Market positioning

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Feb 23, 2010 2:53 pm

I plan to become an RIA to actively manage US equity portion of clients' assets.
The idea is to completely align manager's interest with clients' interest.

Market positioning: "No payment without performance":

On aligning incentives: 90% of my retirement money gets the same treatment as clients'.

On performance and cost: At the end of each 3-year period, compare portfolio value under active management  (Pa)  to portfolio value under "Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)" (Pv).
Management fees is the higher of $0 or (Pa-Pv)/2.

So, the excess performance is split equally between client and manager.

I will not earn any income for the first 3 years, and in those years when I do not beat Vanguard.

The mechanics of how to structure this as an RIA gets challenging. But, I digress - topic for a different thread.

I would appreciate your thoughts on the positioning and market potential.

Feb 23, 2010 2:59 pm

Good luck with that.  If you aren't starved out of business, I'm sure you will be shut down by the State.

Feb 23, 2010 3:26 pm

yeah, seriously.

Plus you can only charge a performance incentive to accredited investors; who would gladly pay you anything you want if you have a proven edge.

And why a fund and not an index? What happens if Vanguard closes that fund - you going to start your 3 year time line over with another fund?This doesn't sound very thought out.

Plus you'll, shoot your eye out.





Feb 23, 2010 3:27 pm

ravi -  not going to happen. 

Like WB said, you'll likely be starved out of business.  Unless you just have a whole lot of money and contacts.  If you do, might I suggest opening a hedge fund.

And please tell me you're not my cousin from Great Britain.  I already have an uncle in India who thinks that he is a "businessman" when really what he does is answer the phone when my wife has a problem with her Gap bill.

Feb 23, 2010 3:29 pm

Just out of curiousity, what is your performance so far against VTSMX?

 
Only a couple of times have I come across clients that want their portfolio compared against some arbritrary Vanguard fund.  100% of the time the client is a former (or current) DIYer who thinks they can do better in their "low cost" alternatives.
 
I'm betting that this guy/girl is one of these DIYers who thinks they "have the stuff" to be a successful money manager.
Feb 23, 2010 3:31 pm
Moraen:



And please tell me you're not my cousin from Great Britain.  I already have an uncle in India who thinks that he is a "businessman" when really what he does is answer the phone when my wife has a problem with her Gap bill.




He would have had to start with:

Dear good sirs:


(don't all Nigerian scams start that way)


Feb 23, 2010 4:38 pm
CALI123:

yeah, seriously.

Plus you can only charge a performance incentive to accredited investors; who would gladly pay you anything you want if you have a proven edge.

And why a fund and not an index? What happens if Vanguard closes that fund - you going to start your 3 year time line over with another fund?This doesn't sound very thought out.

Plus you'll, shoot your eye out.



Thank you for the questions.

Index and fund are in the same general ballpark. It does not matter much - Wilshire5000 could work.

Here is why a fund is better:
Vanguard is investable. Whereas Wilshire5000 was not investable for long stretches.
Getting a daily price quote for Vanguard is pretty simple. Getting daily Wilshire5000 data requires subscription to pricing service.
Vanguard includes expenses. Wilshire5000 does not.

If Vanguard closes VTSMX (that is 18 years old), there are other equivalent funds that are investable.

Feb 23, 2010 4:44 pm
ravi:

Getting daily Wilshire5000 data requires subscription to pricing service.



Dear Gentlemen:

ummm, it's really not that expensive. Yahoo probably has it for free.

How are you going to handle trading costs? Custodian? GIPS compliant? You will need to pay an third party to audit the performance - that's not cheap.

oh yeah, you still need to build a book first too.

Again, you'll shoot your eye out.

Admin - this is why we need a CRD requirement on the new boards



Feb 23, 2010 4:46 pm
Moraen:

ravi -  not going to happen. 

Like WB said, you'll likely be starved out of business.  Unless you just have a whole lot of money and contacts.  If you do, might I suggest opening a hedge fund.



Is there no market for pay-for-performance type product in the non-accredited client space?
It will be good to get some evidence to either substantiate or reject that.

Is there any reason to believe that only accredited investors (millionaires) will go for such an offering?

Feb 23, 2010 4:47 pm
ravi:
Moraen:

ravi -  not going to happen. 

Like WB said, you'll likely be starved out of business.  Unless you just have a whole lot of money and contacts.  If you do, might I suggest opening a hedge fund.



Is there no market for pay-for-performance type product in the non-accredited client space?
It will be good to get some evidence to either substantiate or reject that.

Is there any reason to believe that only accredited investors (millionaires) will go for such an offering?



it's the law

Feb 23, 2010 4:54 pm
ravi:


Is there no market for pay-for-performance type product in the non-accredited client space?
It will be good to get some evidence to either substantiate or reject that.

Is there any reason to believe that only accredited investors (millionaires) will go for such an offering?

 
In order to have a performance based fee, the investor needs to be "accredited."
 
Cut me a check for $15,000 and I'll show you the law.
Feb 23, 2010 4:56 pm

Cut me a check for $15,000 and I'll show you the law.

Sounds like something that should have been in Deliverance.

Feb 23, 2010 5:11 pm
Wet_Blanket:

Just out of curiousity, what is your performance so far against VTSMX?

 



My performance (internal rate of return) is +5% above Wilshire5000.
It is not due to a single pick that was a multi-bagger. It was over a 10-year period.
I am not a amateur who does this sporadically - passed all 3 levels of CFA.

I plan to get into this full-time. But I do not have sufficient AUM currently. So, I am giving 3+ years runway to accumulate assets.

Feb 23, 2010 5:15 pm

In other words, you are a computer geek that came up with a program in his spare time, you back-tested it, and realized it would beat the index, and now you want to manage money?

 
Come to think of it, that's how many hedge fund managers got their start.
 
Good luck.
Feb 23, 2010 5:17 pm
B24:

In other words, you are a computer geek that came up with a program in his spare time, you back-tested it, and realized it would beat the index, and now you want to manage money?

 



Used real money to get real performance over 10 years. Have the brokerage records.

Feb 23, 2010 5:26 pm

Your biggest problems are

non accredited investors don't know what a CFA is

if the results are not audited and GIPS compliant, you will have a hard time selling those results to accredited investors. If you have 10 years of statements -get audited. However it may cost 300K

IF the numbers are real, AND you get audited -then you really should start a hedge fund. Why do you want to deal with 50k rollovers when you can make some serious money running a fund. You won't have trouble getting AUM quickly

Lastly, is your strategy scalability. Or will is blow up once size is a factor? If not, hedge fund is the way to go.

There are many RIAs that have formed the hedge fund structure before the market crash, then never did anything with it. They will sell it to someone like you for about 15 grand. Saves you money and time.

Once last thing if you are serious. Attend your local CFA society events. Network and get introduced to a prime broker that will throw you a bone.







Feb 23, 2010 6:19 pm
CALI123:
ravi:
Moraen:

ravi -  not going to happen. 

Like WB said, you'll likely be starved out of business.  Unless you just have a whole lot of money and contacts.  If you do, might I suggest opening a hedge fund.



Is there no market for pay-for-performance type product in the non-accredited client space?
It will be good to get some evidence to either substantiate or reject that.

Is there any reason to believe that only accredited investors (millionaires) will go for such an offering?



it's the law



At the risk of getting into the details, Section 205 of Investment Advisers Act of 1940 says contract cannot provide "for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client"

Now, an equivalent structure is to set up a 2% management fee, portions of which will be refunded (voluntarily by the advisor) based on results. Refunds for performance are not contractually allowed. However, there has been an instance where SEC has allowed a client to receive partial refund for poor performance.

So, there is one precedence.  I have the thread the needle carefully.

That brings up the question of market potential. Any help would be appreciated.

Feb 23, 2010 6:24 pm
CALI123:

Your biggest problems are

non accredited investors don't know what a CFA is

if the results are not audited and GIPS compliant, you will have a hard time selling those results to accredited investors. If you have 10 years of statements -get audited. However it may cost 300K

IF the numbers are real, AND you get audited -then you really should start a hedge fund. Why do you want to deal with 50k rollovers when you can make some serious money running a fund. You won't have trouble getting AUM quickly

Lastly, is your strategy scalability. Or will is blow up once size is a factor? If not, hedge fund is the way to go.

There are many RIAs that have formed the hedge fund structure before the market crash, then never did anything with it. They will sell it to someone like you for about 15 grand. Saves you money and time.

Once last thing if you are serious. Attend your local CFA society events. Network and get introduced to a prime broker that will throw you a bone.



Thank you. That is helpful.
Where can I find out about such RIAs who have hedge funds that are dormant and might be willing to sell?

Good tip re:prime-brokerage. Thanks.

Feb 23, 2010 6:24 pm

Be careful. Rebating one client is one thing. All of the clients is another.

AND check your state rules. Until you hit 25 mil AUM you fall under their guidelines not the sec.

There would be market potential - but as anyone here can tell you, those are not the clients you want. The will complain about every little ticket charge (unless you plan to eat them, which make you a wrap program, which means you need to give 15,000 to wet blanket), and most likely not stay with you for three years.

Feb 23, 2010 6:26 pm
ravi:
CALI123:

Your biggest problems are

non accredited investors don't know what a CFA is

if the results are not audited and GIPS compliant, you will have a hard time selling those results to accredited investors. If you have 10 years of statements -get audited. However it may cost 300K

IF the numbers are real, AND you get audited -then you really should start a hedge fund. Why do you want to deal with 50k rollovers when you can make some serious money running a fund. You won't have trouble getting AUM quickly

Lastly, is your strategy scalability. Or will is blow up once size is a factor? If not, hedge fund is the way to go.

There are many RIAs that have formed the hedge fund structure before the market crash, then never did anything with it. They will sell it to someone like you for about 15 grand. Saves you money and time.

Once last thing if you are serious. Attend your local CFA society events. Network and get introduced to a prime broker that will throw you a bone.



Thank you. That is helpful.
Where can I find out about such RIAs who have hedge funds that are dormant and might be willing to sell?




ask around, go to industry conferences, etc. I know a few guys who have just brought it up (but I am not suring their info to somebody I don't know)

read Barton Biggs book Hedgehogging.