Generate Performance. Communicate Well. Done.
The day I launched Melissinos Trading, I had $300,000 in assets from four investors. Eight months later I got another investor. Growth was slow during that first year. In fact, it took a total of 15 months for assets to double from day one.
But from the day I launched, people were engaged, responding to monthly performance letters firing off questions about my positions and where I thought markets were headed, etc. This told me I was on the right track. I figured that if I could perform well and explain the value I brought to a portfolio, more people would eventually start investing with me.
This is still my focus today. Instead of focusing on raising money from every eligible investor out there, I concentrate on putting up numbers and communicating my value proposition. This is important to me because most people do not make great investing decisions. They’re usually jumping in and out at the wrong times because the manager doesn’t take the time to set expectations. Reducing the churn rate can boost growth as much as increasing the number of investors.
This may sound naive, but to me it makes a lot of sense. It’s hard to control the number of new investors you attract every month – especially without resorting to sleazy tactics that pressure people into an investment that may not be right for them. You put your health at risk worrying about how much new capital you’re bringing in each month. Plus, constantly comparing yourself to other funds with large AUMs (while losing sight of how long it took them to grow) constantly reminds you that you’re a failure.
For me, making performance a priority comes natural. I spent most of my life in athletics, so performing well was always the goal. It didn’t matter how many people were in the stands watching.
To attract investors, I like a simple value proposition. Too often, investors get scared off by fancy finance lingo which results in missed opportunities. If you look at Melissinos Trading’s website, the methodology is described in three easy steps. Performance reports are simple too – showing monthly numbers, what positions are currently held and how much capital is at risk. There are no complicated charts or graphs with confusing statistical language that no one understands. That distracts from what actually matters.
I take a simple approach when educating an investor on my strategy. One thing I’ve noticed is that people want the simple 3-minute version. They want to know how it works, when it performs well, poorly and how much risk I take. They don’t want to be bombarded with performance and correlation statistics right away. After trust, understanding the value is their biggest priority.
I like understanding an investor’s goals and risk tolerance before doing business. If we’re too far apart on these issues, then it’s probably not a good idea for them to invest. Drama will almost certainly arise – especially when performance goes through a rough patch. Setting expectations early on helps avoid stress down the line.
There’s another major benefit of making performance the priority: interests are aligned between the manager and investor. The manager only makes money when he makes money for his investors. For a startup fund with a low AUM, charging a management fee for a while is probably OK because it will relieve some of the stress of having to make money all of the time – which is impossible, anyway.
Once AUM achieved critical mass, however, I believe the most optimal relationship is one based solely on performance.
There are many ways to attract investors. I’m focusing on producing solid performance to ensure that people who do invest with me continue to do so for a long time.
Mike Melissinos is the founder of Melissinos Trading, a trend-following CTA and CPO. Mike’s desire to launch his firm began when working at Bear Stearns and JP Morgan during the financial crisis. He maintains his own blog and welcomes your trading questions at Michael@melissinostrading.com.