Even with a hedge fund fee structure (2% of the assets + 20% of the absolute return), the O.P. gets $135k, which is arguably still not enough to run an office with 1 employee... > 2% of the assets is 30k > 20% above S&P 500, which returned 15% is 35% return on 1.5M or 525k, which accrues 20% fees or 105k Total in fees is 30k+105k = $135,000
3 set-ups were identified: 1) LLC 2) Managed individual accounts 3) Loan to LLC 1) I think LLC is really the most flawd route. It gives very little legal protection to either investors or the trader. LLC will probably have someone with a signing authority on the account... and it will be the trader. The bank isn't required to check if transactions are in accordance with Articles of Organization. So, The trader can just draw a check to himself for the full amount of "investment". Further, if investors seek a refund it may not be straightforward to value open positions, especially given liquidating positions involves cost. With an absence of an independent valuation the refunded amount will be pretty much at discretion of the trader. Becasue the trader is managing the money personally, investors can sue him/her for any loss. In fact, they can sue him for not making enough money; there are a few known cases. Limited liability in LLC is not a protection because in the lawsiut ity will be assumed the trader made not enough money due to negligence or malice. For comparison, in a hedge fund structure the trader has authority to trade permitted instruments on the fund's account (which is verified by the prime broker) and further investments/withdrawals, as well as asset valuation, are handled by an independent "administrator". Further, in one common set-up the fund is managed by a management company, which is advised by an advisory company, and the fund manager works for an advisory company. As a result, liability is substantially more remote. 2) Managed accounts are the simples. CTA set-up is very common and it should be easy to obtain inexpensive legal help. The manager has no access to the actual money. So, investors have better protection. Similarly, there is no issue with asset valuation or withdrawals as all the assets/money are in each investor's account with the broker. Prospects of the tarder's legal liability are the same as in LLP. In addition, if you manually replicate trades in each account there is an issue of giving the customers equal price in each account (separate orders may get a better or worse price or size). Automatic allocation in IB friends and family account solves the problem of front-running some client accounts by the others. However, IB doesn't compare positions in each account and is prone to misallocation in certain cases. Say, if you opne a position with a single trade and close the position as a squence of smaller trades eahc reducing the position size, customer accounts can end up woth small long and short positions. The total position across acoounts will be flat but there is no way to offset these positions against each other. 3) Has a probloem that if the trader looses money the LLC may be liable for the loss and even a small accumulated loss may push LLC into insolvency. If the trader's LLC takes the full loss but very little of the gain, why seek investors anyway?
Check out this guy's blog: http://richard-wilson.blogspot.com/ He talks about setting up funds, marketing, etc.
If you have less than 15 clients you will want to be an advisor at interactive brokers. LLP's only if more than 15 clients, and any registration fees can be found at the secretary of state's business entity registration pages and will save you substantial amounts of money filing on your own. You do not need a lawyer to do this. Look up "LLP registration forms" on your secretary of state's home page. There should be a link to business filings, and I would not talk to a lawyer to do this. I started a general partnership with about a 1 page summary of what was being formed, who was involved, what the purpose of the agreement was, and how fees and compensation were handled. If you can get your clients to sign this, then there isn't any problem, as it will stand up in court, but just remember to get the signatures notarized. Filing an RIA registration has taken nearly all year for me, and I'm still not done completing a disclosure document for my CTA. These are only licenses you'll want to get, again, if there are more than 15 clients and you'll want to trade through IB. Whatever you decide, I'd like to suggest becoming a model manager on Covestor, and getting your people to subscribe. They have plans to charge performance based fees to accredited investors, which, incidentally, is the only type of investor that you may charge percentages of profits from. It does not sound like any of your people qualify. To qualify to be an accredited investor, you must have either 3 year spousal combined income of $300,000 or 2 years as an individual of income of $200,000 with expectations for that to continue. The other possible accredidation is $1 million of liquid assets not including primary residence. Only the above three allow you to charge percentages of profits, but can be overridden with all investors becoming party to your LLP or LLC. These formalities aren't necessary and neither is speaking to a high priced attorney. You can take care of any of your filings through your secretary of state, and, as long as you don't sound like a complete moron and haven't forged anybody's signatures, having these documents notarized are really all you'd have to do to set this up.
This logic sounds correct, so do how people really start managing OPM and making money from that? Even if you have a 10 million fund you can earn only a modest amount after you consider the expenses, and I assume that money managers don't start with a 10 million but with much less. But if they start with much less, how do they make a living from that (if at all) during that period and at least don't loss money after all of the expenses? It sounds to me like a catch-22 -- no one will give you substantial amounts of money to manage unless you have a great and long track record of successfully managing substantial amounts, but you just can't start by managing substantial amounts and with managing small amounts you may just breakeven (if not loss money) and have a huge administrative and legal headache. Therefore I don't understand how there are people who succeed to make millions a year from managing OPM, could you please explain it?
You are right. Running a fund is running a proper business. In the end if you are not able to generate enough fees to pay for your expenses you will fail. If you are not able to raise enough capital to generate the fees, you will fail. And like other businesses, often you have to invest money to start or grow the fund business. This involves paying those administrative expenses out of pocket. These days it's getting even harder. Before you could run a profitable fund on a certain amount of capital. Now that has risen by like 4x. http://www.bloomberg.com/news/2011-...nomy-for-partners-to-battle-cash-drought.html
With 2/20 fees, AUM 10, 000, 000 USD 20% return 2% AUM fee = 200, 000 USD 20% performance fee = 400, 000 USD. Total Earnings = 600, 000 USD. That is pretty decent earnings. With 10M AUM you don't have that large of an expense. Let's say; Rent TT Bloomberg Overall your earnings will still be pretty decent.
I'm surprised that no one has suggested to you that you just do everything through collective2. com. Your only cost will be about $200/yr and you can set up an account with them that will only allow your friends and family to participate. You'll have a legitimate sole-proprietorship business where collective2 processes your fee requirements for you and sends you a 1099 at the end of each year for you to file with your Schedule C. All of the legalities are taken care of for you thru the site. No need to set up LLC's and Corporations and pay high-voluting lawyers fees. Just food for thought. Check them out.