Beware the outside investor with the iron stomach...

MarkS · Post by **MarkS** » Wed Sep 21, 2011 3:29 pm

As I've mentioned before, I recently launched a small exempt fund to test the Donchian system with a few colleagues of mine. Of course, they all assured me that drawdowns of 35-40% were fine, and that they were putting in money that they didn't need. "If it takes 15 years to average out with a great return, so be it". This was in early April.

Fast forward now, after being up 10% out the gate, the fund is now down nineteen percent from its peak in six weeks. It's not even a 20 percent drawdown (and only an 11.5% drop from the start), and I'm already fielding the semi-nervous calls of "How are we today??" In fact, just a few minutes ago, after the Fed statement came out, I got stopped out of my Eurodollar position which had been initiated just 27 hours beforehand. Here comes a call: "So how did that Fed thing affect our bonds?...." Ugh.

Not that it needs to be repeated, but when taking outside money take the whole "iron stomach" declaration with a large grain of salt. Anyone know of a "as an investor, one cannot contact the manager about this investment" clause to put in the legalese for a fund???

svquant · Post by **svquant** » Wed Sep 21, 2011 4:19 pm

Mark:

First welcome to the profession of money management! Now you can begin to understand why it is not as easy as it looks as a business. Client relations and capital raising are by far the hardest parts vs system development and daily operations.

I have not heard of that clause you mentioned and for someone to have that type of clause they have got to be oversubscribed and thus be driving the relationship. Doesn't sound like your, mine or many CTAs situation. Also what remedies were you looking to put into such a clause? Sue your investors or get a restraining order? Not a good way to build a business. You just got to put up with it, explain it nicely and thoroughly, trade trough it, and build the confidence in you and the system(s) over the years. If you read the WSJ this week even John Paulson gets an earful from investors when he is in a drawdown.

One final thing - it is even worse when the investors are family!

MarkS · Post by **MarkS** » Wed Sep 21, 2011 7:16 pm

Thanks svquant. I was being somewhat facetious about the legal clause, and like you said, it would be pretty futile, but one can always fantasize!
As part of the whole spirit of transparency post-Madoff, I allowed my investors access to my trade execution emails figuring it would put them at more ease. In hindsight, this will not be something that I will be doing going forward!

I did catch that Paulson article. It is good to know that even the biggest managers have to face these kinds of issues. Can understand why Cohen and Soros end up managing mostly just their own money. For most of my career I've been in the money management business, but always as part of a team: venture fund, hedge fund, etc. So never was the direct contact or head partner that investors called.

sluggo · Post by **sluggo** » Wed Sep 21, 2011 8:19 pm

I've heard that Tahoe Austin Big Chief Rocks Process has a rule for managed money clients: If a client asks a "why" question, he is warned. If a client asks "why" a second time, he is strongly warned. If a client asks "why" a third time, the account is closed, the money is wired out, the management agreement is terminated, and the client is barred from reinvesting for a period of Y years. Dunno if true.

You could also think about implementing a rule for additions: client can withdraw whenever he likes BUT cannot invest any new money for 9 months after a withdrawal. You need to draw out money next month to pay taxes? Okay it's your money. But you can't invest new money till 9 months later. This ain't your checking account, Sport.

LeviF · Post by **LeviF** » Wed Sep 21, 2011 10:31 pm

I have a client who is an active stock trader dip-buyer. I'm not sure how that is going to work out for him in the next bear market, but I'm in a 45% draw down and he increased his investment by 75% recently and convinced a buddy to open an account too to take advantage of the dip. We need a stable full of guys like that!

stopsareforwimps · Post by **stopsareforwimps** » Wed Sep 21, 2011 11:35 pm

sluggo wrote:...If a client asks "why" a third time, the account is closed, the money is wired out, the management agreement is terminated, and the client is barred from reinvesting for a period of Y years...

Ed doesn't like "whys guys" that's for sure.

I heard he has a very simple rule. You can only ever make one deposit. Any money you withdraw can never be reinvested.

In relation to OP's issue, the fact is that people are really really bad at predicting how they will feel or behave in a given situation. In this case, if someone has not experienced a 30% draw-down it's not likely they will be able to describe what it will feel like. It's just how people are.

Actually Friends and family are a lot better at predicting someone's behavior that people are themselves. Maybe you should also interview the SO when qualifying your investors. That would also cover the "back seat driver" situation.