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Epic
Registered: Apr 2011
Posts: 932 |
01-04-12 05:43 PM
Quote from heech:
For me, the greatest pressure doesn't come from losing OPM money... because I haven't really yet. Most of my investors are more patient than I am, as it happens. The aspect I dislike the most is the feeling of constantly being evaluated by the "public", potential investors, competitors, friends, family... Imagine performing your current job, except with your week to week performance up for open examination and public review. ("I think you flipped your burgers too slowly! More mayo!")
+1
My clients don't care nearly as much as I do about short term performance, but I know that my numbers must look good to keep growing, and the constant scrutiny is tiresome.
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njrookie1
Registered: Nov 2011
Posts: 240 |
01-04-12 05:55 PM
Hi Heech and Epic,
Thanks for sharing. This is really really helpful.
Are both of you using IB? Are you and your clients happy with their handling of paperwork, like statement and tax forms? The handling of trade information for tax purpose can be a huge problem for these clients.
I guess if it is only futures then it is easy since it is market to market automatically. I trade lots of securities and it could be a nightmare for tax filing.
njrookie
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newwurldmn
Registered: Apr 2011
Posts: 2612 |
01-04-12 05:58 PM
Quote from njrookie1:
to implement this is going to be difficult:
"Returns less than or equal to S&P 500 - No Fee"
the benchmark for trading should be risk-free rate. for a year when sp500 recovered from a big down turn like 2009, it is difficult for trader to hold a big long position.
njrookie
If your performance is benchmarked to the S&P500 it's reasonable to expect you to have a beta of 1 most of the time. Otherwise the benchmark is non-sensical.
RE: Trader status, my accountant said that the strategy had to qualify, not the individual. If the individual has a day job he would almost immediately be disqualified. Like I said before, I have spoken to two accountants and two lawyers and have not gotten straight answers, so a lot of it is subject to interpretation.
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njrookie1
Registered: Nov 2011
Posts: 240 |
01-04-12 06:02 PM
My beta is zero - more or less market neutral.
I have a day job job but have never been disqualified for trader status. I have been audited two times without any problem with IRS.
I guess once they see you have over 15 million shares and 400 million dollars traded, they do not want to argue with you 
njrookie
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Epic
Registered: Apr 2011
Posts: 932 |
01-04-12 07:18 PM
Quote from newwurldmn:
If your performance is benchmarked to the S&P500 it's reasonable to expect you to have a beta of 1 most of the time. Otherwise the benchmark is non-sensical.
RE: Trader status, my accountant said that the strategy had to qualify, not the individual. If the individual has a day job he would almost immediately be disqualified. Like I said before, I have spoken to two accountants and two lawyers and have not gotten straight answers, so a lot of it is subject to interpretation.
A benchmark or hurdle rate really has nothing to do with beta. What it suggests is that any idiot can invest blindly in SPY and get normal market returns. It is the skilled manager who can exceed this, and he should be paid for this skill. Beta is really irrelevant IMO. Obviously we are only talking about fees on absolute returns here, as you can't charge a performance fee for losing less than the benchmark index.
Re: tax, it is going to be very difficult to get a straight answer on any of it, but I would look at it a different way. There are hundreds of funds out there that employ strategies too inactive to qualify as day trading. These same funds typically charge 20% performance fees. In 2009 many of them achieved significant returns as the market rallied from lows. I'd bet there wasn't even a handful of clients who paid tax on the fees.
That's just like a normal business having to pay tax on gross sales revenue with no deduction for material cost. It would be really hard for the IRS to win a legal battle based on this premise.
In any case, why is this even a consideration? We are talking about a 2% floor, not a 2% ceiling. If your performance fees end up being less than 2% of someone's income, then either your fees weren't that significant or the person is making a huge amount of money and either way the fee deduction is sort of a non-issue.
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newwurldmn
Registered: Apr 2011
Posts: 2612 |
01-04-12 09:02 PM
Quote from Epic:
A benchmark or hurdle rate really has nothing to do with beta. What it suggests is that any idiot can invest blindly in SPY and get normal market returns. It is the skilled manager who can exceed this, and he should be paid for this skill. Beta is really irrelevant IMO. Obviously we are only talking about fees on absolute returns here, as you can't charge a performance fee for losing less than the benchmark index.
My theory, but if you are saying you will generate alpha to a moving target, then it's not unreasonble to expect to have beta to that moving target. Otherwise it's a pointless comparison. If I can make more money betting on horses than in the SPX that's great, but it doesn't do an investor looking to beat the SPX as he's looking at it from that perspective with respect to risk characteristics.
Re: tax, it is going to be very difficult to get a straight answer on any of it, but I would look at it a different way. There are hundreds of funds out there that employ strategies too inactive to qualify as day trading. These same funds typically charge 20% performance fees. In 2009 many of them achieved significant returns as the market rallied from lows. I'd bet there wasn't even a handful of clients who paid tax on the fees.
That's just like a normal business having to pay tax on gross sales revenue with no deduction for material cost. It would be really hard for the IRS to win a legal battle based on this premise.
In any case, why is this even a consideration? We are talking about a 2% floor, not a 2% ceiling. If your performance fees end up being less than 2% of someone's income, then either your fees weren't that significant or the person is making a huge amount of money and either way the fee deduction is sort of a non-issue.
If you are doing a fund (ie a partnership) it's a different tax situation entirely. I was referring to managed accounts, where the assets are held in the clients name and you are "logging in as him."
The rules don't have to make sense. It's stupid that an active trader gets a different deduction than a guy who trades every week.
You are right about the 2% floor being potentially very small. On the other hand it can be very big depending on the clients other income, assets, and other deductions. Regardless on the value judgement about how much money is a lot, it's not automatic that all the fees they pay you in a managed accounts set up is deductible.
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