The idea – like most disruption – is simple. You follow somebody’s trades and give them a share of the profits. This enables a new breed of fund managers to invest first then gather assets later, which is the exact opposite of how it works today. Today a fund manager startup first gathers assets from limited partner investors and then invests those assets. This model is broken for both the limited partner investor and the fund manager startup. The fund manager startup has a huge hurdle to overcome which is proving how good they are at investing before they have made any investments. This favours the big incumbents, so that the limited partner investor is faced with a bad choice:
- Either get unexceptional returns by putting capital into a big incumbent active fund manager, many of which are closet indexers ie the worst quadrant of high cost beta.
- Or take a big risk on a fund manager startup. As with any startup, you may strike it rich, but the risk is super high.
The idea of reversing this to to invest first then gather assets later works as follows:
- An Originating Investor (OI) makes some trades and agrees to have their P&L tracked by their broker.
- A Follower Investor (FI) agrees to follow them and pay a % of profit (but no AUM fee).
So the risk is low for both parties. OI is already doing trades on their own account. Whatever they earn from FI paying them a % of profit is bonus. OI could be an individual or a company employing people and building proprietary technology. FI does not pay any AUM fee ie is only paying on profit.
The key to success is enabling both parties to make money even if the number of trades is very low, which is the subject of Part 2.
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