Let's say I have some investors that want to give me a small amount, say $500k, to trade for them under a typical hedge fund format, 1-2% mgmt fee and 20% of profits. Obviously, that does not translate into big earnings potential for me, unless I return an astronomical number. But I am interested in starting this venture and growing it into something that is a little more feasible. My question is: can I trade my own personal account (retail or prop) on the side while managing this fund? Are there any restrictions? That way, I could still trade for my personal income as well as build the hedge fund at the same time. Does anyone know of anyone with experience like this? Thanks.
Hello rjontrades, We have researched it before and the red tape around the hedge fund structure made us shy away from it. I highly recommend that you make sure all your T's are crossed and I's dotted. The SEC is really going after hedge funds at this time. The setup fees, audit fees, attorney fees and the risk you will assume will cut deep into your profits. I would recommend that you research some alternatives to the Hedge fund structure, such as LLC companies and so on. For smaller funds, they make a lot more sense. It will also make it easier for you to trade your own account along side the fund. Hope this helps.
I would put my own money in the fund, but I would rather leave the money in and grow it, as opposed to taking out periodically for regular expenses. By trading separate account, perhaps prop with only 5-10k, I can generate an income separately to suffice, while I let the fund grow (hopefully).
Do you have any idea what a red flag that is to a potential investor? I mean what am I suppose to think. I give you my money but you are putting your own money in a prop account to trade it differently. Here is an idea. Why not take the 500k and put it in the prop account. That way it's one account. With that size you can hold overnights, daytrade, do whatever you want. The first question I would ever ask a potential fund manager is, is your money in the fund? If he says no, I walk away. So would 99% of potential investors.
I'll offer u my 2 cents........... If you are serious you can open up Managed Accounts Im sure many firms do this but I work w/ Tradestation and I know they do ....I have no $ interest in TS.. The obligations leagllly and accounting wise are much lighter then under the hedge fund moniker and your "investors" will be recieving their own statments daily so it gives them a heads up on their positon. Further, it will be up to them to pay u out on whatever basis u set up monthly quarterly etc So U wont have ur hands on their doe until they owe it 2 u .......Lastly, under these managed accounts the breakdowns of the trades are done automatically by the brokerage by %'s that U set up w/ them ..... U do a deal for a 1000 shares and boom as soon as its done its broken down and put into the respective accounts ... take the trade off no need 2 sweat the %'s its alldone ........Think about it ..... if the biz takes off and ur making big doe take it 2 the next step when u have enuf $$ 2 have lawyers accountants and whoever sort all the details out for u
I have recently been in the exact same situation as you. I was a successful trader who wanted to start a hedge fund. I am now in the final stage, all legal work complete, and in the process of raising capital. yes, you can trade your own account on the side, that is legal. Here are other things to consider in my opinion. The best thing to do is get that fund started, the sooner the better, so you will have an audited track record. Then if you continue to have great results, the fund will grow, your audited results will easily attract new capital. But $500 K is not enough to start a hedge fund, I won't consider doing it until I have at least $1 million, preferably a bit more than that. Here is why - your fixed costs will cut into your first year results too much. You can keep costs low, but I have already faced $12 K in costs before even talking to the first potential investor. That is just reality. Assuming the fund starts trading, the first year audit will cost about $15 K, so that means almost $30 K in fixed costs the first year, and that is if you minimize your costs. Many funds spend $75 K in the first year. Now $30 K as a percentage of $500 K is 6%, that is a very large hurdle to have to overcome, it means your results are dragged down by 6% before you even start. But if you traded $1 million, it would only be 3%, on $2 million its only 1.5%, etc. Yes, you will have to put in your own money too, otherwise why would anyone else. If you haven't got your series 3 yet, go out and get it now, that is the first step to starting a fund. If you need further info, send me a private message and I can give you further advice.
We've found startup cost and formation can be done onshore for around 12k, and have worked out arrangements with an accounting firm for much less per year. Managed accounts are an easier way to start, but if you plan on on any client base growth in the future, this setup can be somewhat limiting in what you can an cant do. If you want to bounce around some ideas send me an email or give me a call sometime. Take care Chad
Further on C' Dudes point .... If you are looking to make a living off ur trade outta the gate a 1mm or 2 is going 2 provide u at least enuf to keep u going iof ur not successful in the 1st cple of months.