The benefit is for the business. If I create a firm and hedge fund the results are the funds results and not the managers. It institutionalizes the performance. My desire is to build a business. I won't be able to put my personal accounts into Hedge fund performance tables. There are many types of risk investors will evaluate of which most will be hightened for a start up. The one risk that I can minimize, from an investor's point of view, is performance replication.
IMO, people are a bit too liberal with their advice around here. It makes me wonder if many of them have been through the process of starting a fund. First, to accomplish what you are trying to do, you don't need an incubator fund. See, the SEC and NFA require past performance to be disclosed in a certain format anyway. A lawyer or accountant is simply following this format, which fortunately is plainly demonstrated online. Once the draft has been completed, it is sent to the proper regulating body for approval. There is often a bit of back and forth, but in the end it is the regulating authority who approves your disclosure documents. Second, you don't need to prepare disclosure documents until you are ready to start managing for others. This means that you don't need any audits, and you are exempt from registration. It isn't until you are ready to branch out that you'll need to prepare the necessary DDOC and meet the compliance requirements. The only thing you need to do at this point is to form the entity and setup entity's account at your chosen brokerage. Your capital will be the only thing traded and you won't need to provide statements, audits, etc... until later. Even if you use a service like Legal Zoom, it will only cost you about $400 to setup an LLC or LP to start things off. You aren't large enough right now to even consider an off-shore master-feeder fund, or anything that might require greater legal assistance. All discretionary accounts within the past 5 years must be disclosed via the prescribed format. So I really wouldn't do what was suggested earlier, like starting sub accounts for different strategies and then running with the one that does well. BEFORE you even think about creating a discretionary trading entity you should be extremely confident in your single best strategy. Remember this one important point. DISCRETIONARY ACCOUNTS ARE NOT THE PLACE TO TEST STRATEGIES FOR PROFITABILITY. EVEN IF THEY ARE YOUR OWN PERSONAL CAPITAL. To do this is to pretty much guarantee that you won't be able to raise significant funding for several more years. Prop accounts are where all strategy development should take place. Never include a strategy under a discretionary account until it is proven and trusted. Lastly, yes you can include proprietary performance in your DDOC, but it is provided in a completely different section and the fact that it was a prop account is stated very clearly. But understand, whether you create an LLC through Legal Zoom, or use a law firm to create an "incubator fund", the DDOC in the end won't be any different, and the prospective clients will not know the difference. So I ask, why would you want to spend $3000-$5000 on something that doesn't provide any tangible benefit?
Thanks for the feedback. It never occurred to me to use legal zoom. I don't know enough about legal or compliance matters to trust myself to do this without assistance. I was planning on only doing an audit when I was ready to take on clients. I plan on running an algo system i've developed and back tested. I will know within a couple of months if the system works as expected. It's at that point, I would move the ball forward with the paperwork. I would rely on the advice given to me by an attorney who has done this before, on what steps if any I should take to ensure success. I will be gaining their experience and insight. It may seem easy to you, but I would feel much more comfortable doing this with someone who does this for a living.
The lawyer has nothing to do with your probability off success. I understand your reluctance because i was once where you are. But you know who really does this stuff for a living? The SEC and NFA. Everything you need to do is completely spelled out on their web sites. Infinitely more valuable is a good accountant who will make sure that you are set up in the most appropriate tax structure. Should you be an LLC or LP? If an LLC, should you elect to be taxed as a C-corp, S-corp, or sole proprietor? If an S-corp, how much should you pay yourself and how many of the available deductions should you use? The lawyer really isn't nearly as valuable IMO. They are simply changing up a couple words in a boiler plate document that has been prescribed by the regulating authorities. You could just as easily find one from another fund on the web and change it where necessary. Submit it to the SEC or NFA and change what they tell you to.
To my knowledge, the agencies only acknowledge receipt of your document, and keep it on file -- they don't suggest edits.
They reject it for missing/incomplete info. They don't audit it for accuracy. They're not going to audit your performance or anything, but they will deny registration if required info is missing. They've provided a very nice template for you to follow. It is very easy to find a few examples from reputable firms on the web, and then use the NFA/SEC template to make the necessary modifications. The hardest part is to make sure that your performance calculations follow the prescribed format. But none of it is hard at all. It isn't coincidence that almost all the DDOCs you'll find on the web are incredibly similar. For a typical domestic fund, it is pretty much boilerplate. In the end, if you have any questions, just call them. It's not like they won't help you with it. The best part is that they answer questions for free. I worked with two different reputable lawyers. $500/hr and they provided the exact same answers that I got from the NFA any time I called. The lawyers also didn't verify the accuracy of any info that I provided. They simply displayed it in the expected format. They will not accept any liability for inaccurate info either. That is on you. Once you start talking about off-shore master feeder stuctures, then the lawyers start providing a more valuable service. But for an exempt fund or CTA, or any vanilla domestic fund, they are pretty much worthless. Get a good accountant and go from there.
fhg386, I am in the same boat. I made an algorithmic strategy last year. Been trading it since November with outstanding results and was looking to start an incubator fund (right now it's in my simple account at scottrade). However after reading stuff on here I will just consider getting an audited track record and forming a company when the time is right. Some family have been interested and my uncle sent me some money to run in the strategy. I basically had to just throw it in my account and track it myself. Seems to work fine, just not sure of how the taxes will affect me. Keep me posted on how you are doing with this - I'm really curious. -PistolPt
Not trying to hijack the thread but I had one question about after the business entity is set up and you register with a broker. Say I start an LLP to start tracking performance and register with Thinkorswim. Will they consider me a professional client if I only manage my own funds? In other words, do I have to start paying the data fees to the exchanges. Because those really start to add up.