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Kim

SteadyOptions Fund Discussion

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For the last five years one of the most common questions our members, potential members, and former members ask is “Is there a fund/managed account/auto-trading platform for the Steady Options model?”  We have consistently said no for numerous reasons – from regulatory, to the expense, to time management, and to potential trading issues at scale.  These issues aside, in order to meet our members’ requests, Steady Options, in conjunction with Lorintine Capital, is now exploring launching a fund that trades the Steady Options model and is inviting Steady Options’ members, potential members, and former members to participate.

 

Lorintine Capital has resolved the regulatory, expense, and time management issues, and plans to launch a fund within the next year based on the Steady Options model.  However, one issue remains – and that is trading at scale.  We believe we have this issue resolved, but until actual money is put to the test over a period of time, it is unknown if the planned solutions will be as effective as we hope.  Therefore, Lorintine Capital, on a limited basis, and for discounted fees, is going to open managed accounts to trade the Steady Options strategies in order to ensure the scalability of the model.  If you are interested in participating, you must understand the following, and must be willing to sign disclosures to the effect:
 

  1. These managed accounts are going to act as a beta phase and if successful will be merged into the fund that is created.  Investors participating in the beta phase will not be required to join the fund, but they will not have the option to remain a managed account (there are too many regulatory hurdles and fee issues);
  2. Minimum investment during the beta phase will be $50,000.
  3. The goal of the managed accounts and eventual fund is not to duplicate the published Steady Options results, but rather to hit 40%-50% of those published results.  Realistically, if we hit even 25% of those results, we’ll have one of the most successful funds in the world and will be happy.  We expressly reserve the right to change these goals prior to the fund launch;
  4. All beta managed accounts will be block traded together, mimicking the fund structure.  No investor will be granted preferential fill treatment, regardless of the size of that investor’s account;
  5. We will not be accepting more than $5m of capital during the beta phase. In some initial conversations with interested investors, we fully expect this $5m target to be reached very quickly.  If you wish to participate, and miss the opportunity, we apologize in advance, but will make the fund available to you, when and if it launches;
  6. All investors will be reminded, in writing, of the potential of significant draw downs of the Steady Options strategy. For example, if there is a 20% drawdown in the first two months, that drawdown may not have occurred because of scalability issues – it may simply occur due to the inherent volatility of the Steady Options strategy.  If losses occur, we will know if it is because of beta phase design issues or just the vagrancies of the Steady Options strategy.  All beta investors need to be aware that draw downs may occur that have nothing to do with trading and be willing to go through those draw downs that have nothing to do with scale issues;
  7. Any investment into the beta phase must be from at risk capital only.  If an investor’s net worth is $1.5m or less, we will not accept more than ten percent of your investable capital and preferably no more than five percent at this time.  If your net worth is above $1.5m, we will not accept more than fifteen percent of your investable capital and preferably no more than ten percent;
  8. Unfortunately we will not be able to accept non-US based investors during the beta phase.  If and when the beta phase is successful, the Fund structure will be able to accept foreign investors from most jurisdictions.  If demand is high enough (at least in excess of $25-$30m), we have a highly tax advantage structure which can be utilized for non-US investment capital (and offer some tax advantages to US investors).  Specifically, the structure will block FIRPTA and ECI for non-US investors, block UBTI for US-tax exempt investors, and will defer portfolio level taxes for normal US investors.  However, this will only become available if the beta phase is successful and demand is high enough;
  9. Managed accounts will be charged a flat fee of 1% during the beta phase.  The Fund will charge a 1.5% management fee and 20% profits interest (after the High Water Mark) for qualified investors and 2.99% for non-qualified investors. Investors that participate in the beta phase will pay one-half of the management fee of the fund when the fund is launched as a thank you for participating early. There will be no performance fees during the beta phase (regulatory reasons).  The management fee will be conducted regardless of the success of the beta phase.  We are sensitive to the fact that fees on unsuccessful models (e.g. diagonal model from about two years ago).  However, there is a significant time commitment and expense involved in doing this and no one can work for free  (If the entire $5m is subscribed, that’s a $50,000 gross fee, out of which the entire expense of the fund setup will come, all overhead will be paid, and all other expenses covered);
  10. We expect, but cannot and do not guarantee, that getting into earnings trades should be doable on almost every published steady options trade.  However, when exiting a larger position, the dynamics will completely change compared to what most members are used to observing.  There will be no waiting until right before close to exit, and rules are being implemented regarding taking profits further out before earnings and how to exit the trade throughout the day on the last day if held (scaling out).  There is simply no way thousands of contracts can be held until one hour before earnings announcements – that’s an invitation for disaster.  This means the beta phase and eventual fund’s profits will differ from the published results (and thus the change in goals for the beta phase and fund);
  11. Fund investors will need to maintain an active subscription to SteadyOptions. If your investment in the Fund is less than $250,000.00 you must subscribe to Steady Options at discounted rate of $995/year. SteadyOptions subscription will be free for fund investors who invest $250,000 or more in the fund. The Fund investors get a discounted rate, all the privileges of full members, and can utilize the forums for education, to discuss the Fund, or for any other permissible use.
  12. All investors will be required to sign agreements with Lorintine Capital, a set of disclosures, and make certain representations and warranties covering the points discussed above.


We would not be doing this if we did not think we could be successful at it.  Christopher Welsh at Lorintine Capital will be the primary trader of the strategy and is committing some of his own personal capital to the beta testing.  However, there absolutely can be no guarantee this will be successful until positions are actually entered and exited. Paper trading, software testing, conversations with trading desks and trading pits can only carry you up to making the actual trades.  If we see that positions cannot be exited appropriately, we will end the beta phase and return any remaining investor capital. 


As part of risk management, we may reduce the size of each trade (while also possibly taking more trades). The plan is to start with smaller allocation (around 5-6%) and possibly more trades. If we see that it works well, we might allocate up to 10% for certain strategies. But overall it will be similar to what we do at SO.

 

Process to participate:
 

Chris is currently putting the documentation together for the interested parties. The disclosure documents and account opening documents should be ready to go by early next week. Please contact Chris at cwelsh@lorintinecapital.com if you are interested.

We are very excited about taking this next step forward with our members and have high hopes of a successful fund launch post this initial beta phase. We expect the beta phase to last at least six months, perhaps up to a year.  However, depending on what occurs, that position may be shortened or lengthened – we will keep everyone up to date on the timeline.  We invite you to ask any questions you may have either on this topic or by emailing Christopher or Jesse at: cwelsh@lorintinecapital.com and/or jblom@lorintinecapital.com

As a side note, there is absolutely no intention to change anything about the current SO service. It is my plan to continue to provide the same service to regular members for years to come.

 

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Kim, 

I think offering a fund like this is a great idea as long as it doesn't adversely impact the newsletter. It sounds like you have planned it in such a way as to minimize the impact on newsletter subscribers, which is great. However, my heart sank when I read that the minimum investment for the Beta phase is $50,000. Even though I don't qualify for the Beta due to living outside the USA my hope is that the minimum investment for the Beta is not going to be indicative of the minimum investment once the launch happens.

My feeling is there might be quite a few subscribers to the newsletter who might struggle to put together $50,000 in risk capital and yet who know and understand the Steady Options strategies, who have full faith in what you are doing, and who are in it for the long haul. I have a hedge fund friend and one of the most challenging things to deal with is clients who bail out when the going gets tough at the sign of the first drawdown. I feel there would be a bunch of us, especially those of us who have been members for several years, who might struggle to put forward $50,000 but who could manage say $10.000 or $20,000 and would make excellent, loyal long-term clients of the fund.

I love how Steady Options newsletter gives the little guy (and even the little little guy) a fighting chance. At the same time I hate how hedge funds are only for the rich, and not for the little guys, which only magnifies the inequalities between people.

So my request: Please consider giving us minnows a chance to participate in your fund and to continue to grow with you over the years...:Footinmouth:

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@equus

The main reason for $50,000 minimum investment is contract allocation. Since beta phase is managed accounts, that means that unlike a fund where all the money is in one account, those are separate accounts. If we allow 10,000 accounts to participate, we will have serious issues when trying to allocate options contracts equally between accounts. For example, if we buy a $6.00 spread, and allocate 5% per trade, we cannot allocate 1.2 contracts to 10k account. That means that different accounts will have different performance. We don't want that to happen. $50k account does not resolve the issue completely, but makes the allocation much easier.

I don't know what will be the minimum allocation for the fund. We will definitely try to accommodate the "little guys" - the problem is that hedge fund will be limited to only 35 non-accredited investors due to US regulations.

Chris should be able to add more details.

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i cant see how this wont hurt the regular subscribers.  I know you said different strikes and expiration but how will that really work?  There's only so much flexibility with earnings straddles and atm calendars

 

That being said, it's a great position to be in...dont blame you for doing it at all

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On 3/1/2017 at 9:26 PM, RapperT said:

i cant see how this wont hurt the regular subscribers.  I know you said different strikes and expiration but how will that really work?  There's only so much flexibility with earnings straddles and atm calendars

First, don't forget that not all fund money will be in addition to what is being traded today. In fact, more than 50% of the current interest comes from the current members.

There is a LOT of flexibility. For straddles, we can use strangles instead of straddles, and/or different strikes and expirations. It will actually spread the risk, and this is what many members already do now. For calendars, there are many strikes close enough to ATM, especially for higher priced stocks like AMZN, GOOG, PCLN etc. For GOOG, we can trade GOOGL instead. We also trade many highly liquid stocks like FB, AMZN, NFLX, TLT etc. - they can be traded thousands of contracts with no issues. 

 

Same trade idea can have many variations in terms of strikes, expiration etc. Many members already modify our official trades based on their own risk tolerance (trading further expiration for straddles to reduce the negative theta, widening the strikes for TLT fly etc.)

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2 hours ago, RapperT said:

i cant see how this wont hurt the regular subscribers.  I know you said different strikes and expiration but how will that really work?  There's only so much flexibility with earnings straddles and atm calendars

One of the reasons we're going forward with this is because there has not bee a noticeable drop off in performance as more and more members have been added over the years.  The Beta test is going to be smaller than what we estimate the current members are all trading.  Option markets are also continually growing -- five years ago CSCO option volume just wasn't that high.  Now?  The Friday ATM call strike traded almost 3,000 contracts.  There are other options that trade in the tens of thousands of contracts daily.

 

Sure if a NKE straddle has a volume of 4 contracts and an OI of 12, we might not be able to do that trade, but by and large, I think we'll be fine (emphasis on think, which is why we're doing a beta phase).  With the Beta phase being at $5m max, that means at any one time, we'll not have more than $2.5m deployed.  If we stick to around 5% a trade (or less), that's a maximum of $125,000 in any one trade.  If it's a $1 spread trade, that's 1,250 contracts -- for most instruments that should be doable.

 

We also don't just throw in an order for 1,250 contracts -- that would cause issues.  Rather the software submits lots of orders, over time, in increments of 10-20 contracts or so.

 

Our intent is not to hurt the members -- in fact we're doing this because of the number of members that have requested it.  I am fully willing to end the Beta phase if it turns out to not be feasible or eliminates the SO model.

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I am starting to get repeated questions, so I am starting an FAQ section, which will be amended as questions continue to roll in.  Please don't let this FAQ stop you from emailing your questions in.

 

1.  I live outside of the United States, is there anyway I can participate in the Beta phase?

Only if you have a US taxpayer ID and a US residence.  I realize this is inconvenient, but those are requirements by the brokers we use.  When and if the actual fund is launched, it will be open to non US-based investors, who may be able to get tax advantaged treatment.

 

2.  I want to participate in the Beta testing phase, how do I do so?

Send an email to me, cwelsh@lorintinecapital.com.  As soon as the registration documents are finalized, I will email them to you.  We anticipate to send out registration/managed account paper work early next week.

 

3.  When is the Beta phase launching?

Our target date is April 1, but it may be sooner.  We have received quite a bit of interest just in these past few hours, and if we reach our $5m target before then, we'll start before then.

 

4.  Do Beta phase participants have to be accredited investors?

No they do not, but that is our preference.  If we have over $5m in interest, we will give preference to accredited investors.  I realize this may not seem fair, but with the US regulatory framework and the fact that any eventual fund will be limited to only 35 non-accredited investors (actually the current term is"qualified clients"), this is the safer choice for us.  Also, since the Beta phase is considered to be at risk capital, accredited investors are simply more likely to be able to absorb a loss if it occurs. 

 

That said, if we don't have $5m in accredited investors in the next couple of weeks, then we will accept non accredited investors, provided they can make certain financial representations and warranties regarding the capital they are investing.  If you participate in the beta phase, and a fund is eventually formed, we will NOT kick you out, you will be permitted to be one of the 35, regardless of the amount you invest (it still has to be at least $50,000.00).  We greatly appreciate all of those who are willing to take this risk with us, and we won't exclude you from a fund if it is ever formed.

 

5.  If I invest over $50,000.00 can I withdraw any of it before the end of the Beta phase?

This is your money, in your account -- you can withdraw it at anytime, regardless of whether or not you have an account with $50,000.00 or $2,500,000.00.  However, there are some caveats.  If your balance drops below $50,000.00, the account likely will no longer be suitable to participate in the Beta phase and we may have to close it.  We will of course communicate with you about this before doing so, but we do reserve the right to remove any account that has funds withdrawn from it resulting in a balance below $50,000.00.  Again though, it is your money, if you need it, or simply decide to stop participating in the Beta phase, you can do so at anytime.

 

Also, if you need your money RIGHT NOW, there likely will be some additional losses incurred from having to exit open positions prior to their intended close.  These are all publicly traded securities, but if you want out, the markets may dictate losses.  Finally, as is always true, there is trade clearing time, wire transfer time, and other delays which can occur in closing an account or withdrawing money from it.  These time periods are typically no more than 3-5 days, but I have seen it take longer.  If you think you may need this money in the immediate future, or even near future, DO NOT INVEST in the Beta phase.

 

6.  What changed?  Why do you think scaling will not be an issue anymore? 

 

The answer to this is multi-faceted.  First, Steady Options, with the assistance of our members, has grown significantly over the years.  Using fairly conservative estimates, Steady Option members already trade more than we will be trading in the Beta phase -- and successfully.  So we know that it is possible to increase volume and still obtain fills.

 

Second, we have spent quite some time talking to our broker, reviewing trading software that assists with large option orders, watching open interest, and generally becoming more comfortable with larger option trades.  At the $5m level, it is highly unlikely any one trade will exceed 10,000 contracts -- and somewhat unlikely a trade will exceed 5,000 contracts.  The software we will be using can slice a 2,000 contract order into 100 different orders, each between 10-30 contracts, each with limit prices varying at levels we set, and which are entered at time intervals we set or which are randomized.  Our broker has already offered to essentially dedicate some of its employees on the option desk to assisting us getting fills for a period of time (they want the business).  If we trade in the volume we expect, we also should be able to obtain lower commissions, giving us room for some slippage on our trades.  These factors taken together increase our confidence in entering trades.

 

Third, we have looked at scaling into trades over time.  Go look at the majority of threads, members get fills within seconds of the trade posts -- and they also get fills sometimes days later.  This gives us more confidence in being able to enter trades over time.

 

These same factors make us somewhat more confident about exiting trades.  However, exiting is still the LARGEST RISK to the Beta phase.  If we somehow run into problems entering trades, so what, we still have the cash in our accounts.  If we run into problems exiting trades, unintended losses may (will likely) occur.  We would not be launching a Beta phase if we did not think we could pull this off -- I am putting my own money at risk too after all.  However, please realize that we are calling this a Beta phase for a reason.  Until we actually get into a trade and then get into a situation where we HAVE to get out, it is simply impossible to know how much bigger a loss would be at the $5m level as opposed to the $10,000.00 level.

 

7.  What is the maximum loss which may occur?

Please don't ask that, it is impossible to answer.  The theoretical max loss is 75%.  We do not intend to ever have more than half of our capital at risk at any one time.  If we are fully deployed, cannot exit any trade, are forced to hold to expiration, and every trade finishes out of the money after expiration, then we would lose 50%.  If for some reason we did not call it quits then because we learned what went wrong trying to exit, we would then deploy 50% of our remaining capital (25% of the original).  If we were wrong on having "fixed' the exiting problem, and once again cannot exit any trade, are forced to hold to expiration, and every trade finishes out of the money, we could lose that entire allocation as well, resulting in a total loss of 75%.  This is highly unlikely to occur.  Even if we couldn't exit a single trade, I don't think I've ever seen each and every trade finish out of the money -- given that many of our trades would rely on moves in the opposite direction (e.g. volatility vs. earnings trades), this seems virtually impossible.  However, if you want to know what the max loss is, then I’ll say 75%.

 

If you want a realistic “max loss” I haven't a clue and won't try to predict it.  As unlikely as it may be, if you're not prepared to lose up to 75% of your investment, DO NOT participate in the Beta phase.  I cannot conceive that this result is likely, but it could occur, and this is a Beta product, inherently risky, and I want to be sure everyone understands that.

 

8.  What is the timeline of the Beta phase?  (Or I don't want to participate in the Beta phase, when are you launching a fund?)

 

There is no firm timetable.  Our goal is to have the Beta phase started on or before April 1.  How long will it run?  Well if it is an abysmal failure, only sixty days.  This is not our goal.  Realistically, it will be a minimum of six months prior to us even considering launching a fund.  It may be a full year, depending on what we learn and what we identify that has to be fixed during the Beta phase.  It is possible that this works just perfectly and three months in we see that we could be trading ten times the volume we are without issues.  In that case, we'd start a fund sooner -- but I wouldn't expect such results.  There are always bumps in the road that have to be navigated.

 

9.  Do you have to use taxable accounts, or can I use an IRA?

 

You will be able to use an IRA in both.  In the Fund, you’ll have to find a third party custodian or setup an IRA check writing account.  When/if the Fund comes to be, we will provide a list of potential custodians investors can look into.  We cannot recommend one, and you are free to disregard the list and find your own custodian.

 

10.  Will all of the managed accounts be treated the same?

 

In general, yes.  All of the trades will be executed as a block through a block trading account.  They will then be evenly allocated to each managed account.  However, in actual performance, each managed account will not have the same performance.  This is because contracts can only trade in whole increments.  If we set up a trade to be 5% of each managed account, in Mr. Smith’s account that may be 3.2 contracts and in Mr. Roger’s account that may be 3.9 contracts, depending on the value of each account.  In this example, our software would trade 3 contracts for Mr. Smith and 4 for Mr. Rodgers.  So now Mr. Smith has less than 5% trade allocation and Mr. Rodgers has more than 5% -- which will result in performance differences between the two accounts.

In a Fund this won’t be an issue as there is only one account with the investors’ money pooled.

 

11.  Is Lorintine Capital a fiduciary?

 

Yes, Lorintine Capital is a Registered Investment Advisory firm (RIA).  We owe a fiduciary duty to all of our clients (unlike brokers – I’ll post a rant against anyone whose against the fiduciary rule for brokers later).  This means we cannot front run trades for our own gain as well as a host of other rules.  We take this very seriously.  Our clients have entrusted us with their money – we will do our best to trade it as expected.  This does not mean we guarantee performance or insure against losses.

 

12.  What is the goal for the Beta phase?   How did you come up with that number?

 

We are targeting 50% of what SteadyOptions obtains.  If SO has a 10% return in a month, we would be thrilled with a 5% return.  There will be some slippage entering and exiting positions and it is not realistic to expect SO returns at the Beta level or in any eventual fund.

 

Where did this number come from?  We decided it was a reasonable goal – there isn’t any special formula behind it.  Maybe we get really good and hit 75% (unlikely) or maybe it is harder to get out of trades than we thought and we only can hit 20%.  This is the point of the Beta product – to figure out just how much we are going to have to sacrifice off what occurs in a $10,000.00 account.

 

13.  Why can smaller accounts not participate in Beta and/or the Fund if it is launched?

 

We cannot accept smaller accounts for the Beta test phase as each account is an individually owned separate account, that we can block trade together.  If a smaller account, lets say $10,000, were to participate in Beta, it would make trade allocations impossible in many circumstances. 

 

Remember we won’t invest more than 50% of the capital at once, which leaves $5,000.00 to invest.  If we reduce the trade size (as planned) from 10% to 5% (or less), that leaves only $250/per trade.  Frequently that won’t even be feasible.  We cannot allocate “partial” contracts, only whole contracts.  It may work on some trades, but not on all.  We did spend some time in deciding what to set the level at and $50,000.00 was the lowest we were comfortable with.

 

When/if a fund launches, we will be able to take up to 35 “little” guys.  And by little, I mean non-accredited/non-qualified clients.  We’re not sure how those 35 will be divided yet, but there will be a possibility for at least some smaller accounts to be established in the Fund, if and when it is formed.

 

14.  Does the definition of qualified client include real estate?

Real estate, yes – but not your principal residence.  The term qualified client is defined by law and means:

A.    A natural person or company who has at least $1,000,000.00 under the management of the investment advisor;

B.     A natural person or company that reasonably believes either:

i.                    Has a net worth, including that of their spouse, of $2,100,000.00 not including their principal residence; or

ii.                  Is a qualified purchaser

This differs from the definition of an accredited investor.  You need to be an accredited investor to invest in a fund, but you must be qualified if you are going to be charged a performance fee.

If you have other questions, please don't hesitate to post them or email me at your convenience. 

 

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I know the regular member service will continue, just wanted to give my comment. I'm one of those subscribers which won't be eligible for beta/fund or won't make sense given my lower capital size/net worth. I recently discovered and joined SO (which I'm really glad) after losing a lot of capital with other newsletter and making bad decision to trust and risk too much of my capital with it. My goal now is to learn the strategies here and be good at it, which will take time. So I'm hoping SO will continue to provide the same service to regular members for years to come despite the beta/fund being successful.

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5 hours ago, mack611 said:

I know the regular member service will continue, just wanted to give my comment. I'm one of those subscribers which won't be eligible for beta/fund or won't make sense given my lower capital size/net worth. I recently discovered and joined SO (which I'm really glad) after losing a lot of capital with other newsletter and making bad decision to trust and risk too much of my capital with it. My goal now is to learn the strategies here and be good at it, which will take time. So I'm hoping SO will continue to provide the same service to regular members for years to come despite the beta/fund being successful.

There is absolutely no intention to change anything about the current SO service.  If/when a fund is launched, we intend on it being as invisible as possible and all SO members to continue to have things just as they are now.

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I didn't realize we had this many accredited investors in the group to warrant launching such a fund. I hope it works out since it shows that SO can handle more volume which is definitely a good thing for all of us. 

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We've had an incredible response and interest level so far, thank you to everyone for your positive feedback, questions, and even criticisms -- that's how we can ensure we're doing the best thing for everyone here.  Paperwork for those who are interested in participating in the Beta phase will be going out early this week.  If you have interest in participating and have not yet been in touch with me, please email me (cwelsh@lorintinecapital.com), post on here, or send a PM through here so I can ensure you're included in the correspondence. 
 

We want to thank everyone that has expressed an interest in participating in the Steady Options Managed Account Beta Test phase.  Everyone who contacted us should have already received a link to the paper work necessary to establish a managed account.  We have already exceeded the minimum amount of commitments necessary to proceed with the Beta Test phase, though there is still room for additional investors

 

If you would like to participate in the Beta Phase, the paper work to establish a new account can be found at: http://www.lorintine.com/strategydocuments/.  If you have any questions on what documents to fill out or how to fill it out, you may contact either Christopher Welsh (cwelsh@lorintinecapital.com) or Jesse Blom (jblom@lorintinecapital.com).  As a reminder, if and when a fund is launched, Beta Phase participants will only pay one half of the management fee and be guaranteed a spot in the fund (should the Beta phase prove successful). 

 

   Once the Beta Phase is filled, there will be no more Steady Options managed accounts open until such time a fund is launched.  Thank you to everyone who has expressed interest in assisting us.

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On 3/1/2017 at 8:11 AM, equus said:

I love how Steady Options newsletter gives the little guy (and even the little little guy) a fighting chance. At the same time I hate how hedge funds are only for the rich, and not for the little guys, which only magnifies the inequalities between people.

 

Very broadly speaking, the purpose of a hedge fund is to hedge exposure to stocks, which is why, as a whole, they have underperformed the S&P 500 TR since 2008, and why money has migrated to low fee index ETFs.  Based on articles I've read, the same exodus is occurring in actively managed mutual funds (personal note: if I'd just put 100% of my 401(k) contributions, along with the contributions to my kids' 529 funds, things would be looking quite a bit better today).  

The market will turn, though, and hedge funds will outperform again.  Anyway, if I had to put my finger on any actual point I've made in this post, it's that it isn't always a disadvantage to be a little guy because, every now and then, you get 7 fat years in a row.

I AM NOT MEANING TO HIJACK THIS IMPORTANT THREAD, SO PLEASE DON'T REPLY!

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I would like to point out the general misconception about what a hedge fund is -- it really has nothing to do with hedging positions.  Sure the original were some short of long/short equities, but the definition of a hedge fund is nothing more than a "pooled investment vehicle."  It can be a pool for purchasing debt, real estate, investing in the stock market, a traditional fund, or whatever.  It's simply one entity (or sometimes a few if you have onshore/offshore varieties) where everyone dumps their money into one basket and that basket trades.  (This has come up quite a bit recently).

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My apologies, Chris, for pigeon holing what is a very diverse and important part of the capital management industry.  I truly did not mean to do that.  I felt it important to make clear that one shouldn't get down or be hard on oneself for being, monetarily, a "little guy," because every single member of this great community was, at some point, a "little guy."  I did not mean to disparage or misinform regarding hedge funds, but rereading my post I can see I did just that.  I'm sorry for doing so.

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No problem at all (and you really are about the tenth person in the past few days to wonder why we call it a hedge fund when we're not hedging stocks) so really don't worry at all.

 

And it's all relative, I feel like we still are the little guy :)

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Depending on the number of offshore investors that are interested (and their are quite a few), it's looking like I'll have a onshore/offshore fund.  There's two possibilities for that:

 

1.  Traditional Master-Feeder structure - we'll create an offshore company, LP, or unit trust (depending on jurisdiction) as well as a US limited partnership.  Those two will be feeders into an offshore limited partnership.  Which jurisdiction that is in depends on our broker.

2.  Annuity structure -- if we use the annuity structure it may get outside the realm of what people who traditionally invest in hedge funds are used to (purchasing an interest in a limited partnership), but it has some significant tax advantages for us.  I'm still working with the lawyers who know even more than me on this, but it looks like for our foreign members we could defer all taxes on an investment in it until they cash out.  I think we may be able to get that to apply to our US investors as well.  This is not a for sure thing yet, I have to go to New York and meet with a group that forms them this way in a couple of months.  BUT if it did work, it may be difficult to turn down this structure -- the tax advantages would just be to high not too.

 

So the short answer is, we're not 100% sure yet, but we're working on it in the background for when/if the Beta is successful.  Either way it will be able to accommodate investors from outside of the US -- even if we go the simplest route and just set up a US Limited Partnership we could still take investors from outside the US, we'd just have to go over tax with holdign with them all.

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For those members not participating, but curious:

 

The Beta test is up and running and has been since last week.  So far getting into positions has not been noticeably different than entering into trades was ever in my personal account.  I haven't gotten all the trades I want -- but its not because prices going suddenly up, it is more because prices never got to where I want.  For instance, the last two trading days, I've been willing to go into FB at $.040, but the price hasn't gotten below $0.50.  That's not a volume issue, that's just supply and demand.

 

We're still VERY early in the process and have not tried to exit any positions yet, but so far we have successfully entered:

-  SO VXX trade;

- Yoswer VXX trade (though I don' think there was an official one this week, I am in the 16.5/19.5 and it's off to a good start so far this week;

- VIX Risk Reversal

- SLB straddle

- MSFT straddle (entered before it was an official SO trade, if it ever becomes one)

- RUT BWC

I'm extraordinarily happy with how things have been going -- let's just hope that continues through the closing of trades as well.

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For those who are interested, we have completed the Beta test phase and we ARE moving forward with a fund.  All of the Beta Participants will be getting emailed directly, but if anyone else has interest in the Fund, please email me at cwelsh@lorintinecapital.com.

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I have a few questions.

Is the regular subscription service going to shut down or take a lower priority? (Its your right. ) Unless  the fund is doing completely different trades or trading after release of  subscription trades it seems to me that it will negatively impact the ability to get filled.  Will it be doing the same trades. Maybe it  the fund was already in place as i found it difficult to get filled in the last 3 months. Were the trade levels the same in the last 100 days as the fund will make going forward? 

 

Edited by Topcat

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As we mentioned several times, the SO newsletter will continue and remain the same high priority. The fund is managed by Chris while the newsletter is managed by me. My plan is to continue providing the same level of customer service to SO members for years to come.

We also discussed why there should be no impact from the fund. The fund might take same trades, slightly different trades or completely different trades. In SO, there are dozens "unoifficial" trades outside of the official model portfolio - they are discussed on the "unofficial trades" forum and members can always trade them in addition to the official trades. We have not seen any significant impact while the beta was running.

Beta members got full update about beta performance, public forum is not the proper place to discuss it due to various SEC regulations. 

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We have had an overwhelming response to the launch of the Steady Options Fund.  We have sent out well over one hundred subscription agreements and are processing them as fast as we can.  If everyone comes through with what they have said they want to invest, we will be oversubscribed. However, it is our experience that less than half of what people initially say they want to invest actually gets invested, which means there should be room for more investors. Outside of the Beta testers and Qualified Clients, this is a first come first serve situation.  So if you are interested and haven't gotten your paper work, please email Chris at cwelsh@lorintinecapital.com or call him at 214-800-5164.  If you have gotten your paper work and need help filling it out, you can get in touch with Chris, or Jesse at jblom@lorintinecapital.com.  

Because of the large number of investors signing up, the first trading date is most likely going to be September 15.  We just have more paperwork to get through than anticipated (which is a great problem to have), and we want everyone who has timely signed up to get in at the start.    

We want to thank everyone for the great response so far, and hope to hear from more of you next week.

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I wanted to also thank everyone for the support so far to the fund.  I've just emerged from the backlog of paperwork today, having now processed everyone's subscription agreement that has been submitted.  I have been told, firmly, by seven other individuals that they are also in and will have their paper work tomorrow or Friday.

 

This means we are on for our target trading date of September 15.  That does not mean if you have not gotten to the documents that you cannot join.  If you get them to me by Monday, you likely can be in for the first trading day.  If you don't, we add new investors the first of each month.  (In other words, get your paper work in when you can.  If you get it in on September 23, you'll be trading October 1.  If you get it in October 2, you'll start trading on November 2).

 

There will be a private forum on here for the Fund members to discuss the fund and get individual questions answered, but there also will be quarterly updates posted to all of the Steady Options members. 

 

If anyone has any questions, please just email me a cwelsh@lorintinecapital.com.  I'll be back to my regular posting and commenting next week.

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To my information the fund has only been trading for a day or two after its first closing on September 15th. I assume we will hear about first indicative performance figures for the rest of September in early October. October will also be the fund's first full trading month. 

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As a three month review, I have been a participant since the  fund's very first trade. Can't say I expected this degree of disappointment in performance. I subscribed because I believed Chris could achieve better results than I could on my own, executing my own trades.  Looks  to me like the account is being over traded with heavy transaction costs. This was one of the reasons given for the poor performance of the beta fund. Personally, I'm a bit more selective with my trades, avoiding having more than 4 open spreads, straddle / strangles, etc., on  simultaneously. I guess this is the magic number I feel capable of effectively managing. I don't know about the rest of the subscribers, but I 'm a bit more selective in my trades, resulting in fewer transactions, lower commissions, reduced stress, and superior management. I see that we have once taken a loss of 46.34% on an individual trade,  which was unacceptable. The 39.11% loss on a trade earlier this month was difficult to swallow, but at least it was within the parameters set out in the plan. Beyond that,  I don't have the degree of confidence in the fund I had when subscribing. Slow and steady is the name of the game, but it should be slow and steady improvement in value. So far, that is not being realized.  Three months of trades and we're down about 1% as best I can estimate. We have had swings of 2% in the overall portfolio as reported by NAV consulting which gets records to subscribers about 20 days after the close of the month, They are very sparse in their reporting, only providing a beginning and ending balance for the prior month. 

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We are working on a detailed response to the above question and comments (to be out once Kim has edited).  That said, there are fund forums where these discussions should occur.  I want to have open and public discussions about the fund, its holdings, and its performance - but there are regulatory rules and laws against that.  We can't have public discussions (I am entitled to respond to public comments and will), but we will have to shut down most discussions in the public forums.

 

Again there are Fund forums.  All investors have access.  Any Steady Options member who wants access can have it.  The laws/regulations simply say I cannot have open public discussions.  If you request access, you can have it.  You just need to send Kim or myself a note.  One of the things regulators ask during audits (and I was just audited by the State of Texas), is WHO have you sent fund information too and if you have online forums, who has access to them, and what's your process for grating access.  I have to be able to say that it is a private forum granted to actual investors and people who have requested access -- not that we have it readily available. 

 

We are not trying to "hide" what the Fund is doing - in fact, I prefer open discussions as that's how we make improvements.  I just don't like paying fines to regulators.  So after the post in response to the above, we will have to direct fund specific questions to the fund forums. 

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I would like to address some of the points raised.  Some of which I believe are inappropriate criticisms and others are completely valid.  I will address the ones that I believe are slightly overblown first.  Please don't read the following as an attack on the criticisms - we want investor feedback (though I do wish investors would reach out directly before making things public, particularly since making public things about the post is an abject violation of the fund agreements -- not because I don't want an open discussion but because it violates advertising and communication rules set in place by the government -- that's why we created forums specifically for the fund).

 

Fund forums:

There is an entire forum now devoted to the Fund, which is where the Fund reporting occurs.  Due to regulatory reasons, we cannot send out detailed updates of the fund to the general public.  However, there is a specific fund forum which fund investors, and anyone interested in the fund, gets upon request.  The fund forum updates the trades about every 10-14 days and has a discussion area to discuss fund topics.  By law I have to keep these private and not open for general viewing - they can only be available upon individual written request.

 

NAV/Third Party Administrator:

As for the complaint about NAV.  The Fund uses a third party administrator for the safety of individual investors.  They independently verify firm statements, brokerage statements, and bank statements.  This means they start their work once statements are sent out by the firm, broker, and bank.  As the fund manager, I cannot send the statements to NAV - they are mailed directly (or in one case electronically sent), directly from the third parties (banks, brokers).  As all of you know, those statements typically go out in the mail, or electronically, somewhere between the 2nd and 5th of each month.  NAV receives them, audits them, and prepares the month end analysis.  This process typically takes about 10 days after the receipt of the statements from the bankers/brokers.  This is normal with all third party administrators.  All Fund members have online access to NAV and get the statements as soon as they're available.  I realize in today's society, everyone would like a detailed report on the first day of the month - but I don't even bet brokerage statements on the first of the month, much less get them, process them, get them to a third party (NAV), and have them process them.  Fund accounting always takes longer than receiving a bank statement simply because fund accounting doesn't even start until the fund receives its bank statements.  This was well explained to investors prior to investing and is the way the majority of funds operate.  Funds who do not use independent third party custodians typically get their statements out within 7-10 days of month end.

 

Expected Results:

The Fund has never sought to duplicate SO's performance.  The offering documents make this very clear and was a point detailed to each investor.  The strategy cannot be replicated large scale, particularly after taking into account commissions, volume restrictions, and other hurdles.  This does not mean the strategy cannot generate positive returns.  We still firmly believe in the strategy, or we wouldn't have moved forward.  The offering documents make it clear that we are targeting double digit annual returns.  When pegged on the topic, I have always stated that our internal goal is to average 1% per month or more.  I think its highly possible that we can do more than that, probably well more than that.  Any year that we hit 15%-20% will be an incredible, stellar year.  (Any fund that consistently returns 12%-15% would be one of the best performing funds in the world if it can do it over time).  To say that there are expected results of more than that is disingenuous when the communication on it has been very clear.  HOWEVER, that is not to say that every trade in the fund so far has been perfect (see below discussion).

 

Outsize losses:

The two trades complained of were on the VXX diagonal and the SVXY diagonals.  These trades can, and do, experience 50% losses.  The Fund did have a 46% loss on one VXX diagonal.  However, overall, this has been the funds single most profitable series of trades.  On a weekly basis, even with the large losses, it averages over 10%.  On the VXX/SVXY trades, we do use a 50% stop loss parameter and expect to see a 50% loss on a position about 6 times a year.  This is not a 50% loss to the fund, its a 50% loss on one trade.  Assume the Fund allocated $100,000 to the trade.  That would be six losses of $50,000.00 (or $300,000), and roughly 46 gains of 10%-15% (or $460,000 to $690,000).  That's a nice net gain.  It's also a great hedge/offset in declining volatility markets.

 

VALID CRITICISMS/AREAS OF IMPROVEMENT

As with any product, there is always room for improvement, and we are certainly still adjusting.  Part of the reason we shortened the Beta phase was due to the efficiencies of the Fund structure.  (Lower commissions, trade allocations, and a variety of other things that we learned in Beta).  One of the major things we still have to learn though is which instruments do not work at scale (PCLN for example was a major one we learned in the Beta).  This means we are trading quite a bit more individual earnings straddles each month.  But we are not over trading as most of those trades are much smaller in quantity (meaning not a full fund allocation).  A good current example is the fund running the CALM straddle.  A full allocation to the fund would be around 1,200 contracts.  Our position is 80 and we track how easy it was to get in and out at that size.  If it works great, we'll add it to the list to increase in size.  If it doesn't, we nix it.   KMX is a great example.  This was extraordinarily difficult to get in and out of, but one that has traditionally done well for SO members.  It has now been moved to the Fund's restricted list.  We do expect the volume of trades done will dramatically decrease over the next couple of months.  

 

I'd also like to point out the net effect of these trades.  While an investor might see a report in the forums that the DATA earnings straddle lost 8% - that TRADE lost 8%.  The net effect to the fund was a 0.18% loss.  Again, for regulatory reasons, I cannot generally post actual dollars on each trade.  I'm walking a thin enough line posting the trading percentages.  But just because a trade loses 20%, does not mean the fund loses 20%.

 

The Fund can certainly improve its execution of trades, and we're working with IB on how to do that.  We are constantly adjusting and learning which trades we can enter and at what sizes.  I would much rather trade 80 contracts of a trade to make sure it works the first quarter, 250 the next, and 1,000 the next then have to overpay for a full 1,000 contract position.  

 

Part of the reason the fund was setup was to trade more trades than most members can -- it improves diversity and lowers risk, but yes, it also raises transaction costs (though we do get a flat .15/contract, which is about as good as I think anyone with a large account can get). In fact, I've had 3 investors say they LIKE that the fund does more trades, as if it only did 2-3 trades a month, they wouldn't be getting any value, as they could do that. Kim and I already have begun to review whether or not the risk/cost trade off is worth that and will continue to do so.

 

I always am happy to discuss the fund, and questions or concerns people have.  After this response, all responses will be directed to the fund forum.  If you want to participate, you simply have to email or PM Kim to request access.  We want to have open discussions with anyone interested -- we're just not allowed to have open discussions with the world at once.

 

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Thank you for the update Chris.

This topic is now closed to new comments. Please PM or email me if you want access to Fund forum.

Clarification:

Participation in the fund and access to fund forum requires active SO subscription.

 

To emphasize once again why fund trades don't impact SO trades and why fund can trade few million dollars while we still recommend no more than 100k for SO members:

 

  1. Fund trades and SO trades are not the same trades. They might be from time to time, but they might be entered at different times, different strikes etc. The fund might spread calendar trades between more than 2 strikes, and those strikes might be different from SO model portfolio.
  2. Fund has more trades with lower allocation.
  3. Fund is trading in institutional account using different techniques than retail account.

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