Raising Capital for Start-Up Quantitative Funds


Smaller start-ups are more common in the quantitative fund management arena than in other areas, and many successful modern day funds began with less than $100k in capital. But attracting seed capital and hanging on to it has become harder than ever. This article covers the basics that you’ll need to put in place to ensure that a small startup quant fund is able attract capital investment…

As investor interest diminished following the credit crunch, demand for many of the investment vehicles offered by quantitative hedge funds also fell. Where fund managers before had dictated the terms, often providing little transparency and with conditions not necessarily favorable to the investor, the balance of power has now shifted firmly towards the investor.

Although managers across the whole gamut of strategies were affected by this regime change, few have suffered more than those offering quantitative trading strategies such as statistical arbitrage and high frequency market making, with practitioners of these approaches having been widely held accountable for many of the recent market inefficiencies and declines.

With a dearth of investors and a relatively low level of participation in the current bull market, the environment has become more challenging than ever for those seeking to raise seed capital for new funds, or retain institutional capital in established investment partnerships.

Quantitative fund managers must now be more explicit than ever when explaining their strategies, their source of alpha, their back-office processes, risk management, and differentiation from competitors. As well as returns, the intelligent investors and high net worth individuals that quantitative approaches attract will tend to be equally concerned with volatility, market liquidity, prime brokerage, and general transparency of a fund’s operation.

To help you stay competitive when raising capital for your quantitative hedge fun, we’ve assembled the following list of essentials – if you’ve got these bases covered then prospective investors will be able to understand the unique edge that you are able to offer.

  • Explain how your performance and returns will be replicated into the future, including how they can be scaled with greater assets under management. Because investors will be reluctant to commit based on short term track records, if you don’t have several years of solid returns under your belt you should be prepare to explain precisely how you will ensure consistent performance through a full market cycle. You’ll need detailed quantitative data to show how your strategy navigates corrections and bear markets, and continues to generate alpha throughout periods of unique volatility and economic duress. Given the fraught market conditions of the last decade, this will be one of the main concerns that informed investors will have.
  • Be prepared to demonstrate the effectiveness of your strategy with a full range of industry metrics. Investors in quantitative funds are more sophisticated than ever, and you will be expected to provide all the measures they need to effectively judge your performance. You’ll need Sharpe and Sortino ratios, volatility of returns and maximum drawdowns at your fingertips. For many “fund-of-fund” arrangements, these objective measures tend to be more critical than subjective ones, and if you’re not able to provide the data when it is requested you simply won’t get due consideration.
  • Limit counterparty risk. With so many financial institutions finding themselves on the ropes in recent years, you need to ensure that you have several prime brokers and custodial banks in place. Many investors will now insist upon selecting both prime brokerage and custody providers themselves as a way to mitigate these risks, and it is important that your fund has the flexibility to accommodate these requirements.
  • Ensure that you are operationally equipped to offer separately managed account structures. This option is growing in popularity, and investors will want to see evidence that a separately managed account will perform in tandem with your core strategy. Demand for separate accounts is growing, especially amongst institutional investors.

Over the coming years, as regulation increases and more advanced and efficient algorithms exhaust alpha sources in electronic markets internationally, raising capital for a quantitative fund is only going to get harder.

Following these simple guidelines should help you to raise and retain quantitative hedge fund capital successfully.



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