Dan Schmidt
·4 min read
Hedge fund managers are well compensated, but the job is often less glamorous than it looks. Competition for capital is fierce, the fight for top talent is endless and impatient clients are always just a bad quarter or two away from demanding change or their money back. Like a pro athlete in front of a fickle fanbase, it’s a life of "What have you done for me lately?" And for some fund managers, the game has lost its luster.
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Ditching The Traditional Model
Michael Platt had had enough. The British hedge fund manager had made himself plenty of personal wealth, but he found the pros and cons of running the fund needed to be more balanced. The year was 2015, and the investment industry’s fee wars were underway. Major online brokers were slashing commissions in a frantic race to zero, and index funds were putting downward pressure on fund expense rates. But these weren't the only fees under pressure.
Hedge funds usually charge clients a "2 and 20" fee, which means a 2% fee on the client’s assets and a 20% fee on investment profits. Platt's hedge fund, BlueCrest Capital Management, charged clients 2 and 20, but despite 15 years of (mostly) successful operations, clients were becoming more demanding. Down years were less forgivable, and the race to attract top traders was becoming burdensome. So, in 2015, Platt walked away.
Scaling Down To Lever Up
After more than a decade of running multiple trading strategies operating in unison, Platt wanted to slim down. After several subpar years, clients had the hedge fund industry in their crosshairs, and many wanted their fees reduced. Instead, Platt transformed his fund.
On Dec. 1, 2015, Platt sent an email to his clients letting them know he'd be returning the $7 billion in assets Bluecrest was managing and turning the firm into a private office. While no longer a hedge fund, Platt's company would continue operating proprietary trading systems using the British billionaire's money — much like George Soros did in 2011.
Platt could fine-tune his trading strategies using his own money, free from the burdens of managing outside capital. Rules about leverage were loosened, and BlueCrest's traders focused on specific markets or assets where their expertise lay. With the focus of the fund narrowed, Platt was able to use his own capital to produce outsized returns. Platt's traders were bulldogs who were always looking for an edge and were handsomely rewarded for performance under this new structure.
"I look for the guy in London waking up at 7 a.m. to log into a poker site so he can pick off U.S. drunks coming home on Saturday night," Platt once said about his hiring practices.
Platt's best traders got more capital, and underperformers had their cash flow cut. The slimmed-down operation turned the corner quickly, but Platt's biggest year was 2019 when a tailored fixed-income strategy produced returns of over 53% and netted the firm $2 billion in profits. According to Forbes, Platt was the second highest-earning hedge fund manager of 2019 — even though he didn't have a single client.
Proprietary traders at BlueCrest helped Platt double his already vast fortune. And while prop trading challenges like Trade The Pool won't offer the same level of capital, you can test your trading techniques using its cash pool. For less than $100, clients can start on the challenge, and those who double their profit targets can move on to a fully funded account.
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This article Closing Up Shop: Why Billionaire Michael Platt Transformed His Hedge Fund Into A Prop Trading Giant originally appeared on Benzinga.com
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