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.
—Kim Bang
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, they all had their best returns in their first years of business.
Then subsequently they got a lot of money on the management, they're very successful, and they continued to be successful I would say but at a lower level, right? So, their returns are almost half, and the annualized returns are almost half than where they were in the very first years. Perhaps equally important, their behavior, their correlations have converged, right? So, when you are an early adopter looking for an emerging money manager, and you really understand the business and you really know what you're doing, you're in the sweet spot, right?
The opportunity is a sweet spot to make an investment with a good, solid emerging money manager, somebody that you feel comfortable with, that you think has the proper credibility and can run an organization, and you understand their edge and you believe in it, you are really sourcing for a sweet spot. So, I think that's where we are right now. 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 sharp is running around 2, which is very high for historical standards in this space. I think the historical sharp of the BTOP50 is closer to .7%.
Niels: Indeed, indeed, but, of course, obviously over a much longer period of time. But there's no doubt that you've had a very solid start to your live performance, and of course I've also seen the historical simulations of your systems, and they look very intriguing. Now, before we move into the real nitty-gritty of the system and trading, I just want to pick your brain a little bit because of all your experience in the large organizational structures, but then applying it to a small organization today. What have you kept in house, and what have you outsourced to the partners that you mentioned that you can use when you're small?
Kim: Right, so what we're doing in house is clearly we're doing the research. So my son is primarily focused on the research, he's the one who has more of a quant background, so he does a lot of the research and the testing and so forth and so on, of course I participate in that. I am quite focused in sort of overseeing the models and the operational side of it on a day to day basis that it's running properly and so forth and so on. We are looking to… We're in the process of setting up our servers into a co-location site at NY4, and the reason we want to do that is to have a more robust infrastructure I would say, and better redundancy, and closer to the markets and so forth. So we call that sort of a little bit like an outsource instead of running everything internally with the internal computer centers and networks and that kind of thing.
The other thing we've done is we partnered up recently with a firm called Worth Venture Partners. Worth Venture Partners is an emerging hedge fund manager platform - an institutional emerging hedge fund manager platform. So what makes them institutional is that they have a broader staff. They have hundreds of millions under management; they specialize in identifying emerging managers that they think have potential. Currently they have about a handful, so we're just about to be onboard and we're launching in April, So we'll be the sixth manager. And they have some diversified strategies, right? We're one particular strategy, and all the other guys are doing other things. But essentially what they do, is they come in, and they do deep dive due diligence. They do real-time monitoring and operational due diligence ongoing. They monitor for risk and leverage and concentration risk. They keep books and records. They do strike NAV's. They provide compliance over site and regulatory over site, right?
You can get overly focused on an individual Trend Following model at an individual time scale, but it's the combination of all of the pieces put together, and the combination of all of the markets put together, and how you manage risk that determines your end performance.
—Kim BangSo, the benefit there is that it's not really something that we think provides us an edge if we were to in-house it, and also, the expense for us would be very significant. So, for us to outsource it, and actually in this case at Worth Ventures, they provide a hedge fund sleeve. So we're part of their co-mingled, diversified program, but at the same time we have an independent, standalone investment sleeve. This means, that our investors, rather than managing multiple managed accounts, we can aggregate funds into the Prolific sleeve, and we can manage the funds on an aggregated basis there. And it's a third party oversight, it's a third party independent oversight of that money, and striking bid and the NAB's, and recording the numbers, etc., etc.
Niels: Sure, that makes sense.
Kim: So those are some of the things I that are necessary when you're trying to start up something from an emerging manager perspective. The other way is, is that if you are somebody who is very well known in the business, and maybe you've been managing money for 20 years at Goldman Sachs and you have a whole team there, and you spin out of Goldman Sachs, it's very likely that you can get funded with hundreds of millions of dollars and you may decide to set up your whole entire infrastructure from scratch and run the whole thing, but that's of course because you have a very large asset base starting off, right?
Niels: Sure, yeah absolutely. I just have one last question, I promise, regarding that which is organizational, but I do find your background super interesting and very relevant. I think sometimes people underestimate the importance of the organization actually, especially in these kinds of businesses where usually there are not that many people. So the people who are there generally have to work very well together. So, in your experience in the past, and maybe it's probably the Bloomberg experience for the most part; and looking into the future, and hopefully Prolific Capital will grow, and you're going to have to face the same challenge with your own organization, but how do you build a strong culture in an organization in your opinion? What's been your experience in that?
Kim: That's interesting that you ask me that because you know I worked for Bloomberg for about 15 years, and Bloomberg has an incredibly strong culture. It's a real talent and effort to build such a culture. I think it takes a lot of effort and a lot of time, and it is a very valuable thing to have. It has something to do… There's a lot of elements that go into this, but I'll give you an example from Bloomberg. I'll give you a few examples from Bloomberg, which sort of really captures the culture in many ways.
For one, Mike made sure that our incentive across the organization, regardless of the various departments was singularly focused on the Bloomberg terminal. So, everybody in the entire organization was remunerated - the bonus was linked to the performance of the sales and the growth of this product. So, that's one way just to align the organization in a very powerful way. The other thing is something that is extremely powerful, and I think insightful, from Mike, and that is that he had one pricing policy. So regardless of whether you took 2 or 1,000 terminals, the price would be the same per unit. So, imagine the impact on the entire organization, all the people and the culture as a consequence, is that when price is off the table, the entire organization has to focus on supporting and validating the cost of this terminal.
Niels: Sure, yeah absolutely. I just have one last question, I promise, regarding that which is organizational, but I do find your background super interesting and very relevant. I think sometimes people underestimate the importance of the organization actually, especially in these kinds of businesses where usually there are not that many people. So the people who are there generally have to work very well together. So, in your experience in the past, and maybe it's probably the Bloomberg experience for the most part; and looking into the future, and hopefully Prolific Capital will grow, and you're going to have to face the same challenge with your own organization, but how do you build a strong culture in an organization in your opinion? What's been your experience in that?
Kim: That's interesting that you ask me that because you know I worked for Bloomberg for about 15 years, and Bloomberg has an incredibly strong culture. It's a real talent and effort to build such a culture. I think it takes a lot of effort and a lot of time, and it is a very valuable thing to have. It has something to do… There's a lot of elements that go into this, but I'll give you an example from Bloomberg. I'll give you a few examples from Bloomberg, which sort of really captures the culture in many ways.
For one, Mike made sure that our incentive across the organization, regardless of the various departments was singularly focused on the Bloomberg terminal. So, everybody in the entire organization was remunerated - the bonus was linked to the performance of the sales and the growth of this product. So, that's one way just to align the organization in a very powerful way. The other thing is something that is extremely powerful, and I think insightful, from Mike, and that is that he had one pricing policy. So regardless of whether you took 2 or 1,000 terminals, the price would be the same per unit. So, imagine the impact on the entire organization, all the people and the culture as a consequence, is that when price is off the table, the entire organization has to focus on supporting and validating the cost of this terminal.
I worked for Bloomberg for about 15 years, and Bloomberg has an incredibly strong culture. It's a real talent and effort to build such a culture. I think it takes a lot of effort and a lot of time, and it is a very valuable thing to have.
—Kim BangThe value proposition has to be always very clearly understood and articulated, because there is no discounting, right? That means the analytics have to justify the cost; the sales people have to justify the cost, the support people have to justify the cost, the contract people have to support the cost. The entire organization has to sort of rally around validating this cost of the product. So, this was a very powerful thing, and I think Bloomberg recognized this in the way that he competed with the Reuters and various other market data vendors. Mike was basically prepared to say, "Listen, if you can't support the price point, we're just going to close down the business."
Niels: Yeah, I mean it's interesting, it's fascinating, and maybe I'm completely wrong here, but it seems to me that that kind of philosophy would work very well in our industry because everything, everyone in an organization of an alternative investment fund, or hedge fund, or CTA, or whatever we call it, are all focused on (or should be) creating the best possible output of the program because that's what's really going to make a difference to the investors whom we ultimately are privileged to serve and care for.
Kim: That's right, I mean I think that two or three things that are absolutely paramount is that number one, you have to be able to show a positive and attractive revenue stream. You have to as an emerging manager, I think it's important to show a differentiating value proposition. Another way to say that is, you have to have a low correlation. In our case we benchmark against BTOP50, so I think it's important for us to show a low correlation through that peer group. Thirdly, your risk-adjusted returns have to be really good, another way also to say that, right? Your sharp ratio has to be very attractive.
I think those are the key components to sort of how you market or present our product. If you have those three, I think you have a shot. It's not that it's easy because it's hard to break into this business for sure. I think those are sort of the three components in which if you can keep producing, the quality in those three categories, I have to believe that over time you'd be able to grow your assets.
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