An alternative industry truism is that it takes capital to raise capital. Depending on the source, anywhere between 80% and 90% of all new capital allocated to hedge funds is entrusted to those already managing $1 billion or more.
The reasons are diverse, but since the financial crisis, new and smaller managers are finding it difficult to gather assets regardless of their performance, strategy, style or approach — and despite the certain mediocrity that will result from the concentration of assets within a narrow subset of extremely large money managers.
Conversely, investors still need to separate the wheat from the chaff in vetting promising emerging managers? While attracted to the diversification and potential alpha they offer, the process is tedious, expensive and risky. After all, no one was ever fired for putting money with BlackRock.
However, a crop of innovative fintech companies are applying modern technology to the interaction between motivated investors and emerging managers.
Connecticut-based BattleFin is one such company, but with several unique twists. An all-in-one manager, event organizer, platform provider and fund incubator, BattleFin is among the most comprehensive examples of a firm working at the nexus between emerging managers and investors.
BattleFin is widely known for its Discovery Days, at which new managers are highlighted and a select group chosen for actual allocations from investors and/or BattleFin itself. The events are billed as tournaments that put trading talent and motivated capital providers together in a unique setting. The most recent tournament was in June aboard the aircraft carrier U.S.S. Intrepid in New York City, which consisted of seminars for emerging managers (dubbed “flight school”), meetings with BattleFin to help groom and incubate promising managers and one-on-one meetings with investors. The goal, according to BattleFin, is to match the right managers with the right investors.
The investor one-on-one’s during the Intrepid event were detailed discussions between managers and interested early-stage investors more advanced that the typical meet and greets so prevalent at industry conferences. Instead, managers were intensely quizzed on strategy specifics, experience, assets, risk mitigation, education, staff and administrative resources.
At the crux of the BattleFin ecosystem is the company’s Stadium platform. Managers interested in participating join Stadium and are verified and validated by BattleFin’s systems, including pulling information directly from prime brokers and running risk validation algorithms to ascertain which strategies generate the best risk-adjusted returns.
At the same time, managers are able to showcase their fund and apply to be part of the company’s incubator program, which helps with portfolio optimization, front and back office functions, scalability and distribution. The incubation process involves investor matchmaking while also connecting BattleFin’s separately managed account offering, which makes allocations on behalf of client investors.
Once accepted onto Stadium, funds can apply to take part in BattleFin’s allocation tournaments. Not everyone is invited, however. Once a fund is up on Stadium and has been fully verified, it receives a proprietary score from BattleFin based on the company’s risk metrics. From there, BattleFin and its investor partners track the fund, and only the top-ranked funds are eligible to compete at events such as the one on the Intrepid. Accordingly, the funds aboard the warship that day in June had already been carefully curated.
Top-performing strategies receive allocations of up to $10 million at the conclusion. Winning managers are invited to become part of the incubation program and are distributed to investors on the platform.
For investors, Stadium works in a similar fashion. Investors are vetted as well, and must qualify for participation as SEC-defined Qualified Clients, a designation that puts additional criteria on the standard accredited investor requirements. Investors that participate in Stadium agree not to circumvent BattleFin to access the strategies available.
As a co-investor in winning strategies, BattleFin’s due diligence is its own, meaning total transparency and no reliance on manager-generated tear sheets or third-hand information. The platform leverages the screening and verification process of the events to winnow the list of candidates to a manageable and pre-qualified level, which in turn makes finding, researching and allocating to promising managers easier and faster.
Stadium is out in private beta now; the full platform is expected to be active in the fourth quarter of 2016. “When fully rolled out, Stadium is where top emerging managers seeking capital can apply and managers that BattleFin has invested capital with will be continually showcased in front of accredited investors,” says Tim Harrington, president of BattleFin. “The layout, analytics and distribution for investment strategies will be a game changing tool for traders, hedge fund managers and family offices.”
BattleFin does the heavy due diligence lifting. By investing its own money and that of its clients, some of the conflicts that have doomed other matchmaking services are avoided.
It is too early to tell if Stadium will be the silver bullet managers have been seeking. It remains to be seen, for instance, if the vetting and verification that BattleFin provides will be a sufficient adjunct to the due diligence typically undertaken by an institutional investor. In addition, there is the question of when it is appropriate to take on institutional capital. Nonetheless, any system that efficiently puts investors in contact with valid, competent managers to help grow their asset base is a good thing for both parties.
Competing in BattleFin was a valuable learning experience. It’s a lot of fun being part of something that’s global and gets you out of your comfort zone. Prospective contestants should make the investment to make their presentations look professional. When you review other traders’ PowerPoint presentations you can definitely tell who put some time into it and who didn’t.
Everyone has to make up formal documentation on their strategies and processes. This part alone introduces you to people who are doing complex strategies, which sometimes helps to give inspiration to your own strategies and helps professionalize your pitch. You also can find people on the trader board who are not prepared. Several of the people I was introduced to on the leader board remain friends.
It truly is a great way to network with other professionals that you’ve never met before from around the world.
During the competition, the people at BattleFin offered classes to help participants make up the appropriate presentations to show prospective investors. One of the biggest aspects that kept my attention was their stop loss algorithm. Your portfolio isn’t allowed to be down a certain percent during the competition or else you get kicked out. They don’t want people taking 20% swings in assets intraday.
Several of the major moves in my program during my experience at BattleFin forced me to peel off certain positions to make sure they stayed within their thresholds. This hampered my results but taught me a lesson in position sizing.
No one wants to have someone come in, put a huge trade on that makes 40% in a day and not trade any more during the competition. They want people whose strategies are consistent and have a true trading process that works when the sea is calm and when markets are volatile. This is what helps to separate those with real trading potential from the novices. BattleFin tracks the traders’ largest up day versus the largest down day and the total number of up days versus down days. Everyone’s data is monitored in real-time by BattleFin’s platform to keep traders on a level playing field.
The Battlefin event includes networking parties that introduce traders and money managers to prospective investors in places like Florida and New York. It entails cost but the goal is to win and potentially earn an allocation of up to $10 million for your strategy or fund.
Even if you win, you will want to take a close look at the terms of allocations because it is not a typical allocation from an investor off the street. Looking over several of the contracts reveals numerous clauses along with non-compete language, and what and how the non-competes are implemented. Like any contract you will want to look at all the fine print.
Tim Fligg is a professional trader. He was portfolio manager for the Kelley Asset Management Fund at DePaul. He won the BattleFin global trading competition three times. He specializes in options and futures trading.