The Top 10 Questions Emerging Managers Ask

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

Forget about the question of 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 or 7 (or both) and your registration.

Question 2: When should I start taking clients?

When you’re registered. If you accept an allocation from an investor and you take off, you want to be SURE your registration is in place, which goes back to the first question! The investors you want that will get you to the next level you want to get to, want you registered NOW.

Question 3: Which is more important: an attorney or an accountant?

You should have both an attorney and an accountant. You have recordkeeping requirements that will be audited by the NFA or the SEC. You have legal documents that you’ll be signing with investors and service providers.

Question 4: 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, hire a bookkeeper and possibly acompliance 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 of having both legal and accounting coverage, besides ensuring that they’re done right, is that it gives you credibility when you’re small.

Question 5: 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 must have experience in our industry. You don’t want to train them on your dime. And you’d better make sure you can talk to them; that you are both on the same page.  As Frank Pusateri, Managing Partner of CTAExpo, says, “There are no dumb questions; you should feel comfortable asking either of them anything.”

Question 6: Should I outsource my back office?

These days it’s called “bundling” and yes, you could consider it. Investors are willing to take the trading risk but they’re afraid of operational risk and fraud. Explore firms such as Bobby Schwartz’s RCM, Nell Sloane’s Capital Trading Group, and John Hynes’ HedgeFacts for bundling options that offer an a-la-carte menu, including areas such as back office, marketing, and even some accounting and compliance. Per Bobby Schwartz, “There are three things you should never bundle:  Fund Administration, Auditor, and Lawyer. These need to be kept separate.”

Outsourced or not, remember that it’s still your back office, so recognize that the underlying responsibility is also 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. 

Question 7: 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.” There’s no evidence that shows that offering cheap fees works. Besides, if you start with low fees, how do you negotiate?

Question 8: 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 might be a way to grow assets faster. Finding a TPM or seeder isthe 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. Recognize, however, that the costs can be by commission, by retainer or up to 50-60% of fees. How do you find out who the right person is and how much the cost will be? Speak with some of the firms I listed above, remembering that they can give you a “bundled” package. Explore others.

Caveat: Be careful when researching firms.  Understand exactly what they can or can’t provide. For example, Bobby Schwartz’s firm, RCM, works with startups, but has a rigorous due diligence process for them. The manager needs to prove they have a decent (3-year) runway to sustain their business while they grow; they need a good strategy and a pedigree. They need to have a good corporate profile with trading and investor safeguards. If all checks out, RCM charges for commissions and execution, includes clearing, treasury, validation at discounted rates, and no charge for marketing. They take 20% of the management and performance (incentive) fees only for the money they’ve raised for the manager. As the manager graduates to funds, other options become available.

Question 9: What should I do to look professional in the eye of the clients?

Master the 8 key areas of your business: Operations, Legal, Accounting, Human Resources, Security, Technology, Marketing, Compliance… with Risk Management weaving its way through every one of those areas; there’s a lot going on! Get Organized! What you need to remember is that somebody or somebodies must 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 10: What if I can’t afford to 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 and to spend about $50,000/year 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 or take on a partner to get the experience. You can also grow your business part time – it extends the timeline but has the advantage of being less expensive during the startup phase.

Summary

No one path to greatness works for everybody. But every successful manager has had a burning desire to succeed, work hard, and work smart. Some weren’t afraid to spend money and some still 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.  They operated as professionals and gained investor trust.

The biggest issue with emerging managers is that they don’t know the right questions to ask , they don’t know what they don’t know, and they won’t ask or rely upon experienced people for the answers!

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

Carol R. Kaufman, Founder/CEO of Alternatives TLC, LLC has been consulting to emerging and seasoned alternatives managers and various types of industry businesses since 2005. She performs operational and organizational due diligence using her Emerging Manager Roadmap, helping firms find the resources they need to successfully scale. Her first product, InvesTier®, was acquired by SunGard in 2002. An entrepreneur for over 40 years, Ms. Kaufman’s specialties include public speaking, training and software/service-based solutions to organizational problems. She resides in Hawthorne, NJ.

CTAEXPO welcomes the submission of new or reprinted educational material.  This material was provided and prepared by Brandywine Asset Management and is published to provide educational information and background to financial industry professionals and sophisticated investors. CTAEXPO does not endorse or recommend the author’s services.