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September 1, 2012

Startup Firms Face Challenges

By James Armstrong

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  • Startup Firms Face Challenges

Many traders dream about striking out and starting their own investment firms. But with capital difficult to come by these days, startup shops are having to find innovative ways to market themselves and demonstrate the strengths of their strategies.

When Anthony Cambeiro left a large hedge fund to found Anthology Capital Group, the trader was surprised by how difficult it was to get investors to seriously consider his fund, in spite of his previous long and successful track record.

Bruce Frumerman

"It's definitely challenging out there," Cambeiro said. "Assume you are going to reach out to 1,000 people, talk to 100, to get one investor."

Though some traders turn out to be natural marketers, Cambeiro said that for him marketing involves a very different mentality from investing. A trader might have total confidence in an investment strategy, but demonstrating that confidence to prospective investors can be another thing.

Fortunately for him, Cambeiro frequently dealt with prospective investors at his old firm. However, that was as part of a team. Now, he has to sit down with prospects without a large sales team to provide assistance.

"In my previous hedge fund sales experience as one member of a team presentation, I didn't have to know everything and have it at the tip of my tongue," he said. "I now have to be able to talk and think ahead as to what the next key point is I have to communicate."

According to Cambeiro, the sales cycle has gotten longer since the financial crisis of 2008. These days, it's a six- to nine-month process, from meeting with potential investors to actually getting a check. And with some institutional investors, it can take years.

Bruce Frumerman heads the consulting firm Frumerman & Nemeth, which helps startup firms better position themselves to attract capital. He said that in addition to having all the right systems in place, such as trusted service providers and a solid legal structure, a firm needs to know how to properly tell its story, to fully relate how it does its research, risk management and decision making.

"There are two jobs for the prop trader who now has started his own shop," Frumerman said. "First, you have to deliver performance that is in the ballpark of acceptance. Then, you have to be able to educate and persuade people to understand and buy into how you invest, because that's what differentiates you from the competition."

According to Frumerman, the number one cause of money management firms closing their doors is not that their trading strategies blew up. Rather, it's because they couldn't get enough people to understand and buy into how they run their portfolios.