If a person is managing opm in the form of a hedge fund or managed accounts (esp a hedge fund) are they required to have a series 7 license even if they are trading using an automated trading system? Having read many of the posts on this forum...allow me to anticipate some of the responses and get them out of the way right off the bat: - you're an idiot - if you are asking a question like that...you are nowhere near ready to manage a hedge fund/ opm Fantastic...now that we've got that out of the way...I hope that your responses will be enlightened and helpful.
While there are ways to get around registering as an investment advisor, chances are you will have to register at some point on some level (either state or federal). As that's the case, you'll need your Series 7. Though it's a nuisance, it's an easy exam. In the state of California, for instance, you must register as an RIA if you manage any kind of fund (even if that fund isn't in California and has no California clients). In addition to the 7, I need the Series 65, which has since been replaced (I believe) by the Series 66. If you need to register as an IA, then it doesn't matter if you're picking securities based on sunspots or using an ATS. The bottom line is that you have discretion in managing client funds. Many years ago, I started my first hedge fund with a whopping $840k. Instead of paying my lawyers ridiculous rates to handle all my RIA paperwork and testing setup, I used (and still use) the services of a compliance consultant. They handled everything from filling out paperwork to setting up the exam. If you're interested in getting their contact info, feel free to contact me. Good luck. polr
Thanks for the response guys... polr trader...I understand that you needed those licenses as the 'trader' of the fund...but you still need the licenses EVEN if it is absolutely executed by the automated system?
I'm afraid so. It really depends on where you are, though. In many locales, you don't need to register as an RIA. If that's the case, then you don't need the 7/66. But then if you grow to a certain size and have over a certain number of clients, then you'll be subject to SEC registration (which we've avoided due to the number of clients test). Who created the ATS? You? Somebody you hired? That means you have discretion. When you have discretion, then you're an investment advisor.
A hedge fund is a fee structure, that is it. Set up a LLC, as a 'natural person' it serves as the management firm, The LLC hires you the Portfolio manager. If and when you get sued, this will be the defendant, your personal assets will be shielded unless you co-mingle personal assets. The LLC then organizes a Limited private partnershipand acts as the general partner to th epartnership. The partnership is the 'hedge fund'. Generally, a 3(c)7 entity under the IRS rules. Typically limited to 99 investors + the general partner (your LLC). These two entities are governed by your State's Secretary. The official Secretary of State certificates are necessary to open bank and brokerage accounts. The fund offers units of investment using the exemption from the Congressional 1940 Investment Advisor's Act . The '40s Act stipulates what you need to disclose to potential investors and the methods allowed. The Offering is conducted via an Offering Memorandum as opposed to a Prospectus for an IPO. The SEC allows you to be exempt from the 1933/1934 Securities Act if you follow the regulation D guidelines. Once you go thru the above you should come to the conclusion that hedge funds ARE regulated, next time you read they arent should make you wince. The investors should all be Accredited Investors which are defined as meeting suitability and net worth minimums. You do not need any license. If you obtain a 24 month lockup of initial capital you are exempt from registering with the SEC. The State you are located in has its own securities rules, last I checked we still are a Republic. CA CO FL TX MA are ball breakers...due to abuses in the past. Some require you to be registered if you take a performance fee, if you do not take a performance fee it is much easier. If you invest 10% or more of your capital in futures then you must follow the rules of the CFTC which are much more onerous; again, even the CFTC has exemptions allowing you to avoid CTA registration by following the limitations found with a small CPO. Lawyers will do the above for 10k, and an audit can be done for another 5k or so. The hard part is having a strategy, money management, risk management. Oh! I forgot something, then you need to have investors. Good luck!
You don't need the 7 but you will need the 65 if you are a investment adviser. Do an offshore hedgefund
The only problem with going offshore is hiring an Adminitrator such as Customs House. I think the annual fee runs in the mid 20k range. The accounting gets more expensive as well. If the capital is coming from offshore it does make more sense. You can live in the US and trade in the US and qualify as offshore, if all your operational activity is conducted offshore, thru your Administrator. Many onshore funds set up a sister offshore fund if and when they start to receive interest from non-US investors such as fund of funds.
Hell yeah, thanks for the info. No interest in running a fund- but good info for personal trading. Thanks.