The type of traders Jack Schwager interviewed in his Market Wizard series of books were by and large already well-established and in some cases already famous. However for many aspiring traders getting recognized for their performance is a majority of the battle. Schwager along with his co-founders, Emanuel Balarie and James Bibbings, have a new company FundSeeder that aspires to make the process of trader identification easier and more efficient. In short, “FundSeeder provides traders worldwide with the opportunity to get discovered.” I recently had a chance to ask Schwager a few questions about FundSeeder. My questions are in bold, Schwager’s answers follow.
AR: The FundSeeder platform is analytics-based. This is in contrast with your Market Wizards books, where getting to know a manager, their process and how they think is important. How do you compare these two different due diligence models?
JS: They are completely different and have different objectives. The goal of the Market Wizards books is to glean the trading lessons and traits of great traders and disseminate this knowledge to the public in what I strive to make a highly readable format. The goal of FundSeeder is to find undiscovered trading talent worldwide and to offer traders a venue to create verified track records and access a platform with account graphics and analytics. Verification is achieved by getting daily account data from the broker (with the trader’s request and approval) rather than from the trader. The plan is that FundSeeder Investments, a completely separate company (the entity with the appropriate registrations), will select skilled traders discovered via the FundSeeder Technology website (fundseeder.com) for possible inclusion in an emerging manager fund or to introduce traders to select investors when there is a mandate fit. Registered traders will also be eligible to be included on the separate FundSeeder Investments website when it begins providing a trader database to qualified investors. Beyond the account verification process, separate additional due diligence would be conducted by FundSeeder Investments on any traders selected for possible allocations.
AR: One of FundSeeder’s future products will be multi-manager funds. How will they be constructed? Will they focus on the instruments utilized or will you seek to optimize the risk/return profile of the overall fund?
JS: The focus will definitely be on the return/risk profile of the overall fund, although return/risk will also be an important input at the individual manager level. The only constraint regarding markets traded is that they be liquid. So I would expect all the managers to be trading one of the following types of instruments: futures, FX, equities or options on any of these. As for the portfolio construction, we will adhere much closer to an equal risk allocation among managers than an equal dollar allocation. While an equal risk allocation would serve as a neutral base, individual allocations could be increased for managers who are considered particularly attractive for analytical or discretionary reasons and reduced for managers for any number of reasons (e.g., lack of experience trading larger asset size).
Below is a video about FundSeeder works:
AR: What do you specifically look for in a trader’s track record? How much verified, real-time data to make meaningful decisions?
JS: Well, to begin, we only consider return/risk, never return alone, which in my opinion is a meaningless statistic. After all, any manager can double his returns by doubling the average position size. Of course, doing so, only doubles the risk as well. If you only look at return/risk, you won’t get fooled by high returns generated by higher risk. If a manager has high return/risk but low return because he is very risk adverse, we can always increase return through notionalization.
Another important point to be made is that, unlike most performance based websites, FundSeeder is built on daily data. Therefore, for any track record length, you have approximately 21-22 times the number of data points as with monthly data, thereby providing much greater statistical significance. Daily data provides much greater insight into risk than monthly data. For example, a manager who has a 20% drawdown intra-month but finishes with only a 3% loss might not look risky on monthly data, but the daily data would tell a different story. There is no place to hide in daily data. Therefore, although the minimum acceptable record length would depend on multiple strategy specific factors, such as the frequency of trades, for any given manager or strategy, you could get by with a shorter record using daily data than the conventional monthly data.
Of course, you also have to look at how returns are being made. For example, a strategy such as selling out-of-the-money options might generate both very high return/risk and seemingly low risk if there were no adverse market environments during the track record. But such a strategy could be subject to very high event risk, even though such risk may not be manifested in the track record. So it is unwise to choose managers on past performance only.
AR: The prevailing trends in asset management are towards low-cost index and smart beta ETFs. Do you see room in the market for an enterprise focused on active management and the generation of alpha?
JS: The trend you describe is a consequence of a growing perception among investors that alpha investments are too richly priced and are structured to serve the managers not the investors. And, I would stress, it is not just a matter of the level of fees. Consider how incentive fees are typically structured in a hedge fund. If the manager makes 10% in a given quarter, he will keep 2% as an incentive fee (or more, depending on the incentive level). If, in the next quarter, the manager loses 11% or more, bringing performance back to flat, or even negative, he still keeps the 2% incentive fee, while the investor is left with a net 2% or greater loss. We think there are much fairer ways to structure a fund. We believe by combining more investor friendly fee structures, with access to undiscovered emerging manager talent, FundSeeder should be able to develop an investment product that will be well suited and attractive within the current environment.