Financing / Crowdfunding : Looking for feedback from Accredited Investors...not pitching you/them. by Ryan Elliott

@RyanElliott Your plan sounds very sharp. I like the mitigated risk to principal focus. Perhaps one suggestion, don't invest all the profits, if that is the intent. Also, out of such a holdback maintain a development pool to identify value properties which require a lift to close name talent. Love to discuss further and happy to assist. Bravo! More about me at www.FilmBudget.com Worldwide - 30 year Major Hollywood Studio and indie film and tv producer, executive producer, line producer, DGA UPM, financier, investor, film budget expert, film finance plans, producer consulting for fellow filmmakers and a working producer as well.

Ryan Elliott After reviewing it, I see a number of red flags that could expose you to legal and financial risks. There are significant concerns with the way you’re presenting the fund’s structure, its risk profile, and the way you’re communicating your potential returns and principal protection.

1. Unrealistic Return Projections (20-30% Annual Returns)

The goal of generating 20-30% annual returns through swing trading options and leveraging market momentum is highly ambitious and could be misleading for potential investors. Investors tend to be highly litigious when investments sour as they seek a way to claw back whatever they can get. While swing trading can be profitable in the right market conditions, consistently achieving returns in this range is incredibly difficult and unrealistic, especially in volatile or sideways markets.

The stock market averages around 10-12% annual returns over the long term, and many professional traders, even those with highly sophisticated strategies, don’t consistently achieve 20-30% annually.

You mentioned using options and leverage when the conditions are right, which inherently increases both the potential returns and potential losses. This kind of strategy can be extremely volatile and could lead to significant losses, especially if the market behaves unexpectedly.

Investors need to be fully aware that there are no guarantees when it comes to achieving consistent profits—and any claim that the fund will consistently generate 20-30% annually is misleading and could expose you to legal action for misrepresentation.

2. Risk of Principal Loss

While you state that you are focused on "protecting your principal", this is a contradiction in the context of the strategy you’ve outlined. You mention using leverage and options, which are high-risk strategies. The reality is that there is no such thing as guaranteeing principal protection in a fund that employs options trading, particularly when using leverage.

Options trading is a high-risk strategy, and positions can be wiped out in a matter of days or even hours, depending on market conditions. In the event of a market downturn or significant volatility, it’s entirely possible that the fund could lose substantial portions of its capital.

Principal protection in this context is not realistic. If the fund uses options, leverage, or other high-risk strategies, it’s critical that you disclose the risk that investors could lose their principal. Failing to do so, or implying that principal protection is a guaranteed outcome, could expose you to lawsuits for fraud or misleading statements.

3. Lack of Transparency Around Film Investment Strategy

The fund’s strategy is focused on swing trading options in the stock market, but it’s unclear how this ties into the film investments. You mentioned using the profits from the hedge fund to fund films, but it’s unclear:

How you plan to balance the two strategies. The high-risk nature of swing trading options seems inconsistent with the relatively illiquid and long-term nature of film investments.

If you’re raising capital for a hedge fund and using those profits for film investments, you need to clearly outline how these two strategies will interact and how investors will be exposed to both. Film investments are highly speculative, and you can’t simply use hedge fund profits to fund films without properly explaining how both sides of the fund are managed, and how that might increase the overall risk for investors.

It seems like there’s a conflict between the hedge fund strategy (focused on high-risk, high-reward short-term trading) and the film strategy (focused on long-term, illiquid investments with very low success rates). Without a clear strategy for how these two sides will function together, investors may be misled about what they are actually investing in.

4. Backtesting Methodology and Performance

While you’ve backtested your strategy over the last 15 years and claim positive results, there are several concerns:

Backtesting results are not indicative of future performance. While it’s useful to backtest strategies, past performance doesn’t guarantee future results, especially when using highly volatile instruments like options.

You mention that the system is designed to respond to what the market is actually doing, but market conditions can change, and past results may not replicate in the future, especially with changes in market volatility, interest rates, or geopolitical events.

Consistency in the strategy is key. If there are periods of underperformance (which is inevitable in any strategy), you’ll need to disclose how those drawdowns will be handled and how investors will be protected from catastrophic losses.

5. Legal Risks and Investor Misunderstanding

You are making several claims that could easily be misinterpreted as guaranteeing profits or principal protection, which could expose you to legal action. If investors lose money, especially after being led to believe that the fund is low-risk or guaranteed to produce positive returns, they could take legal action for misrepresentation, failure to disclose risks, or fraud.

Specific Legal Concerns:

Principal protection cannot be guaranteed, particularly when using options and leverage, both of which involve substantial risk of losing principal. The SEC and other regulators could view these statements as false or misleading.

Unrealistic return projections of 20-30% per year are problematic. These figures could be seen as bait-and-switch, as historical returns in this type of strategy are far from consistent.

The lack of clarity about how the hedge fund’s profits will fund film investments without putting investors’ principal at risk creates further confusion. If the hedge fund takes losses in its trading positions and then uses those same funds to invest in films, that could create conflicts of interest and expose you to potential claims of mismanagement or failure to disclose material risks.

Kenneth, thank you so much for all the time and thought you put into this response! You are 100% valid and accurate in your points. I'll try to address them if I can, and some I may just need to go back work out on my end.

1. You're right, the market averages 10-12%, but that's when you buy and hold. On average, since 2000, if you add the market move on the up days, and add the market move on the down days, you get the total range the market moved for the year. It might it might return 10% year over year, but it actually moved on average 46.5% (according to Grok). Using technical analysis If you could capture half of that move, we're at ~23% (no leverage, no options), which is in the target. If you use 2x leverage, you could be twice that, and instead if you keep the majority in money market funds and use options on the up moves, you can realize gains in that range. I'm also capping the fund at $100M, with the idea of expanding to 3 total funds, so $300M total. When a $10B hedge fund wants to hedge their long position, they may buy $50M worth of puts, just in case the market goes down. I'm looking at buying a $5-15M (5%) position, in the direction I expect the market to move.

Also, when it comes to professionals not getting superior returns. I'm not sure why they don't. I've heard it could have to do with the size of the fund, and if you're making frequent trades, you can actually move the market. Another reason might be (and I'm still learning some of this - full transparency), you could get stuck with a liquidity issue. You need someone to take the other side of your trade, and if you have $1T, there aren't too many people who can take the other side of the trade, buying or selling.

2. When I say, "protecting the principal," I should specify. When someone has $5M to put into a movie, their principal is spent. There's nothing left, and often the producers took out loans against credits and rebates, and the movie has to make significantly more than it cost for you to start getting your principal back. With the fund, your principal is never at risk from the movie's performance, because your principal is never invested in any movie (fund profits are, so you're basically playing with the house's money).

Your principal is in the fund...so your principal IS 100% at market and fund performance risk. I do maintain a giant cash position (money market funds, about 4% return currently) with whatever isn't in an option position, starting with one option position (5% of the portfolio), so about 95% is in cash. If another buying opportunity comes up, cash drops to 90% cash, and so on. As we close out an option position, any profit tops off the fund at $100M (if there were previous loses) and excess goes into a sub account for each film project.

You're also 100% correct - options can be wildly profitable, or fall to $0. The loss is limited to -100%, but there are positions that have made 40-300% returns. That's why we use 5% positions, so if there are multiple losing trades in a row, you still have dry powder to take advantage when the market rebounds.

3. I'm all about transparency, almost to a fault. I was in banking for several years, and I talk countless people out of getting credit cards by explaining how they actually work. I have a page on my website that shows the money flow from the fund and from the movies. Also, money never goes back into the fund. Any fund returns over 30% (net of fees - see website), go right back to investors. Any film revenue goes right back to film investors 120% of the budget, then 50% in perpetuity.

The goal for both the fund and the films is to have limited downside (small positions, small budgets) and unlimited upside.

We're keeping film budgets at $5M (it's the original Blumhouse model), so as the $100M fund makes 5%, we move $5M to an LLC with every fund investor as a prorated percent partner according to their participation in the fund. They're on the escrow account where all the money comes in from the film, so everyone gets their percentage. I'm hoping there's very little overhead, but the money in the account gets distributed to the investors according to their percentage. If you have a 10% ownership stake, and $1M comes in, you get a check for $100k. I really want it to be that easy. We're just getting started, so I think it'll work like this, I want it to, at least that's the plan.

4. You're right. In all of finance, there are absolutely NO guarantees. Even bonds, backed by the full faith and credit of the US gov't, you can't ever say they're "guaranteed." Backtesting or any prior performance does not indicate or guarantee future performance. However, it's the best indicator we have. The market averages 10-12% when you buy and hold, but that doesn't mean it'll keep doing it. But it probably will. If you're engaged to someone who cheated on her last 4 husbands, you might want to get a really solid prenup.

There are definitely trades that lose -100% and go to $0. That definitely happens. The objective is to have enough trades, based on entry signals, that the profitable trades outweigh and outnumber the losing trades.

I try to be as open and honest as possible. As far as bait-and-switch, maybe I need to lower expectations. Do you have any suggestions for what would be appropriate?

Thank you again for your thoughtful response!

Ryan Elliott Actually, if talking about a specific index like the S&P, between 1926 and 2023, the market's typical yearly performance is about 12.70% (average) and 15.43% (median). That is data spanning almost a century, or 100 years. Obviously, in any particular year, the market could be up or down 30% to 40% or more, which is where active vs. passive investing or investment management comes into play. The bottom line is that there is always risk the market could swing in any direction and at any time, but investors in the stock market typically have the appetite for the investment swings that come with that asset class. The mere fact that in finance, the rewards tend to increase based on the level of risk implies that if someone is targeting a 20-30% return, that essentially does imply taking on more than usual risk.

It's one thing, in hindsight, to point to specific market movements and performance, but in the moment, when facing the pressure and paranoia of daily price fluctuations, uncomfortable or model-defying trends, market buzz, and the overall panic exhibited by other market participants, it’s natural for paranoia to spread quite rapidly, and models can get tossed out or sidelined because you don’t have hindsight in the moment.

The market is very efficient, and arbitrage opportunities do not exist for very long. If you walk down a street and see a $100 bill by the roadside, you can trust it won't be there for very long. There are some similarities between this and professional money management. Even for the most skilled money managers, when you have the responsibility of generating income and profits that millions expect in the form of pensions or other types of obligation, making an explicit promise in terms of expected return is rare and uncommon and so is generating 30% per year returns every single year.

The investors that focus on film financing tend to have a focus or expertise in film financing, and most have the appetite and sophistication to deal with the risk—or should.

Also, films with a budget in the $5-$10 million range are technically indie films and are incredibly risky. As much as 90% of films made in this range fail. When you mix that in with a purely speculative investment strategy, the risk further increases, not decreases. There is a reason why banks can't touch film financing as an asset class, and those that do only loan against tax credits unless of course you provide a $5-$10 million collateral..

When managing any sort of investment fund, you typically can't make any explicit guarantee that you'll attain a return of such-and-such or that principal is "protected," "guaranteed," or anything remotely close to such language, because there are attorneys who make a living suing people to recover funds invested in any venture because of loose language that could lead an investor to infer that is what you meant.

Wow! Great idea! Asked for an add!

Ryan, you are spot on but being an accountant and experienced in the market, I agree with your plan. Your profits also have your time and experience invested and not easy. I have done the same but with very small base. It helped to produce short film which in first shot went on the American pavilion of Cannes. Now working for a musical feature based on true events with Grammy winners; award winning cast and crew on board. But building guard rails for success will definitely make you shine. I am blessed being a Writer and Producer is an advantage and working on 2 more features. Good luck!