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Jan 23, 2009 11:49 pm

I would like to get this boards opinion on the best way to monetize/proceed with the following:

I currently work in the finance industry
and have researched and tested a long term asset allocation and investment model
that I believe is far superior to current offerings. It is designed to outperform
the S&P500 benchmark by reducing volatility and increasing compound
gains. It has been tested over many years of data and has been running
out-of-sample with significant success; most recently the performance
has been stellar, investing a majority of its assets in treasuries and
cash since late 2007, avoiding all the recent turmoil, and showing a
positive gain for 2008. I should add this is a Long-Only model currently and involves very simple principles, no voodoo quant optimization.

Along with the model, my business
partner has a significant number of contacts with high-net worth
individuals. He was a top producing broker many years past and
continues to work in a business development role at a private equity
fund.

Our goal is to leverage this model along with his current network. However
our strengths are in sales, trading, and research. We have little
expertise in compliance, legal, or operational matters. My partner
needs the ability to solicit clients and I need the capital to
implement the model. So how best to do this:

1) Hedge fund & Mutual Funds are out, if the current environment wasn't bad enough, the initial costs make this prohibitive.
2) Start our own RIA. I believe there are turn-key solutions for this?
3) Join with an existing firm? How would one propose a venture of this nature?
4) Sell the model? Who would be prospective buyers?

Ideally we would like to be able to legally begin soliciting fairly quickly and with as low start-up costs as possible, even if this means a percentage of our profits....

Thanks everyone!

Jan 24, 2009 11:34 am

How much of your own capital will be invested in the strategy? Also, you can set up a hedge fund structure relatively cheaply ($35-$50K). If this model you built actually works it would be well worth the small investment. Also, lots of people build historic models that produce gains, have you actually been invested using it or just theoretically using it? Big difference. The hardest part of asset management is raising money, you certainly don't want to give away a piece of your business if you think you can raise the money on your own.  Just my opinion.  

Jan 24, 2009 12:42 pm

Given the current environment I believe a hedge fund would not be the optimal structure. Although I don't believe the model is completely dead, it is my opinion a High-Net worth individual would feel much more comfortable depositing money in a managed account or some other protected structure where the account is in their own name as opposed to a hedge fund which exposes them to the fraud they hear about almost daily on the news. This is mostly a perception/psychology, just like I wouldn't want to be selling Ford or GM cars right now.

This has been tested with our funds, there is relatively little turn-over or trading, perhaps 5 trades a year and it only invests in highly liquid securities (ETFs, Indices, etc.) Should we raise a significant amount of capital, I have worked with a number of high-frequency trading models for execution purposes. Commish from a BD are relatively cheap and I included a healthy dose when testing this model.

At this early phase of start-up I would not be opposed to giving up a small sum initially, 10 or perhaps 20 bps, if the entity/advisory can get us started and running quickly and provide all the legal/compliance/administrative backbone. Should we really experience success then we can make a decision on becoming independent or retaining the service if their is value added (reduced expense, sales leads, etc.)

Jan 24, 2009 1:11 pm

Hedge funds that aren't committing fraud typically use a prime broker that also offers custodian services, or they have their own custodians, Every hedge fund fraud involves a firm not using an outside custodian. When the investor writes a check he writes it to the custodian not to your fund name, it is a pretty simple way to calm any concerns involving fraud. A high net worth person will fully understand this with a 60 second explanation, it's a relatively simple concept, you aren't holding the money, your custodian bank is holding it. I know a guy who already has a hedge fund structure legally set up and a compliance guy, they are just at the beginning of trying to raise money, if you are interested in talking to this guy leave an email address and I can contact you. I'm sure some people might disagree with me about the perception of hedge funds right now but I think serious investors who can invest $1 million + into a single fund are typically sophisticated enough to understand why fraud does and does not occur.  If you are targeting $50K investments that is a different type of investor.

Jan 24, 2009 1:34 pm

"When the investor writes a check he writes it to the custodian not to your fund name"

I'm not sure this is correct. I believe a hedge fund is set up as a capital fund and an advisory firm. The capital fund acts as a pool and hires the advisory to invest the capital. The advisory then charges the fund a fee, usually 2/20 and that is how revenues are generated. The investor may wire money into the Custodian/Broker Dealers account but the fund manager has complete control over those funds; meaning they can withdraw money, pay for expenses, wire into other accounts, etc. straight out of the capital fund without investors approval. Hence you have hedge fund managers disappearing with investors money.

A typical managed account is opened in the name of the individual investor and Power of Attorney is given but there is no Capital Fund to hold the funds. The advisory cannot deposit or withdraw funds and the investor has complete control (although the advisor can charge fees for deposits/withdrawals which are handled at the BD end)

I could be mistaken but that was my understanding. Regardless from preliminary discussions within our network, the word hedge fund is radioactive and we would like to avoid it. In such time as we have sufficient AUM and the trust of investors we can rethink our structure.

Our core goal right now is speed to market and minimize start-up costs. There was a service called RIAinabox, scary name, but they are offering turnkey RIA for < $2,500.
The BD we are considering also has whats known as a Friends & Family account for deposits under $25MM and I believe 5-10 clients. Any thoughts on these two structures??

Jan 24, 2009 2:00 pm

If you think you'll have under 25 million you might want to check out interactivebrokers.com I think they offer a service that might work.  The only hedge funds I've ever heard of disappearing with money are funds without an independent custodian and prime broker, feel free to point out an exception to this.  I definitely could be wrong but if you are using an independent custodian and prime broker I don't think you can have them send a check in your funds name then walk down the street to your bank and deposit the money in your funds account then have that money sent to your personal account. I could be wrong but I didn't think that could happen. Seems like there would be much more fraud. Given the amount of hedge funds that exist in the world the amount of fraud is pretty much non-existent, although the media goes crazy about it when it does occur. 

Jan 27, 2009 11:30 am

Let's see, U have a 'model' that invests in two riskless assets - cash and Treasuries. How innovative, and you think someone will pay you for this? HAHA. Are these short T or long T. I would suggest that any long term T you have are about to blow up on you and you should be shorting them, but that's a market view.

 
The reason you have no risk is because either you don;t know how to measure it (long dfated T do have a lot of interest rate risk and hence measured volatiilty), or your 'model' is in Bills, which don't (much). So having a portfolio of money market assets and T-bills is not very aggressive -- which would have been nice to put in place back  in say Sept 08.
 
What you basically have is a market timing strategy -- none of which work, which you probably don't know or you wouldn't have posted this silly idea in the first place.
 
A far better approach, in my humble opinion, is to introduce assets with inherent non-linear valuation functions (thats a math term). But since you don't understand quant stuff don't go there either.
Jan 27, 2009 1:10 pm
MinimumVariance:

Let's see, U have a 'model' that invests in two riskless assets - cash and Treasuries. How innovative, and you think someone will pay you for this? HAHA. Are these short T or long T. I would suggest that any long term T you have are about to blow up on you and you should be shorting them, but that's a market view.

 
The reason you have no risk is because either you don;t know how to measure it (long dfated T do have a lot of interest rate risk and hence measured volatiilty), or your 'model' is in Bills, which don't (much). So having a portfolio of money market assets and T-bills is not very aggressive -- which would have been nice to put in place back  in say Sept 08.
 
What you basically have is a market timing strategy -- none of which work, which you probably don't know or you wouldn't have posted this silly idea in the first place.
 
A far better approach, in my humble opinion, is to introduce assets with inherent non-linear valuation functions (thats a math term). But since you don't understand quant stuff don't go there either.
 
You just got owned, you idiot.  These two are obviously pimping their website.
 
How's that for a linear equation?
Jan 27, 2009 3:07 pm

I'm not sure what caused such an adverse reaction? I mean wtf guys? There is no website nor product to sell here to you, only to a few private individuals who's assets have been mismanaged by traditional investment techniques; mean-var optimization/Markowitz Efficient Frontier and the like.

I am certainly not a PhD quantitative analyst. I combined elements of MPT, some statistical analysis, and academic work and back-tested an idea. It is stupidly simple, I will not argue with that. Despite your assumptions it does invest in a broad number of assets classes and provides a CAGR in-line with the S&P500 however with substantially less volatility.

"introduce assets with inherent non-linear valuation functions"
If this means assets with non-correlated returns then please kick your own a$$...if I am wrong, then I would be humbled to hear your elucidation...


Jan 27, 2009 4:13 pm

I think what Corleck is trying to say here is that he is the son of the deposed king of Nigeria and has $1B to invest in a fool proof riskless model and all he requires is for you send a small wiretransfer fee to a P.O. box in Malaysia. For this trouble you will be rewarded with 50% of the total expected returns. I think I already got one of your emails.

Jan 27, 2009 7:46 pm
IndySouth:

I think what Corleck is trying to say here is that he is the son of the deposed king of Nigeria and has $1B to invest in a fool proof riskless model and all he requires is for you send a small wiretransfer fee to a P.O. box in Malaysia. For this trouble you will be rewarded with 50% of the total expected returns. I think I already got one of your emails.



I had a person actually tell me she wanted to make a $6m deposit into a new account and that it was coming from her friend in Africa. The lady clearly wasn't educated nor had the means to manage that cash and I tried explaining to her that she was getting scammed, she got pissed because I was the 3rd or 4th person that told her that.