It's all about your career goals and expectations. IMO, if you aspire to be "great", and one of those talking heads on CNBC, no reason to put off what would be inevitable and necessary. Doesn't matter how great your track record is, if no one believes you.
I have generally operated under the assumption that I'll be able to get my personal account audited in the future if I decide to raise money then. Do you think there is additional value in setting up some sort of formal structure now and getting monthly audits in real time? The latter seems like a big hassle to me, not to mention the additional costs I would incur. I am very curious to hear if you think there is significant value in setting up a formal structure right now.
If you are a CFA and in good standing, then you get an exemption from the RIA exams. I would set up the fund now. It makes everything cleaner. Plus you can start writing off any expenses you have in relation to the fund. It only costs 10,000 to set up a fund and it's boilerplate work so it doesn't take much time. No reason to get an audit done in real time. When you are ready, hire someone do to a back audit.
This is the step I am not too sure about. It is my understanding that audits start at about $25k. No? That's a pretty big hump to get over for a trader who doesn't have good funding contacts and a pedigree. The registration is cheaper but not trivial, and once you're registered, you have regulators as a constant irritant.
In this particular case, he made over $1 million last year in trading profits... and is now trading with a $1mm+ account this year. I think a $25k investment in his business is perfectly reasonable. (Btw, my costs were roughly $15k for full service startup, $1500/mo for admin, $25k/yr for audit + tax. So, roughly $50k a year all in... which is still not a lot of money if you're potentially making 7 digits a year.)
There is definitely "value" in doing things the official way, now. "Audited" private accounts are better than nothing, but they will still be discounted by investors in terms of how convincing they are. For all I know, you had 10 different trading accounts... and you just cherry-picked the one that happened to do well. On the other hand, the more you invested (financially and emotionally) in making this thing "real", the more convinced I will be in the numbers. This is certainly not a black/white thing, and I don't know how to quantify whether it adds "significant" value to your long term prospects. But again, at the scale you've reached, it just doesn't seem like a lot of money or a lot of work... the only thing you *can't* buy 2-3 years down the road is time. Assuming you continue to do well in a few years and really want to raise money, if you try to include your current numbers in your presentations and tearsheets, every lawyer in the land will make you add a little footnote that says "... results from 2012-20xx were based on prop traded accounts..." (And in some contexts, like NFA-approved disclosures, you have to show prop traded numbers completely separately - in something like an appendix.) I personally think $50k a year is worth getting rid of that footnote. By way of personal disclosure... I traded my first futures contract EVER in June of 2009, and started work on setting up my commodity pool less than 5 months later (November 2009). So, I'm obviously kind of a hot-head when it comes to this stuff. But I certainly didn't regret my decision at all.
Thanks for posting. Useful way to think about the issue - especially that you can't buy "time" lateron.
doublet83 - have you thought about an incubator fund to be used until you're ready to go? also, pm me if you have any questions re the cfa.
Thanks for the color here. Given me some more things to think about. In addition to the initial set up costs and work needed to set up the structure, it appears that if I trade under a LLC - S corp, my taxes will also be higher, thanks to some self employment taxes and payroll taxes, which I cannot really offset given that I have few business expenses. I'm not sure what the point of an incubator hedge fund is. I feel like I either trade with all my money in my PA, or I trade with all my money under an LLC.
Note that you wouldn't trade "under" a LLC. You would form a LP, and your investment would be in there as a limited partner. Your LLC would now be the management company / general partner for the partnership. Self-employment taxes or what not would only apply to management fees earned (if any). Your capital gains as a LP would be taxed just as if you invested in some random strangwrs' fund. (Obvious caveat: internet tax advice should not be treated seriously! Ask your own counsel. But I believe that's correct.)