Best of TTU – How To Start & Grow A CTA Business

I get a lot of questions about ideas to help build the best Trading Model, and I understand why many aspiring managers feel that this is critical to their future success.  There is though, a lot of truth in the saying: “Most people overvalue ideas and underestimate execution".  What I mean by that is, when you want to start and build a business such as a Hedge Fund or CTA, I’m not so sure that the real challenge lies within the design of your investment approach.  Nowadays, I think that raising the initial funds from Seed or Early investors have actually become the biggest obstacle for new managers. This is something I have a long experience with, and this is why I wanted to focus on it, in today’s post.  So I thought that Kim Bang, who spent many years at a big firm like Bloomberg before starting his own CTA firm, is the perfect person to talk about this.  So enjoy these unique takeaways from my conversation with Kim, and if you would like to listen to the full conversation, just go to Top Traders Unplugged Episode 77 & Episode 78.

Growing from Family Clients to Institutional Investors

Niels:  Sure. Let's jump to the next topic that I wanted to ask, and I know and realize that you're a small organization. But still, I do want to ask because clearly you have a huge amount of experience in building organizations and running them and so on and so forth. You fully understand what is required in the trading world, so how have you structured your so-called "organization" as it is today with the AUM you have right now? How do you do that and still make it attractive for investors, maybe even institutional investors, to take you seriously?

Kim:  Right, so it's not easy, I would say, and I think the reality is, is that if you're going to try to make a go of this business, you need to have some money yourself that you can put up. So, I think that you need a few million dollars that you can put into the business yourself. Maybe you can go to a family member or two, and ask for 1 million or 2, and maybe you have a friend or a business associate from your prior life, and maybe they'll put up a couple of million bucks. So, if you can get out of the gate somewhere around 5, and even better around 10, but I think that's the minimum level where you have to start.

I think that you probably can't expect to get any more money from any outside investors for probably the first 18 months. I would think 18 to 24 months is probably the first time, which is around where we are right now. We are getting more inquiries now than ever, and it's from, I would call them, early adopters - but institutional clients. These are probably institutional clients that I would classify as very knowledgeable about this particular industry. So they're very comfortable. They understand the underlying investment strategies, they're very comfortable with the type of trading activity that goes on in these markets, and they understand the risk associated with it and the volatility.

"We've been fortunate. Our timing for the launch was pretty good. As I mentioned to you, we're annualizing a little over 19% so far, and our Sharpe Ratio is running around 2, which is very high for historical standards in this space."

So, they really understand. They actually like to make investments around this time frame. I think the reason, as you mentioned in your opening commentary, is that we've done some research, and it's very easy to do when you look at the BTOP50 firms -there's about 20 of them in there. It's very clear to see, all of them had their best performance in the first say 3 to 5 years in business, and their average performance was around 20%, which is pretty outstanding. And, by the way, these firms, they launched at all different times, right? It's not like they all launched 30 years ago. Some were 30 years ago, some 20, some 10 years ago, right? So they were fairly well dispersed. But in common,