Are you sure that C2 is appropriate also for long-term investing and not just for trading based on "signals"? I got the impression that C2 let people to publish their trading system and if other people like that they can subscribe for a fee, and C2 pass a certain amount of that fee along to the trading system's owner. I am not sure if it is suitable also for long-term money management which is not necessarily based on "signals" or any sophisticated algorithm (as opposed to short-term trading). Please correct me if I am wrong.
You are absolutely right about the catch. There are a few managers who started with under $1 mln fund and grew it to a billion size, but as a rule they started up 10 years ago or earlier when the hedge fun industry wasn't so crowded, they produced stellar returns in the first year (over 50%), they also usually had industry connections. So, there were rich people who they knew personally and to whom they'd go marketing. The above is still a very adventurous route. As the article linked by newwurldmn suggests, a popular way to start a hedge fund is by securing "seed" capital. Search the forums. There are a few threads with in-depth discussion. Typically, in exchange for providing capital the "seed" investor would request a share of the fund fees. There might be additional conditions like the new fund manager may be required to take teh first loss on the fund etc. The advantage of this route is most peopel who specialise in providing "seed" capital also run a massive marketing machine. So, the fuind manager gets lots of support in this department. Also note that the interests are aligned. The investor participate in the fees the fund earns. Another route is "CTA", where there is no fund and the manager trades in accounts that belong to individual clients. Fees from this approach are not necessarily any higher. However, CTA may have more sources of earnings. They may earn commission from selling 3rd party investment products. They may offer consulting for people who want to set-up autotrading operation. All depends on the individual's skill. There are a few prominent posters on these formus who've gone this route. In practice, most people who start a hedge fund are people who have already managed money either as a trader in bank or as a fund manager for another fund management company. So, a better route could be securing a job with one of the big fund management companies. collective2 has a different business model. If you already have clients there is absolutely no reason to share the fees with collective2, as in this case c2 doesn't provide any value whatsoever. collective2 is also useless for generating a track record. All record it can demonstrate is "paper trading" and there is no means to verify how much or actual money is managed or if the real-money performance is anywhere near the paper trading performance. Further to trade using collective2 one needs some kind of auto-trading solution. If you sell both auto-trading solutions and strategies to run in them, arguably, you are managing people's money directly irrespective of whether you distribute trade signals via local network or via c2. collective2 has an option to send trades from systems directly into brokerage accounts... but I would think twice about giving brokerage account logon to people who only have a web-site and don't answer a phone. Especially after collective 2 was hacked a year or so ago and credit card details got stolen.
Thanks for the detailed response. I didn't find a reference to seed capital in the article in the link, can you please provide a link to the specific article you mentioned? Also, as to collective2, don't you think that the people who provide there trading "signals" are on the borderline of being investment advisers without registering with the S.E.C?
The article's point was that it's tougher now to run a fund. It wasn't talking about seeders (which have existed for a long time). It is mentioning that the bootstrapping method (start with a guy in a room and build out as you raise funds/revenue) is no longer viable. You have to spend a lot more in infrastructure from the beginning than 5 years ago.
You are welcome! Seed capital deals are often kept quiet. So, I just assumed there was one with CC Asian Evolution Fund. Nothing indeed is mentioned in the article. If you want to read one of the more open discussions on the topic, check out http://www.elitetrader.com/vb/showthread.php?threadid=214586 No, they are clearly not. In order to qualify for "investment advice" signals should be accompanied by some kind of commentary. For example, TheRumpledOne with his DRAIN THE BANKS!! thread may be at risk of being considered giving investment advice because he provides argument behind his ideas. collective2 only provides buy or sell signal. The lack of any argument or reasoning behind the suggested trades makes it clearly excluded from the "investment advice" area. If a c2 vendor also posts comments on his or her Web-site, they are still excluded from regulation as mass midea (the same way as commentary on TV or in newspapers is excluded) but they carry the same fiduciary responsibility to readers and fall under all the same rules as regulated financial advisors regarding frontrunning etc.
I understand all that is being said here in this thread but have a few questions: A) So you have an LLC that goes in and trades these family and friend accounts - I get that - How then does one charge,legally, a fee for that? B) Are you then not an investment adviser at that point?
Different states have different rules regarding when you don't need to register as an investment adviser and under what circumstances you are able (or unable) to charge a performance fee.
I see. That article that was posted makes a lot of sense. It's amazing what a little research will do. Thanks. Dan