Lucas Liew Founder at AlgoTrading101

How to Raise Capital for my Trading and How Much Will I Make?

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Last Updated on June 24, 2020

How to raise funds for my trading? Here are 3 ways: 1) Join a proprietary trading firm, 2) Raise from ultra high-net-worth individuals, and 3) Raise from online investor marketplaces. You will make between 10% to 30% of your profits when starting out.

However there is a caveat to raising money, you got to be good at trading and have a good track record over a few years.

What is considered a good track record in trading? Making 25% per year annualized with low correlation to the market for 3 years, with a 10% maximum drawdown, and being profitable 90% of the months (Up 33 months out of the last 36) is an example of a fantastic record.

We have dedicated another blog post for this: What is a Good Track Record in Trading?

What are the 3 ways to raise funds for my trading

Join a proprietary trading firm

The best way to raise funds is to work for a proprietary trading firms.

These firms usually don’t pay you much of a base salary. They provide trading capital and you take home a cut of what you make.

You work as a solo trader in these firms.

There are some trading firms who take in those with no experience.

However, if you have a good track record, you stand a much higher chance of getting in those firms and can negotiate a better deal – more trading capital and better profit share.

There are some trading firms where you work as part of a team. In those firms, you work as an fixed-salary employee as part of a bigger system. You won’t have much autonomy as a trader.

I’m not referring to those firms in this context. More info on these 2 types of trading firms here: How to get a Job in Trading and How Much will I Make?

Even if a firm is not a proprietary trading firm on paper, they will likely bring you in if you have a proven trading record.

Be creative here when contacting the different types of trading firms, hedge funds, family offices etc.

Raise from ultra high-net-worth individuals (UHNWI)

Rich people wants to put their idle cash to good use, but they won’t trust any stranger to manage their cash.

You need to earn their trust, and design a collaboration where they won’t have to worry about you running off with their money.

Contact these people via warm contacts if possible. Talk to other traders who are trading money from these UHNWI.

In certain countries, it is not legal to trade other people’s money without getting licenses from the country’s financial authority.

One possible workaround is to be an employee of the UHNWI. The UHNWI will set up the trading accounts in his/her personal or company’s name, and you officially work for them as an employee and set a variable compensation based on your performance.[1]

This way, you remove the element of mistrust too as they don’t have to worry about moving funds to accounts under your name.

[1] This is not legal advice!

Online investor marketplaces

You can increase your capital online via certain platforms.

3 popular ways are to 1) raise capital from others 2) get allocated capital via winning contests 2) selling signals.

Raising capital via others online platforms

These platforms are sometimes referred to as PAMM platforms.

This method of fund raising has been around for a while but it hasn’t really caught on.

It’s probably because most traders go bust and people stopped putting money with them.

Popular platforms are:

Let’s talk about PAMM for a while. PAMM refers to “Percentage allocation management module”, which is a fancy way of describing a trader managing money for other people.

A broker that supports PAMM accounts allows people to put money in Trader X’s PAMM account. Trader X will trade his PAMM account as usual, if he makes money, he gets a share of the profits from his clients.

PAMM accounts are useful as all the money are stored with and the trades are verified by the broker. Thus, there is little foul play by the trader or his clients.

More info on PAMM: How Forex PAMM Accounts Work? (Investopedia)

Raising capital via winning contests

Popular platforms are:

These platforms host algorithmic trading competitions. Those who win these competitions get allocated capital.

They then run your strategies with this capital and you get a cut of the profits.

Selling trading signals via online platforms

Selling trading signals AKA copytrading AKA social trading AKA mirror trading entails people copying the trades by Trader X in an automated fashion.

Popular platforms are:

  • Etoro
  • ZuluTrade

There has been some criticisms about social trading services. Most of it are not relevant for you, the trader. They are relevant for people who are looking to copy trades.

Concerns range from:

  • High latency: There is a lag between the time the original trader fires his trade and when copier enters the copied trade. Thus, the entry prices of the copier might be worse than the original trader.
  • Better deals for the original trader: All the copiers enter after the original trader. Hence, the copiers move the price in favor of the original trader and they all get significantly worse entry prices since they are all chasing the same trade at the same time. The copier stands to lose significantly if the original trader makes many trades with small profits level, as opposed to fewer trades with larger profit levels.
  • Churned trades: The compensation model for some of these platforms are based on volume. The more the copiers trade, the more the original trader earn. Some traders tend to trade for the sake of churning volume instead of profit.
  • Hard to understand risks: We can see the history performance of the original trader. But sometimes, that is not a good gauge. We can only truly understand risks from the quality of decision made by the trader. (Applies to PAMM too)
  • Selection bias: We see the accounts of the traders that survived and not those that have gone bust. It is difficult for us to review what the performance looks like for an account that might go bust soon. Moreover, this gives an illusion that most accounts do well. (Applies to PAMM too)

Though the above points do not affect you directly, you should always do your best for our clients! The reputation of the retail trading industry is already bad, let’s not make it worse.

As for compensation regarding these online investor marketplace, you need to do your own due diligence. In some cases, there are certain criteria to meet before you qualify for a payout.

How much is my profit share for trading

For proprietary trading firms, it is between 30% and 80%. For trading other people’s money, it is between 10% to 40% is a good gauge . For online investor marketplaces, it varies between 10% to 20%.

Your profit share depends on your track record. If you have a fantastic trading track record, you can command a high number. Otherwise, you will have difficulty getting even a single dollar from others.

Proprietary trading firm

Beginners usually start from 30%. The very top traders could command up to 80%.

Trading UHNWI’s money

Historically, the fund management industry charged 2 and 20, this refers to 2% management fee and 20% performance fee.

2% management fee refers to 2% of the money they manage (AKA asset under management or AUM).

20% performance fee refers to 20% of the profit the fund generates.

Eg. If Fund A manages $100 million and makes $20 million in year 1. They will take about $2 million from that as management fee and $4 million as performance fee.

However, the hedge fund industry has been underperforming and most funds can’t command 2 and 20. Management fee has been falling, performance fee remains somewhat around 20%. Source: Hedge fund fee model morphs from ‘two and 20’ to ‘one or 30’.

That said, profit share percentage is a question of demand and supply. If you are a star trader and everyone wants in on your portfolio, you can set a high profit share percentage (ahem.. Renaissance Capital)

On a side note, it will probably be difficult for you to negotiate a management fee. Management fees are meant to cover overhead costs and you are supposedly a solo trader with little overhead costs.

If you are running a alpha-based strategy and/or are trading in high potential asset classes (such as cryptocurrencies), you might be able to command 50% from the get-go.

Online investor marketplaces

For fund management you get around 10% to 20%.

Here are some payout examples:

How much to capital to raise for my trading

To make enough to quit your day job, you’ll need 100 times your yearly expenses if your profit share is 20%.

If your yearly expenses are $50K, you’ll need need $5 million.

The higher your profit share percentage, the less you need.

If we assume you make 15% a year on $5 million, you’ll make $750K for your portfolio. If your performance fee is 20%, you’ll take home $150K. After $50K expense, you’ll get $100K left over to reinvest (if you want) and compound.

Check out the full math here: How Much Money do You Need for Trading to Quit Your Job?

Actively vs Passively Managed Portfolio

An actively managed portfolio refers to a portfolio where the trader makes many active decisions and trades frequently.

A passively managed portfolio refers to a portfolio where the trader makes few decisions and trades infrequently. Beta-tracking mutual funds are an example of passive portfolios.

Is it easier to raise money if you are an active or passive trader? If you are a superstar trader and have produced 30% returns for the last 10 years, then it doesn’t matter.

If you are not exactly proven and your investor is on the fence, it is better to be an active trader.

Investors want to give you money to do something different from the rest. If you are just going to put the money in a S&P500 ETF (plus minus some stocks), they can do it themselves or give the money one of the many beta-based funds.

Related Questions

Can you raise money from multiple sources? Absolutely. It is even easier if your proprietary trading job is done remotely. You sit at home in your pyjamas and trade for your trading firm, UHNWI and investor marketplaces all at the same time.

Can I get a base pay while trading? As a beginner, it is unlikely but as you produce good performances, you can negotiate a base salary from your trading firm or a management fee from your UHNWI client.

Lucas Liew
Lucas Liew Founder at AlgoTrading101