Aug 14, 2018 Turnkey Trading Partners (‘Turnkey”) has been developing startup Commodity Trading Advisor (“CTA”), Commodity Pool Operator (“CPO”) and hedge fund trading businesses for a decade. Along the way these efforts have garnered numerous industry awards related to Turnkey’s startup, operational, and compliance support services. Perhaps more importantly though, Turnkey clients have been just as heavily decorated. Over the years, Turnkey CTAs and CPOs have regularly won or finished highly in industry “shark tanks”, trading contests, and other similar asset raising or trading competitions. So what is it exactly about Turnkey’s customers that has helped them achieve success? The following are a few top tips Turnkey has found contribute to an asset manager’s ability to raise money: Defining an “Edge” Almost all startup traders, CTAs, and fund managers have a great deal of trouble articulating how they are unique. When Turnkey is developing new placement or disclosure documents with a customer the following questions will be asked: Q: Why are you different? Q: What makes your strategy special? Q: Why would someone want to invest with you? Your team? Q: What is your background in the industry? Managing Money? Q: Do you think there is a difference between trading individually and managing outside assets? Often the response to these basic questions that comes back is fumbled and inarticulate at best. As a startup commodity trading advisor or commodity pool operator it is imperative to determine how trading strategy, personal background, and/or organizational structure (to name just a few areas) might provide a sustainable trading or investment edge. Only after a source of edge has been determined can one clearly and concisely articulate a true reason to investors about why they should consider the strategy. Once a trader has determined what their edge is they need to be able to sell it. There is well known marketing strategy called an “Elevator Pitch”. An elevator pitch alludes to the ability of a person to create a marketing presentation so concise that it could be delivered effectively inside the timespan of a short elevator ride. All startup CTAs, CPOs, and fund managers must be able to communicate their edge to potential investors as an elevator pitch. Start working today on developing and practicing a winning elevator pitch for the strategy being offered. Learn What Investors Are Looking For As simple as it may seem many traders, CTAs, and CPOs have never gone through the mental exercise of putting themselves in an investor’s shoes. Even after developing a strong elevator pitch most traders: Are Able To… …But Are Not Able To Tell someone they have a great trading strategy and/or return statistics Identify the specific reasons the trading strategy is likely (or unlikely) to be sustainable for long periods of time and why it fits well into an investor portfolio Talk about basic risk management techniques (such as: using stops, spreads, or options to reduce risk etc.) Objectively identify trading risks but also threats to the longevity of the strategy as well as the business overall. Intelligently discuss if and how those risks might be avoided Discuss new contract markets and symbols a strategy “could” begin trading as AUM increases over time to add more AUM capacity Fully explain in detail how the strategy and business can become adaptable to a variety of different market and economic conditions as AUM rises and capacity/liquidity declines. Have a plan of action for when, not if, this happens that goes beyond adding new symbols, realistically understand capacity limitations Identify and share generic trading style: “The strategy is technical, fundamental, discretionary, systematic, global macro, black box etc.” Identify an investor’s needs and why the offered trading style and edge fits those needs better than the competition. Realize and understand the strategy is not the only game in town and that being a “technical trader” or “black box” trader means next to nothing to most large allocators. Those with no idea where to start when trying to understand how investor’s think should pick up an industry standard due diligence questionnaire (request a clean copy from Turnkey here for free). The first time this document is reviewed it most likely will be difficult to fill out. In fact it may even seem like much of the questionnaire is not or could never be applicable. Stick with it. Over time and through research the reasons the questions are included will become clearer. Remember this document is intended to help better understand the reasons investors are asking the questions they are of emerging managers. After deciphering the due diligence questionnaire try to answer the questions in the best way possible. After this learn to be truly critical of the strategy, managed account, or fund product intended to be sold. Anyone experiencing difficulty with this process should not be afraid to ask for help. Reaching out to knowledgeable friends or other industry contacts would be a great and free place to start. Alternatively hiring a third party consulting firm like Turnkey Trading Partners might also be a solution. Regardless of how it’s accomplished an emerging manager must learn to seek out and accept criticism then adjust for it. Nearly any startup CTA, CPO, or fund manager can show up at an industry event and talk about how incredible trading returns were during whatever period. Very few however can give an elevator pitch, withstand the pressure of several fast due diligence questions from a knowledgeable investor, and then find a way into a scheduled due diligence meeting after the event. Regulatory, Offering, and Marketing Documents After determining what investors are looking for the next step is to develop industry competitive fact sheets, pitch books, and other solicitor materials. In addition to this many managers forget or don’t realize that allocators also care about internal controls, regulatory policies and procedures, as well as other operational policies. Anyone who has reviewed a due diligence questionnaire (see above) should realize this. In order to consistently “win” individual investments and institutional mandates money management firms must find ways to check as many boxes as possible with investors. Remember most investors in the CTA, CPO, and fund management industry get hundreds, if not thousands, of fact sheets passed to them each year. When the chance to put marketing documents in front of a prospect arises those documents must be at least industry competitive. They also must communicate the information a potential investor is looking for in a quick and effective manner. Most allocators want to quickly know: Strategy type and markets traded Length of track record Strategy capacity Unique edge Basic financial stats: monthly ROR, Sharpe, Sortino, draw downs, volatility etc. Infrastructure or company information: at some least clues about operations Company and trader background and/or history When preparing marketing documents remember that potential investors at this stage rarely want to read technical details. Allocators want to quickly know if what is being presented meets investment mandates. If the answer is yes only then might it be worth the time to set up a more in depth meeting to talk details. A fact sheet should be seen as a screening tool to an allocator and nothing more. It is a document that is used to set up a meeting and additional due diligence. CTAs, CPOs, and fund managers will be well prepared for such a meeting if they have gone through the due diligence questionnaire process above. At a due diligence meeting managers will then have the chance to share more information about the strategy. It will be at this time that investors will also ask about (and perhaps request copies of) company policies, procedures, and compliance programs. Each of these items must also be well thought out and prepared for such a meeting or it simply will not matter how strong a company’s marketing literature is. Face to Face Meetings and Due Diligence Managers that are able to set up face to face meetings have moved beyond step one of the investor screening process. At this stage it’s important to remember that the financial industry is highly competitive and cut throat. It is likely there will be only one chance to impress and move the investment process forward. Prior to getting to this stage in the sales cycle managers should ensure that all company documentation is in order (see above – marketing, disclosure, operational, compliance documents etc.). Ahead of any meeting with a qualified investor managers must also have already thought through any potential questions which might be asked. Here are some quick “Do’s and Don’ts” CTAs, CPOs, and fund managers should consider when it comes to face to face meetings: Do’s Do: remember to be prepared; try to know what will be asked before it is asked Do: remember the meeting is about getting an allocation, not about being right Do: be prepared to make a “yes” easy and have everything in order for such a response Do: dress nicely and remember social pleasantries Don’ts Do Not: get emotional, allocators are looking for good investments not defensiveness Do Not: try to “educate” the allocator; they already know what they are looking for Do Not: hard sell investors on a “golden goose” opportunity, they get pitched constantly, be humble Do Not: answer questions or provide details beyond what is asked, be sure to stay concise Target Markets, Established Managers, Running a Business Often times struggling established managers also approach Turnkey for help. These traders regularly complain that firms with much worse track records are raising assets while they are not. They share that their CTA or fund is listed in all the same industry performance databases as the competition. They then say that they also have similar marketing materials, share similar trading philosophies, and possibly even work with the same brokers. Some of these traders might even have gotten their elevator pitch down cold, attend all the industry events, and still walk away empty handed. How can this be? Assuming all things are equal, the answer to the above paradox, in almost all instances, is that the trader they are comparing themselves to has figured out how to view trading money as a business. As surprising as it may be a track record and elevator pitch is not everything when it comes to running a CTA or fund. Once a manager can clearly and concisely explain what makes them unique they then need to focus on traditional small business concepts. To name a few of these concepts traders must effectively handle: accounting, deal with operational matters, follow industry rules and regulations, provide customer service, and on top of all of this continue using the trading skills that got the business started in the first place. Most importantly though, just like any other small business, all CTAs, CPOs, and fund managers need to learn not to waste time chasing investors or brokers that are likely never to become customers. Contrary to popular belief not all investors are created equal. CTAs and CPOs should do their homework before targeting allocators and investors. As an example; how likely is the bank below to invest in this hypothetical manager? Example: A manager trading primarily in financial futures says it’s offered strategy has capacity of $500m The firm currently has a strong 5 year, audited, track record with $300m under management A brand name bank has announced a mandate to deploy $10b to alternative investments this year The bank also announces that the investment must go into long only, commodity centric investments The manager solicits the bank, finds them at an event, gets a meeting, then travels to NYC for follow up. The chance the manager above closes this hypothetical deal is not high. First, the manager has only $200m left in capacity. This amount is likely too small for a bank looking to place $10b over the course of a year. The effort and cost for the bank to do this deal won’t be worth the small contribution the manager will likely make to the banks overall alternatives portfolio profit and loss. Second, large allocators are often uncomfortable with investment manager concentration risk. If the bank invested all $200m with the manager they would hold 40% of the firm’s total assets. Assuming the manager could even offer $200m in capacity to them this likely would not be attractive. Third, the bank announced it was looking into long only commodity centric investments. Typically financial futures would not be considered “commodity centric” in the way grains, energies, or other traditional markets would be. Lastly, the bank very likely has access to similar equities based, long only strategies and would not be interested in a similar return profile. This simple hypothetical example hopefully illustrates that not all investors are created equal. While the monetary figures used in the scenario may seem too high or too low, the concept remains the same. On paper the above bank might look like a great target for an investment. The hypothetical manager was probably incredibly excited to land the face to face meeting with the bank in NYC. Certainly the manager had a chance at closing the deal with the bank, however the facts of the situation suggest a low probability of success. Managers who are raising and keeping assets have most likely learned to avoid such situations. CTAs, CPOs, and fund managers (which may have better overall programs than the competition!) that haven’t figured this out will very likely continue to languish. About Turnkey Trading Partners Turnkey Trading Partners provides customized support to the brokerage and trading industry. We can assist Commodity Trading Advisors (“CTA”), Commodity Pool Operators (“CPO”), Introducing Brokers (“IB”), and Futures Commission Merchant’s working within the alternative investments space. We can also assist Registered Investment Advisors (“RIAs”) and Broker Dealers (“BDs”) within the traditional equities marketplace. Our team is well versed in both operational and regulatory matters relating to commodity futures, equities, bonds, options, swaps, forex, cash and physical trading, as well as several other specialized OTC financial markets transaction types. Our central office is in downtown Chicago, the alternatives trading capital of, and one of the biggest equity markets in the United States. We also have an office located in Ft. Lauderdale, Florida one of the fastest growing trading communities in the country. Contact us today via phone at (312) 324-0040 or email email@example.com.