Just a note. To start a true hedge fund, will cost alot more than $25,000 for legal fees,office setup, phone lines, trading software etc. At the end of the year, you will need your fund audited , which could cost between $10,000 to $25,000+ (per year).Before a trader starts a hedge fund, you better be a very very good trader, especially in this environment . In our firm, only the very best traders should really even consider starting a hedge fund. Then you will only keep 20% of the profits(max), so unless you have a 5 million dollar fund(or there about) to start, you are not going to make any money. Raising five million dollars in a bear market is not easy. In all fairness to Don, I think he was trying to say that if you are a good trader, it would make sense to trade your own capital. Many top traders will, earn high rates of return trading their own capital, without the headaches of trading for others. Top traders earn very high rates of return as L.L.C. members. For the superstars out there(very few), you might consider starting a hedge fund. Be aware that it's much harder to trade 5000 share postions, than 500 share positions. The traders everyone mentions(Soros's , Steinhardt & others), were very successful traders before starting their own funds. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
Gene, The costs aren't nearly as high as you state. I could paint an even more dire and accurate (read truthful) picture of the beginning adventures of a typical prop trader, but that's not why I started this thread...and I don't need to go there.
ktm, The costs of starting a "real" hedge fund is at least what I stated and probably more. Managing a hedge fund is like running a "business", not like trading with an IB account from your home. Hedge fund world has some good information for anyone interested in starting a hedge fund at www.hedgeworld.com . See "Starting a Hedge Fund at: www.hedgeworld.com/education/index.cgi?page=starting_HF A more complete listing of documents that a hedge fund manager may need to create is listed below: Confidential Offering Memorandum Limited Partnership Agreement Offering Memorandum Instructions Subscription Agreements Limited Partner's Suitability Letters Limited Partner's Signature Pages Legal and Regulatory Handbook Accounting and Tax Handbook SEC Regulation D Code (U.S.A. related) Instructions and Ongoing Responsibilities Accounting Spreadsheet & Templates File SEC, CFTC, NFA, and State Forms (U.S.A. related) Quarters End and Year End Duties Fund Account Ledger Prospects and Subscription Log General Fund Ledger General Partner Corporate Books and Records The new hedge fund manager must establish relationships with several industry service providers from the outset of the fund. Some of these include: Administrator (typically non-U.S.A. related) Auditor Prime Broker Attorney Custodian and Registrar Bank (typically non-U.S.A. related) A new manager can expect to spend approximately 25 to 75 thousand dollars in legal and administrative fees. The fees for setting up a domestic fund are, in most cases, less than the fees forstarting an offshore fund. Once the hedge fund manager has enough capital to begin implementing his or her trading strategy, and has established the necessary relationships that are involved in the transactional aspect of the business, the hedge fund can begin trading. Unless you are a very good trader with access to alot of capital, why would you spend all the time and money starting a hedge fund? It is very hard to raise money in a "bear" market . As an alternative to a hedge fund, a trader may partner with one or two qualified investors(they know) and start a trading partnership or L.L.C. Check with your CPA or Legal advisor for more information. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
So many people come to us with "hedge funds" (which really aren't, usually just "borrowed money"), wanting to start a hedge fund, that my first resonse is " You have over $100Million? Are you already licensed?" etc. The serious fund managers have quite a daunting task just to out-perform someone who buys ETF's and holds them. And, as you know, if they are any good at trading they would want to keep all the profits themselves...not share with the investors. Anyway...let's be sure that those who know how to trade can use the capital at either of our firms to trade with!!
I am not as knowledgeable as Don Bright, but I know a person does not need $100 million to start a hedge fund and, I believe, there is no licensing needed either. As far as keeping the profits themselves, I have seen a number of hedge fund managers on the Forbes 400 etc, and have yet to see a prop firm trader on there. Don Bright writes: >So many people come to us with "hedge funds" (which really >aren't, usually just "borrowed money"), wanting to start a >hedge fund, that my first response is " You have over >$100Million? Are you already licensed?" etc. >The serious fund managers have quite a daunting task just to >out-perform someone who buys ETF's and holds them. And, as >you know, if they are any good at trading they would want to >keep all the profits themselves...not share with the investors. >Anyway...let's be sure that those who know how to trade can >use the capital at either of our firms to trade with!!
bozwood, I agree with you but I also think Gene and Don are giving good advice here. I would sya if anything they are lowballing the costs involved, and it only takes one disgruntled investor to increase your legal expenses astronomically.
I don't agree that the costs are in the $75,000 range. My reply was to Don Bright because I do not agree with what he says in his latest post. However, since you brought it up, the original post was: "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?" KTM (correct me if I am wrong) is not looking for advice about whether or not to start a hedge fund. I assume that he/she has enough knowledge to decide that for him/herself and really isn't looking for the collective site's protection. And for the tangent that was taken following the original post, there was no question about joining a prop firm. If a person wants to trade another's money, there is no other way (that I know of), legally, than setting up a LLC or LP, so the prop firm option is moot IMO.
bozwood, If anyone wants to start a hedge fund , I think they should. The costs I gave are very close to the true costs of starting a fund.No Prime Broker will accept a hedge fund client unless the fund is set up properly and all legal documents are in order. That is why starting a hedge fund has substantial startup costs, even if you run the fund out of your house. I know you may find it hard to believe, but a decent Securities Attorney costs $350.00 +per hour (that's just to start). I gave a pretty detailed reply about some of the costs involved. If you are a talented trader and want to start a fund, I would be glad to help you start up a fund(as would Don Bright).However, once traders see about the big picture, a fund may not be as attractive an option as they once thought. Gene Weissman Lieber & Weissman Sec., L.L.C. gweissman@stocktrade.net
Gene, I think your costs are reasonable, I was just thinking the low end of your range. Someone had posted you were too low, so that is more what I was replying to. Also, I didn't have any problem with your posts. I was referring to others.
I hope I'm not the "others" you're referring to.....and when I mentioned the "$100 Million" - it was just to preface a continuing conversation, and I realize that many have started much smaller hedge funds. Having spent years in Public Accounting, and even in this day and age of "fuzzy reporting"- I think I can relate to the amount of "back office" work that is involved. I, too, am not trying to talk anyone out of starting a hedge fund, we have had hedge funds with us for years....my comments (as I think were Gene's) were meant to inform not deter. Good Luck!!