From prop trader to institutional fund manager

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Wilrik F. Sinia is co-founder of the Amsterdam-based hedge fund manager, Mint Tower Capital, whose flagship Mint Tower Arbitrage Fund focuses on convertible and volatility arbitrage. Prior to establishing Mint Tower in 2010, Sinia and Mint Tower’s three other co-founders were part of the management team at Principal Strategies, ABN AMRO bank’s proprietary trading desk.

We hired quite a few former colleagues and over time we have grown the team to 21 people as of today. Wilrik Sinia Co-founder Mint Tower Capital Management

The desk started in 1997 and Sinia was the last one to join in early 2000. When the financial crash happened in 2008, the team, which by that time had worked cohesively for over a decade, began to wonder about spinning out of the bank to set up their own independent fund company; this was at the time when global banks started to embark on shutting down their proprietary trading desks in the wake of the Volcker Rule under Dodd-Frank regulation.

"We had been running Principal Strategies for nearly 10 years before we established Mint Tower with a high responsibility to make sure things operated as smoothly as possible; we took that experience with us when setting up the hedge fund," says Sinia, who will be sitting on the first manager roundtable: 'From Prop trader to fund manager: How to make a successful transition?' on the 7th March; a pre-event session before the Amsterdam Investor Forum on 8th March.

Switching from the bank to your own firm

The biggest difference from moving from a bank to running one’s own firm, says Sinia, is that “you are responsible for every single detail. You have to spend a lot of time on issues that would otherwise have been taken care of by the bank. The spirit was very entrepreneurial at Principal Strategies. However, operationally, a lot was done for us, so that was a big change to adjust to.”

That change commenced in 2009 when Sinia and his fellow partners struck out on their own. They spent much of the following year taking time to get all the components in place, operationally speaking, before the fund started officially trading on 1st November, 2010.

Another key change for the team to adapt to, says Sinia, was having to readjust to the size of capital available.

“We decided to start with friends and family money and our own money, so you’re talking 1 or 2% of the capital we would have been trading at Principal Strategies. This also requires adjusting the size of your trades. In some parts of the market, we were in the top five or top 10 largest traders in Europe, in terms of turnover. As a fund, we probably wouldn’t have registered in the top 1,000. We were starting off from a much smaller AUM base.

“This requires focusing carefully on your P&L. Whereas a USD1 million loss might have been bearable in a single day because of trading noise, now you have to think that a USD20K loss would be unbearable. You have to re-set your mind. It takes a while to get used to sizing your trades and resetting your risk appetite; both on the profit side and loss side,” explains Sinia.

For those that are thinking of making the transition from prop trader to fund manager, it takes time to make this re-sizing adjustment, especially if one is coming out of a bank environment. But it is nevertheless vital; after all, effective risk management is one of the key functions of any successful hedge fund.

Pedigree

The fact the Mint Tower team had pedigree, having worked for many years at an established bank, helped when it came to opening up accounts in London with the main bulge bracket names. “We use quite a bit of programming and technology but we wouldn’t regard ourselves as a complex trader. We didn’t need a vast IT architecture or million dollar data lines to the US, for example,” notes Sinia.

“We were able to use proprietary technology in places. There’s a saying in Dutch, ‘I’d rather go and bark in the backyard than buy a dog’. That’s important. When you’re transiting to become a fund manager you can’t get too far ahead spending money, you need to think twice or three times before allocating capital to IT systems,” he adds.

The fact that the team knew each others’ trading habits and idiosyncrasies also meant that the transition from prop shop to institutional fund manager was a relatively seamless process. It provided a “good base to work from”, says Sinia. “We hired quite a few former colleagues and over time we have grown the team to 21 people as of today.”

Arguably one of the biggest adjustments is transitioning from running internal, proprietary capital to external investor capital. Sinia points out that with bank capital one tends to have a longer period of grace, when it comes to incurring losses; typically the bank will provide a one-year timeframe through which it is willing to live through a period of below-par returns.

With external investors, that pressure becomes greater. There is more of a tendency to scrutinize monthly returns.

“Certainly there is a more pressure to make sure that loss making months are as rare as possible. Things happen in the market and you can’t avoid losses entirely, but they have to be minimized. There’s less breathing room than compared to trading the bank’s own capital,” says Sinia, adding:

“You can’t control everything but most of our clients are very well informed and understand our strategy. They don’t pull their money after one bad month because in the end, our own capital is locked up in the strategy as well and we want to minimize the number of losses, naturally. Ultimately, our clients just want to see that we are doing a good job.”

Something else that Sinia and the team had to get used to when dealing with external investors was that, in the beginning, they would ask a lot of questions about compliance, operational processes etc., all of which “seemed a little bit over the top”.

However, once you start to grow the business and you match the demands of investors, you begin to realise that this is one of the main ways for investors to ensure they are only allocating to managers that can cope with everything. They don’t just want a good investment product; they want good reporting, good compliance and so on. If you can’t deal with detailed ODD requests an investor will start having his doubts.”

The investment process

Having a top notch administrator, a strong operational team: these are important elements that an investor will look at, in addition to the manager’s investment process.

“We’ve never had any process errors. The firm has become a high-level institutional-quality fund manager, and you understand why investors are so demanding given they have to screen thousands of managers. We now have a range of investors in the fund, from small private investors all the way through to large institutional investors,” concludes Sinia.

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