Aaron chat

Isn't that what all of us traders secretly dream off fame and fortune? I think we all want to be rich, don't we and not just comfortable? If I was interested in just making a comfortable living 100k - 200k I would have kept my l old lousy job, the grinding work, the endless meetings, the corporate politics.

I would think managing money, however you do it (hedge funds, commodity pools), is just a natural progression of a good trader. When a trader becomes successful, usually the relatives/friends start to get curious. Most people usually start with family/friends funds and then branch out. Post their performance on hedge fund websites for the world to see.

I don't know how many of you watched Tudor's 'Trader' video which came out in the early 90's, I thought even more interesting than his frantic trading style, was his personal life style, flying in his helicopter to his estate in the Chesapeake bay, hobnobbing with the rich and famous in the Swiss Alps while skiing, dating beautiful model. I know, everytime I read Uptick's posts he talks about getting laid...Uptick, to borrow a line from the movie Wall Street, this is your wake call buddy, go to work..

 

I have read through all of these posts concerning the pros and cons of the Hedge Fund. Personally I have been involved with the Hedge Fund format from many angles in past years. My advice to you is to open your account at a Prime Broker such as ING Barring or Bear Stearns etc. Now what you do is trade as you have been, its not logical to say your going to realize 50%+ returns every year as the money gets larger and larger and you begin to diversify your assets. However, the beauty is this, you don't need to even come close to those numbers in order to increase your assets substantially. When you trade at a Prime Broker your performance records will be well documented on a day to day and year to year basis. The Prime Broker is in bed with many wealthy individuals as well as institutions that are looking for vehicles that show a consistent above average rate return year over year against prevailing market conditions. In other words if you could make 20% 2-3 years in a row average annual return, you will be flooded with money as the Prime Broker will have your hedge fund at the top of their list in terms of performance.
With that said, you have 1.5 million now. The reality of your fund is as follows: You receive 1% mgmt fees that amounts to 15,000k per year. You probably for the most part have it set up where you receive 20% of the gross trading profits and at the end of the year that is swept to you the general partner. Also you have a high water mark in place. With all that said with 1.5 million and a 20% return for the year you would see a gross of about 75,000k. Now 75k is a decent salary for the 9-5 er. So lets say you put back to back 20% performance years in, if you were with a prime broker you would watch your assets really take off as you would be exposed to investors that you will not find in your current circle of influence. Now lets say you get the fund up to 10million because of your prime broker showing off your 20% average annual return record. The numbers would be as follows 1% mgmt fee = 100k; 20% of gross trading profits on 10million account (with a 20% return for year) = 200k. Now your looking at 300k for the year on a gross basis and yes of course your would have to subtract accounting fees, legal fees, offices space, trading expenses etc. My point is your still making a lot of money for yourself and you don't have to make 50% a year because it wont take those kinds of returns to build up your account, its going to take far less (20%) and being with a prime broker is what makes it happen. Good luck to you.

 

Harry + Links- Thanx for the info. I think that may be a route to one day go with a prime broker. I am a frantic type of trader. I need IB type commissions. I am afraid that the additional costs will cut my edge down a lot if I was at a prime broker.

I believe that you are quite well informed on the industry though. 20% is probably all that someone needs to attract money. Being small and new funds, most of us need a lot more to really catch someone's eye. 20% annualy is fine if we have a few hundred mil, but starting at nothing, no one will give you the time of day with 20% in an account with a quarter mil. Aaron type returns will get attention. Notice how he's grown from 200k to a few mil in the past 6 months.


I also believe that most fund managers keep most of their money in their funds. There is less risk if you diversify, but where's the fun in that. Many of these guys do it out of joy. They don't need the money. Look at Buffett. He's still doing it 50 years later. It wouldn't be much fun with no skin in the game (so to speak).

 

By just the nature of a hedge fund, if you're successful and have been doing it for a reasonable amount of time, you're own wealth will be a large portion of the fund. This is because you will be compounding your wealth at a far greater rate than anyone else in the fund (+20% profits compounded yr/yr).

If you're starting out, if you stink, or if you're lucky enough to get a substantially larger investor or number of investors than you, then you might have a small portion of the pot, but most hedge funds that survive have the manager heavily invested for the above reasons.

 

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nitro

 

very excellent points, harry. however, i need to disagree with you concerning prime brokers for small start up funds. the fund i was with used ING barrings as their prime broker. it was a horrible experience. they had no interest, or motivation to help a small fund succeed, and were only interested in us if the fund surpassed the 10 million mark--and this was made VERY clear via multiple obnoxious phone calls asking us to increase the capital size.

as head trader / consultant to this particular fund, i suggested that they switch to trade station institutional ( clears via bear sterns ). the service has been 10x better than a traditional prime broker and one really feels that your business matters to them.

no question, over 10 million--traditional prime broker is the way to go, under 10 million--the institutional arm of retail/ prop is best.

enjoy !

surfer

 

D.Hedge, you're saying this based on what?

I, through my family, happen to know quite a lot of people that are, you know, "in the industry". It's a VERY different picture.

Sure, you can quote me Soros, Niederhoffer, Tudor Jones, but those guys are exception, not the rule.

 

I got a response from my accountant today. I hope it is useful.

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Regulatory Background

The SEC’s rules and regulations related to the area of posting your fund’s information on websites are summarized on this website: http://www.sec.gov/rules/interp/34-42728.htm. This document refers to a large number of no-action rulings that have been issued over the years by the SEC. The sum of all that data represents the SEC’s current position on these matters.



The concern about posting your fund’s information on these types of websites is that by doing so, it could eliminate the exclusion that you have from registration as an Investment Adviser under the Investment Advisers Act of 1940 because you would be “holding out” as an investment adviser. Holding out is a term that basically means that you are advertising your services as an investment adviser. If you advertise as an investment adviser, you must register as one with either your state regulator or the SEC. Typically, registering as an investment advisor requires that you pass a Series 65 examination and meet other requirements.



The standard definition of “holding out” is stated like this:



Advisers may be holding themselves out as investment advisers if they advertise advisory services, use the label "investment adviser" on business cards or stationery, list themselves as advisers in telephone, business, or building directories, or let it be known generally by word of mouth or otherwise that they are available to accept new advisory clients



Requirements for valid websites for posting your data

Generally, the SEC’s no-action letters and other guidance indicate that the following would be necessary to ensure that the simple posting of information on an internet site would not be considered “general solicitation and advertising” if the website:

is run by a broker/dealer registered with the NASD (or is affiliated with such a broker/dealer),
requires a password to gain access,
requires that the broker/dealer have a pre-existing , substantive relationship with the prospective investor, and
requires that the person signing up for access to the service be qualified as an accredited investor.


The no-action letters specifically state that the “pre-existing, substantive relationship with the prospective investor” can be accomplished via a questionnaire providing the broker/dealer with sufficient information to evaluate the offeree’s sophistication and financial situation.



Note that if the broker/dealer arranges for or facilitates a transaction between a hedge fund and an accredited investor introduced to the hedge fund by the broker/dealer, the broker dealer is responsible to qualify the prospective investor as an accredited investor, and to open an account with the investor. These stipulations were designed to allow the broker/dealer to fall under the safe harbor of not having a general solicitation when there is a “pre-existing, substantive relationship between an issuer, or its broker/dealer, and the offerees.”



Conclusion and caveat

So, the bottom line is that it is fine to use certain websites to post your data, as long as they are following all of the SEC’s rules. But, pay strict attention to any sites where you think it would be of value to post you information. Compare the way they operate to the SEC’s no-action letters and other guidance. You do not want to lose your exclusion from registration as an Investment Adviser. Also, make sure you know whether you are subjecting yourself to a fee or commission payable to the broker/dealer if they bring you an investor/client. It is your responsibility to ensure that you do not lose your Investment Adviser exemption, and to know your obligations if the site matches you up with a prospective investor.

 

great and timely info, P2.

thank you,

surfer

 

absolutely not accurate. perhaps the funds that you are aware of operate in the manner you stated earlier. it is certainly not standard operating procedure for a manager to "distance" himself from his fund.

best,

surfer