Several well-known allocators offered us performance fees as high as 70%.
We turned them all down.
On the surface, it sounded like a gift.
But it was all first-loss capital. And that one detail changed everything.
First-loss means exactly what it says. To participate, I had to put my own capital at risk alongside theirs—and every dollar of loss came out of my pocket first.
In a typical 10:1 structure, a 10% drawdown could wipe out my entire first-loss investment, even if the strategy itself was still perfectly sound.
So I wasn't just giving away 30% to 50% of the upside.
I was taking on nearly all of the downside.
And here's what made it pointless for us specifically: our strategy traded futures. If we wanted more exposure, futures already gave us that—efficiently, at very little incremental cost.
We didn't need to hand over most of our upside and absorb most of the downside to get bigger.
The one real benefit was a larger headline AUM.
But headline AUM is not the same as economic value to the manager.
It looks good in a pitch. It doesn't pay you.
To be clear, first-loss capital can absolutely make sense for a newer manager who needs institutional validation, infrastructure, or access to capital they couldn't otherwise reach.
It simply wasn't the right trade for us.
Not all capital is good capital.
Capital has a price.
The smartest managers understand that price before they accept the allocation.
Have you ever been tempted by first-loss capital? What made you say yes—or no?