By: Greg Baracy

At Turnkey we’re constantly evaluating how we can continue to provide our current, and even our prospective clients, with best-in-class service.  On a daily basis we receive inquiries from people looking to launch a new hedge fund (“CPO”) or commodity trading advisor (“CTA”) business. Nearly every inquiry, for over a decade, includes the trader telling Turnkey staff that their new trading strategy or idea will be the definitive “next big thing”.  Certainly, Turnkey hopes that every launch we assist with is successful! However, over the years we have seen many new fund and CTA businesses fail. The question is why? Is there something new traders are missing? Did they fail because they all underperformed with their trading?

The answer to this question is certainly multi-faceted. But one of the most common errors our staff consistently observes is this: traders are very bad at conducting business due diligence. It is amazing how few traders actually understand the industry they are looking to establish themselves in.  For example, it is rare to find a new manager that can clearly articulate how much in assets under management (AUM) they will need, at what annual average rate of return (ROR), and at what average annual advisory fee structure, to even cover CTA or fund operating costs. Many people are indeed fantastic traders, but when it comes to operating a business, they often fall short.

To assist prospective clients considering a CTA or fund launch, Turnkey has created and is now offering a free fund and CTA forecasting tool.  With this tool prospective clients considering a fund or CTA launch can evaluate hypothetical situations to see if their projections will result in a self-sustaining and viable asset management business.  As an example, the following information was input into Turnkey’s CTA forecasting tool for demonstrative purposes:

  • $1M in AUM
  • 8% Annual ROR
  • 1% Average Management Fee
  • 15% Average Incentive Fee
  • 1 hour/month of Performance Accounting Services
  • 1 hour/month of Management Company Accounting Services
  • 1 hour/month of Compliance Support Services
  • $10,000 onetime initial startup costs – formation, legal, NFA dues, compliance costs, etc.
  • $5,000 initial marketing costs i.e., basic website, fact sheets, pitch books, etc.

Under the above scenario, a new CTA would generate approximately $27,000 in revenue during year 1, $21,000 in expenses during year 1, and end up with a net income of only $6,000. Is there enough in savings to survive such a scenario? Is there a second income available?  If not, how can the launch obtain more AUM or generate more fees during year 1? Year 2? Although the costs above are conservative, can any of them be reduced further? How indeed does this hypothetical CTA find a way to make more income?

Those considering launching a new fund or CTA should contact Turnkey today to request our new forecasting tool.  Adjusting the included variables (or adding in new ones) will produce a realistic picture of what is truly required to operate a self-sustaining fund or CTA.  To request a free consultation with our consulting team or to obtain our free forecasting tool, please contact us today via Turnkey Trading Partners or call us at (312) 324-0040.

About the Author:

Greg Baracy has over 15 years of experience in the financial services industry. His expertise spans across many verticals such as investment banking, financial advisory, quantitative and qualitative analysis. His area of focus at Turnkey is in new business origination, customer on-boarding and relationship management. Greg also regularly conducts reviews of customer outside office locations for Turnkey clients. Before joining Turnkey, he managed the Mid-Atlantic, Midwest and Northeast portfolio of municipal issuers for one of the big three Wall Street Bond Rating Agencies. During his tenure, he grew the agencies portfolio to its largest size since its inception. He holds a degree in Economics and Applied Policies from Michigan State University.