A fellow trader and I are moving towards starting a business entity to trade co-mingled funds from others. We have both wanted to do this for some time as we have had numerous requests to trade other peoples' money, mostly friends and family. Of course we're consulting all the CPAs, attorneys and the like to ensure we are legal and proper. My question to those of you who have dabbled in this is about the software and back-office upkeep. Since this will be a small fund to start (less than 35 people), the maintenance shouldn't get too cumbersome. We need daily valuations via a website connected to the master account and statement (tax) generation. Has anyone out there used a COTS package for something like this? Thanks
Just out of curiousity, what kind of fees are you going to charge your clients? Are you going to take a share of the profits? Is there a standard arrangement for hedge funds?
Keep us updated. I'm moving towards charging a fee to my LLC group, and would be interested to hear the pros/cons and any legal/tax advice you get regarding charging fees, etc. Of course I'll get my own professional opinion, but it's interesting to hear from other sources. My thoughts were to charge 30% of profits with a high water mark, so once I'm paid, I need to exceed that equity level to earn my next check. Do you have any thoughts on how you'll charge?
Depending on the amount of money you are going to raise you might be better off looking at a Prop firm such as Bright, Carlin, Andover etc. The payouts are certainly better.
I think it's not that easy (legally) to charge an incentive fee. The Investor Advisors act says you have to register with the SEC as an investment advisor before you are allowed to charge fees on the profits of your clients/LLC members. The registeration is lengthy and expensive.
The plan is to charge 20% of profits and a 1% administrative fee per annum. Larger accounts could see a reduction in the 1% fee and it's possible that in a negative year, some or all of the 1% fee may be waived. Much of this will be standard policy subject to negotiation on a client by client basis. As a limited partnership with less than 35 "non-qualified" shareholders, registration with the SEC is not required. Advertising is prohibited. The most we would potentially have to file with the state would be an ADV for $200, but even that is likely to be unnecessary as we are a private limited partnership who does not seek customers. The main form of disclosure to the shareholders would be in the form of the partnership structural agreements. Like ddefina, I have a number of accounts that I "help" manage now and it's getting cumbersome. If I want all 7 accounts in or out of a position at the same time, it's tough to enter and monitor all the orders at once. This will allow me to roll them all into one account legally and efficiently. I will be able to take advantage of higher priced equities for some of my smaller customers since the funds will be commingled and there should be less volatility. I was looking to do something similar to this last year but the deal with the partner fell apart. At that time, I went through a good bit of licensing and regulatory research since we were going to do investment advisory services as well as asset management. This effort is more pure asset managment and much more to my liking. I'm still researching the issues around the partnership taking the fee. I'm sure there's no problem with it. The traders will be the general partners and the investors will be limited partners. I am planning to sit with my CPA in the next few weeks to get the skinny on tax implications for the income and any other potential issues.
I'm not sure what you mean about the "payouts" being better at a prop firm. We are establishing our own firm.
Hello KTM, Actually Brandon brings up a good point. I believe he was referring to the fact that as a Hedge Fund manager you will typically receive 1% of the assets and 20% of the net profits as your combined annual incentive fee vs a prop firm which would payout 50% to 95% of your net profits. In either case you are using "Other Peoples Money", however, you may have a higher payout trading through a prop firm. Not to mention the cost of setting up and maintaining a Hedge Fund is higher than joining a prop firm. Don't get me wrong there are definitely advantages to utilizing a hedge fund structure when appropriate. Regarding your software question you may want to look into Captools. Here is their link that has some good Hedge Fund info, http://www.captools.com/hedge.html Best of luck with your venture!
Im not in a perfect position to comment on this, but possibly Don Bright could but my understanding is that if you are with a prop firm you are trading their capital and the payout is on the order of 80% +. This is much greater than the 1-2% of assets and 20 to 25% of profits that you could charge for a hedge fund. Also worth considering are the substantial legal fee's associated with starting a hedge fund. I suppose that if you are able to get hundreds of millions of dollars the hedge fund would be the route to go..but if you are looking for maybe a million or so..then a professional firm may be a better way to go. I know of some people at prop firms who have $5million and more in buying power available to them. Brandon
The idea of trading a prop firm's capital the same way you would manage a hedge fund's money sounds great in theory. but, wouldn't it be a problem getting the overnight leverage? Would a prop firm let a trader basically hold onto positions for days and weeks.. the way a hedge fund might? Don maybe you could enlighten us here. Does Bright let a trader manage money in a longer term fashion like a small hedge fund? If so, how are capital requirements different?