’ll need as a manager and develop contacts for the future.
  1. Use family and friends money to build up your track record. Charge a minimal (or no) fee but be sure you:
    1. Have a formal document for investors to sign that has been drafted by an attorney.
    2. Stay within the guidelines of an unregistered CTA or RIA. Better yet, get registered.
    3. Work on your “best practices” (you can refer back to this column for help!) as you build out your track record.
  1. Nell Sloane, of Capital Trading Group, suggests taking advantage of the network of independent introducing brokerage firms (IBs) in this industry.   Seek out seeders but look to structure your business by building a team.   Much of the daily operational cost can be built into a fee model that is a win/win.  Certain IBs and seeders provide a trader with many of the infrastructure services they need.  What’s nice about this arrangement is that much of the daily operational cost can be built into the commissions, so the trader doesn’t have to lay out quite as much money.  Of note, performance will be affected due to the raised commission rate,  there may be a fee sharing requirement and some services such as legal will still have to be addressed, although much can be staggered in as the manager gets more experience under his/her belt.


  1. Get a firm to invest in your firm. This gives you the capital you need but you’re giving up equity in exchange for working and investable capital.


Before determining which direction you want to go, attend industry conferences so you can meet people and firms that can help you.  At a conference, you’re on a fact finding mission; discover what types of deals can be made, even if you’re not ready to make them.  The more you learn about infrastructure services you need – outright, bundled or as a combination of both – the more you’ll understand what it’ll take to get to the next step and what you’ll want your next step to be.  Recommended conferences?  CTAExpo/Emerging Manager.  One day, inexpensive, all the right people for you to meet, all gathered together for you.


For any choice other than being a prop trader, you must be willing to pay to get the support services you need so you can demonstrate an organized and scalable infrastructure.  As Nell emphasizes, “You have to remember – you’re dealing with other people’s money.  You have to hold yourself out as a professional.”   


Once you’ve decided on a business strategy, where do you start?  If your goal is being an emerging manager with your own firm, John Euler, of EAM Compliance Advisors, stresses that a manager’s legal documents need to come first; they lay the foundation on which the manager’s business is built.  With that in place, a proper accountant, administrator, and other 3rd party vendors are added as needed.   John cautions prospective managers to step back and evaluate the process as a whole to decide if they’re ready and financially able to take that step, converting their trading into a highly regulated and expensive business.  “The last thing anyone wants, “he says, “is a simple and honest mistake that costs a lot of money in legal fees because the right foundation wasn’t established before moving forward.”


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.  
  • 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 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

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?


The Top 12 Questions Emerging Managers Ask:

Question 1:                         When do I need to register and how long does it take?   

Forget about the legal liability; if you’re going to trade client money, you need to register.  While exemptions are available, taking advantage of them slows your upside potential.  Soliciting clients without registering is illegal.  You also never know how long it’s going to take; in reality, to get that registration completed, plan on it taking somewhere between 6-9 months – or longer –  to get both your Series 3 and your registration.

Question 2:                         When should I start taking clients?

When you’re registered.  If you take a client and you take off, you want to be SURE your registration is in place, which goes back to the first question!  The clients you want that will get you to the next level you want to get to, want you registered NOW.

Question 3:                         What’s an NDA?  Why do I need people to sign contracts and NDAs –

You spend a lot of time and effort in building a trading system you feel is unique and then don’t bother to protect it.  Strange…

Question 4:                         Which is more important: an attorney or an accountant? 

You need both an attorney and an accountant.  You have recordkeeping requirements that will be audited by the NFA.   You have legal documents (such as NDAs and contracts) that you’ll be signing with investors.

Question 5:                         Legal and Accounting:  Can I do it myself or do I need to hire someone?

As to an attorney:  that’s the legal area.  Unless you are an attorney, hire one!  As to accounting, if you feel you can do the recordkeeping job that meets your regulatory requirements, in-house, hire a bookkeeper and possibly a compliance consultant but definitely get an accountant to review your work.  Remember that “accounting” can include payroll, billing, trade tracking, allocations, shadow accounting, all sorts of things that will take your focus away from what should be your strength; your trading.    One of the key benefits to hiring, besides ensuring that it’s done right, is that it gives you credibility when you’re small.  You need more than one person to run a business; you need professionals and backup!  It has just as much to do with looking professional as to needing the professional help.

Question: 6                         How much does a decent accountant or attorney cost?

They can range anywhere from “not real expensive” to “You’ve got to be kidding!”  Talk with 3-4 of each and draw your own conclusions.  Each has to have experience in our industry.  You don’t want to train them on your dime, which will result at your expense.  And you’d better make sure you can talk to them; that you are both on the same page.

Question 7:                         Should I outsource my back office?

Yes.   Clients are willing to take the trading risk but they’re afraid of fraud; why would they take the risk?  Outsource your back office, but recognize that you’re not giving up the responsibility.  The underlying responsibility is still yours; you need a “checks and balances” system.  You need backup.  You need procedural manuals.  You need to know everything that you have and where it is.  That’s where your “hires” come in.

Question 8:                         I’m thinking of raising money by having cheap fees.  Good plan?

Trading is a business.  Having “cheap fees” says a lot of things you don’t want to say like, “I don’t think I’m worth big fees.”  “This isn’t a business, it’s a crap shoot.“  There’s no evidence that shows that offering cheap fees works.

Question 9:                        Then should I use a Third Party Marketer (TPM) or seeder?

You need to grow your AUM to get industry recognition, be it 25m, 50m or 100m.  Using a TPM, cap intro firm or seeder is a way to grow assets faster.  Recognize, however, that the cost can be up to 50-60% of fees.  How do you find out who the right person is and how much the cost will be?  Talk to a lot of people and find out what the average deal on the street is.  Caveat:  finding a TPM or seeder is the goal of all too many small traders.  And those marketers and seeders identified have an abundance of traders knocking on their door and probably only do a deal with 1-3 traders/year.  The best way to up your chances of finding a TPM or seeder is to be professionally presentable.  It’s a beauty contest.  Find a new TPM or seeder that isn’t full.  Find people hiring, not people doing deals – the harder question is how to find people that are hiring? You have to compete for a client’s attention and have a way to get in the door.  Knowing your strengths and weaknesses is key and then hire to backfill those weaknesses.

Question 10:                      What should I do to look professional in the eye of the clients?  Regulatory, legal, accounting, risk management, marketing, IT; there’s a lot going on!  Get Organized!  What you have to remember is that somebody or somebodies have to do it.  There’s no “not” doing it.  So it’s really a question of if you can and/or if you want to do what it takes.

Question 11:                      What if I can’t afford do the things you recommend above?

You shouldn’t be in this industry.  You have to be prepared to not have a client for 2-3 years OR use a different strategy; there are lots of people looking for smart people – well known firms.  You don’t have to take the giant step of being independent immediately.  You can be completely owned by a seeder to get the experience.  You can do it part time – it extends the timeline but has the advantage of being cheaper.

Question 12:                      How have other people succeeded?

There’s no one answer to this question; no one path works for everybody.  But they all had in common a burning desire to succeed, worked hard and worked smart.  And some weren’t afraid to spend money and some have the first dime they made.  They were all good at gathering information from knowledgeable industry people.  They listened to opinions and formed their own answers that fit their needs, staying within the guidelines of compliance and didn’t cut those corners.

Summary:                           The Right SOP (Standard Operating Procedures) for Emerging Managers:

  1. Define a trading approach that you’re willing to invest time and effort in over the next “x” number of years.
  2. Once you have the approach, prove to yourself that it does work and will work in the future.
  3. Decide what you want to do. There are a number of options to people who have successful trading approaches.  We’re assuming you want to utilize your trading approach as a CTA or a Hedge Fund
  4. Take the Series III exam
  5. Register
  6. GET OPERATIONAL AND GET ORGANIZED. Get an accountant, an attorney, a back office service, a backup person internally, some marketing and product delivery advice.

The biggest issue with emerging managers is that they don’t know the right questions to ask and they don’t know what they don’t know!

Have more questions?  Ask away!  And good luck with your new venture.

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