How to Start a Quant Fund

Every quant pitch contains a backtest, and every allocator discounts it — heavily. They've watched too many strategies that were unknowingly fit to the sample period fall apart live. Your job is to make the discount small by showing the discipline around the number, not a bigger number.

That means out-of-sample and walk-forward results kept separate from in-sample, transaction costs and borrow modeled at realistic (pessimistic) levels, a count of how many strategy variants you tried before this one, and — most persuasive of all — live track record, even small. Six months of live trading that matches the backtest's character is worth more than ten simulated years. If you have paper-only results, say so plainly; getting caught blending simulated and live performance ends the conversation permanently.

Every quantitative strategy has a capacity — the AUM beyond which its own trading moves prices enough to erase the edge. Faster strategies and less liquid instruments hit it sooner. Sophisticated LPs will ask for the number and how you derived it; not having one signals you haven't thought about market impact.

State capacity in the PPM and let it shape the fund's terms: a strategy with $150M capacity should say what happens as you approach it (close to new subscriptions, return capital, add strategies). Committing to close at capacity is a selling point for early LPs — it means their returns won't be diluted by your asset gathering.

The gap between simulated and live returns is mostly execution: slippage, fees, borrow cost on shorts, and fills you assumed but didn't get. LPs will probe whether you've traded this strategy with real money and measured the difference.

A quant fund's management company budget looks different from a fundamental manager's, and LPs who diligence quants know it. Market data licenses, historical datasets, cloud compute for research, colocation or low-latency connectivity if your strategy needs it, and execution software all land on the management company — paid from the management fee, not the fund. Depending on strategy, this runs tens of thousands to hundreds of thousands a year before anyone takes a salary.

Budget it explicitly and show the math: management fee on realistic AUM, minus infrastructure, data, administration, audit, and legal. If the line goes negative below $20M of AUM, LPs want to see the personal capital or working capital that bridges the gap — an underfunded quant shop cutting data spend mid-drawdown is a known failure pattern.

For a discretionary manager, risk discipline is a story; for a quant it should be code and policy. Write the limits down — per-position, per-strategy, gross and net exposure, factor and sector concentration, daily loss limits, and the drawdown level that cuts leverage or halts trading — and state who can override the system and what gets documented when they do.

Overrides are the question behind the question. A quant fund that quietly overrides its models in stress is a discretionary fund with worse tooling, and LPs have been burned by exactly that. A short written policy — when human intervention is permitted, logged, and reviewed — answers it before it's asked.

A fund carries fixed costs — administration, audit, legal — that a small strategy can't feed. Two standard bridges: run separately managed accounts for a few early backers, where each investor keeps custody in their own account while you trade a strategy that builds a live record; or launch an incubator fund — form the fund entities, trade your own capital inside the real structure, and open to outside LPs once the audited record exists.

SMAs are lighter to start but harder to scale — per-account operational load grows linearly, and large allocators will eventually want commingled fund terms anyway. The practical pattern: SMAs or incubator to build twelve or more months of live, verifiable performance, then the fund raise with a record that needs no apology.

The Fund Builder models the fund's economics — management fee, incentive allocation and high-water mark, lockup and redemption terms, capacity-linked disclosures, minimums — and keeps the model, the deck, and the legal inputs consistent. Scroll Deck presents the strategy and its live-versus-backtest record with the fund's actual terms; Legal Canvas prepares the formation and offering documents for independent counsel review; and the generated fund site gives the raise a credible public face. The fund formation package is $6,000, with documents prepared in days rather than months — so the capital you'd have spent on formation legal can go to data and compute instead.