What I have been doing is a 50/50 split on net profits. Paid by the 5th day of every month. The backer can take his funds out or leave them in the account to trade more contracts. I believe in keeping things simple. seadog
I agree. One simplification I would make immediately, no payouts while the account is net negative or underwater.
Usually firms limit the DD for intro traders; at least we do. If they would allow large DD's for intro traders, they might go out of business.
On occasion, I do have people who want me to trade for them (friends and relatives). I tell them all the same thing, "I do not want hassle or complicated bull-shit". They put up the money to open an account and I will trade it. They are at risk of losing all there money down to minimum margin. However, once I have returned all their money invested, by them taking 100% of all trading profits, we then split 50/50 from then on. At that point, they no longer have their original capital at risk (They have no money invested and neither do I) and what makes things happen from now on is me. I have never had a problem with this. They can close the account if they wish at anytime. Obviously, if they aren't happy, I don't want them anyway. If I am making them money, they will be happy. I will distribute profits as I see fit, unless they have reason for needing profits, then we take whatever it is and split 50/50 whatever is drawn out.
If the account you are backing is in your name how do you handle the profits and taxes if the ownership of the account isn't split? All the profits show up on your 1099's but you have paid out a portion of that to the trader. Contract labor? or am I missing something.
After reading Rearden's missive, I'd make that 60/40 (60 to the trader, 40 to the client) of everything above break-even, with an incentive kicker of 70/30 for everything above X% (where X= something "outrageous" ... like say 100%) to be payable on a quarterly basis (this gives the account time to build). Just my thoughts on the subject, thanks for the input.
You'd have to structure it as a corporation of some time (LLC perhaps) and have a lawyer draw up documents.
I agree with Rearden Metal - golden handcuffs is essential. Otherwise you lose money on the losing/marginal traders, and the winners walk away after they make $100k or so. Hedge funds and I-banks should also have golden handcuff arrangements, that way the Brain Hunters of this world would lose back their bonuses when they blow up. One addition I would make is insertion of a capital buffer by the trader. For example, the only trader I backed I insisted on him putting up $5k of his own money and then added some of my own - losses would initially be taken from this $5k buffer. I believe this makes traders more careful as they effectively lose their own cash first. It means that with traders who grind out mediocre returns, or slowly bleed to death, you will in most cases get back 100% of your invesment. Only true blowups or frauds will cost you everything. Also remember to take withdrawals from the account when it is up a reasonable amount. The guy I backed ran the first $10k up to about $95k in 6 months, then lost it all back down to 10k again where I terminated the program. If i had taken withdrawals each month, I would have made a profit on the deal.