Starting a LLC (Hedge Fund Alternative)

Discussion in 'Professional Trading' started by DisciplinedHedg, Mar 30, 2002.

  1. >>>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.<<<

    As Gene stated, starting a hedge fund is very time and capital consuming, and may not be worthwhile until you hit a certain funding point.

    So assuming that we are working with a relatively few group (family & friends) of people (<20) with a total of several million, is an LLC then the best way to go about trading as one entity?

    Is an LLC the best entity for this purpose, or are there better alternatives? Assuming that the others will be silent partners and only funding the entity, and I will be solely managing the accounts. How would I charge for fees or profits with an LLC or another entity?
  2. tntneo

    tntneo Moderator

    LLC is a good way to do it.
    You charge commmissions the way you want (invoice, the shares split or other).
    LLC is pass through, so the remainder of profits is added to each partner personal income.

    There are limitations to LLC in some states you should be careful with. Also, sometimes a C-Corp is interesting (see other threads in this forum).

    The advantage of a LLC is to be a separate entity. This is much better than friends and family giving you money to trade (lending you).
    a LLC is a structured legal entity, which can open a brokerage account, can deduct expenses etc..

    forget hedge funds, even with a few millions it ain't worth it. This is interesting only for very large portfolio and when you want to attract more investors than just the funding partners.
    It costs a lot of money and is under more intense regulatory scrutiny.

    LLC or C-Corp for your case. that's 100% sure.
  3. ktm


    It doesn't matter what you call it or, to some extent, how the entity is legally structured. If you are trading other people's money, then that's what you are doing. A "hedge fund" is a very loose term to describe a number of similar entities and is often misused, especially here. If the term has lost favor, by all means find one that is sexier and in vogue.
  4. It seems that everyone is trying to make a "silk purse out of the sow's ear" - attempting to make something legitimate or even "cool" out of canvassing friends and family for money.

    If you have people willing to front you the cash, and you want to split your profits, just do it....make up some type of agreement, in case you do make money, and share the profits fairly.

    I've seen multi-million dollar arrangements made on bar napkins, and all is well as long as those involved are merely splitting net profits, and no one i charging "management fees" or some such nonsense.

    It really is no big deal....
  5. tntneo & ktm - thanks for the replies. helpful.

    Don - i understand what you mean by "bar napkin." like i said, these are family and friends and as long as the arrangement of fees/profits are clear, it could be done on something as simple as a bar napkin.

    The problem is with the income/profits. In other words, mainly the IRS. This has to be structured so that its legitimate and taxable. I don't think a bar napkin is legit to the IRS.

    So what I was asking was what type of entity suits this purpose. Perhaps an LLC is something on the right track...

    Thanks all...
  6. an llc or an ibc out of usa may be a good way to do this.

    I have a specific question on this topic. Let's say I open an LLC and other people invest in the LLC. The job of the LLC is to make money on markets. I am the chief trader in this firm.

    IB offer me to open an account for the Limited Liability Company
    but on page 3 there is a question asked:

    Does the company intend to trade:

    * solely on behalf of named account holders?
    * on behalf of customers or other unnamed parties?

    hmmm whats the deal. Do I trade on behlaf of customers or do I trade the money of the llc that means solely on behalf of named account holders?
    An llc is a juristikc person - isn`t it? and that means I trade on behalf of named account holders?

    thanks for advice
  7. tntneo

    tntneo Moderator

    don is right. there is no big deal here.
    also I agree about the misuse of hedge fund, to some extents. because there are many different strategies used by hedge funds and that also is misunderstood, as well as regulatory issues with funds with more than 30 partners (and funds which can advertise to find investors and shareholders).
    With all these details, it is understandable that we usually misuse the term here. Like don says : no big deal.

    regarding the previous question : it's easy. YOU ARE NOT TRADING ON BEHALF OF CUSTOMERS.
    because to do that you must be licensed and audited and all that. An entity is allowed to trade for its own account without restrictions as long as it does not have customers and does not advertise to get shareholders etc...
    Because this is the privilege of brokers, prop firms and other regulated (more or less) entities.
    If you do want to have customers, it's another story (and not the original question of the thread).
    To trade others money (friends, family) and you when you want to clearly and well manage this (deduct your real costs, etc...) you do need an entity to avoid any problem with the IRS.

    For starters, individuals not using an entity must first proove they are 'traders' since the IRS does not recognize a trader just because you say so. And that's a problem for capital gains taxes (and more importantly losses if you have any).
    Use an entity (LLC, C-Corp) and most, if not all, of the 'trader status' difficulty is gone.
    Of course a trader with a series 7 for instance can claim 'trader status' with more ease than a private trader without the license.
    (and don't jump on me because there is not such a thing, strictu sensu, as 'trader status'!.. I refer here to the process and different elections with the IRS which maximize your gains, and protect you in case of losses, process and advantages not available to retail investors AND traders without proper requests and organization to the IRS).

    in any case consult a specialist. that's obvious.. we only give you advice based on our experience, ktm, don others and I. But it's your butt when you file and are audited. ;)
  8. The best deals.
  9. Someone that knows of what he speaks.
  10. The first, "solely on behalf of named account holders".
    #10     Mar 31, 2002