Topwater Partners / "First-loss" accounts

[YukaRedux]

Anyone have any experience or information about Topwater, or "first-loss" seeding in general?



I can understand the philosophy of wanting PMs to take the first loss, but not when their capital is 10% of the overall - a moderate down month would crater your wealth. Are these deals the last refuge for the desperate, or am I not seeing something?

[IVolrev]

Lol, you should run, not walk, run, if you stand in a regular employment relationship with a firm and such company asks you to carry the losses you may generate at any given point in time. There is a reason I or for that matter anyone was/is/will be willing to only be compensated by 10-15% of generated profits at traditional sell-side prop groups: Which is that the firm manages its own risk and takes any potential losses. If the firm allows a desk to sink the ship then thats their choice, they can pull the plug at any time. But to ask individual traders to cover losses is ridiculous. I am happy to do that if I in exchange take home 80% of profits while the firm keeps 20%. Otherwise it would be a close to risk-free venture on the firm's end.



Obviously, there are countless of such bucket shops who come up with ever new "innovative" compensation schemes which tilt the odds in the firms favor. I even stay miles away from hft trading houses such as Getco, because their compensation schemes suck. Its great for average achievers and IT guys who do not know better what numbers can be achieved elsewhere but high achievers are badly underpaid in such firms.

[YukaRedux]

Thanks, that was my thinking too. If I wanted to lever my personal capital 10x, then I'd be wanting all the upside...

[HitmanH]

I actually disagree a little. Is a very cost-effective way of levering up your own capital for >50pc pay-out.



Topwater focuses on either low-drawdown/high sharpe strategies - and allows people to get going in an independent way (as opposed to inside a prop shop), maybe alongside some other structures (fund or prop), or alternatively allows fundamental investors who may may 40-50 names in their book to have 1-2 "best ideas" in that - without risking the overall performance of the headline fund - and levering their own cash for those ideas.



They also provide a lot of infrastructure so easy to set-up (and quick).



There are similar people out there - such as Prelude too...



Feel free to drop me an email...

[YukaRedux]

Cheers HH, will do.

[IVolrev]

@Hitman, not sure which part you disagree with. I think when you read between the lines, thats exactly what I said: If I get to keep most of the profit then I am willing to take the first hit. Obviously it all depends on the fine print. Its not as straight forward as you put it, I am afraid. For example, how net pnl is calculated and at what frequencies, how often pay-outs occur and many other variables have a huge bearing on whether the deal makes sense. But taking sub 30% profit share plus being subject to a "first-loss" clause makes zero sense. Its a guaranteed losing proposition for most everyone. Please note that I do not address that at any firm in particular but in general.

[AndyM]

CEO: Brian Borgia...good name for the job.

[FDAXHunter]

I also disagree with IVolrev, this is not something to be afraid of, there are lots of scenarios where this can actually a good deal. Of course, it all depends on what, where, when, how, but there's nothing wrong in principle with it. Especially calls like "if I take 100% of the downside, then I want 80% of the upside" are totallly unwarranted, I'm afraid.

[IVolrev]

@FDaxHunter, regarding your last statement You seem to be my target customer if I wanted to run a bucket shop: You seem to be fine to take 100% of the downside and 50% of the upside. I would love to have you trade for me. I would obviously fire your sorry ass should you ever burn through your initial stake (that I would of course ask you to bring with you upon joining because you seem to be such understanding chap).



Thats exactly why you have a bunch of IT nerds sitting at Getco & Co., people who get their bonus that their manager thinks they deserve and thats it. For them taking home 200k-400k per year seems to be what they always wanted. The big fish work at hedge funds with fixed percentage payouts of generated PnL, and I have NEVER ever heard of a single hedge fund trader taking a loss unless its netted out with gains, factoring into the bonus he/she takes home. The floor for them is zero/getting fired. Some others start their own firms. But sorry to say, people who toil at those hft houses without a fixed percentage payout either believe the firm is dumb in that they get more in remuneration than the generated pnl would warrant or they are duped into believing they get paid handsomely, OR, and to be honest I believe thats the most likely explanations, most of them are not people persons, meaning they would not dare to push the envelope, they would not dare to threaten to walk out as a whole team to leave the firm with nothing, they would have a very stressful and difficult time to sit next to extremely extroverted individuals at hedge fund trading desks, some of whom take home millions if not tens of millions because they made sure they get a fair share of their generated pnl. I am not looking down to anyone working at hft firms but I find it amusing to hear someone claim that 100% risk and 50% of upside is a good deal and that asking for 80% is "unwarranted" to call for. Sure, for such person maybe, but then they should not bitch about the guy next to them who negotiated the 80% profit share, and especially they should not claim their deal is the fairly valued deal.

[Strange]

Sometimes it's a good deal and some times it's not. You should not even think about these guys as capital providers, simply as people providing additional leverage on your existing capital for a cost. If you have a strategy(s) that produces really smooth returns but is under-levered since it's capital intensive, it makes a lot of sense to use these guys.