Starting a small managed fund

Discussion in 'Professional Trading' started by Tinkerz, Nov 23, 2010.

  1. Tinkerz


    I would like to know some of the options for starting a small fund with money from close friends and family, I trade options and futures, no stocks, but I am thinking about starting a small fund before going for a larger prop trading setup.

    So what do I need, there wont be more the 100k for starters, just enough to manage close clients and take it from there.

    Is taking personal loans illegal, and submitting that capital for trading in a sole trader business?

    Or is there a simple method for seed capital?

    Many Thanks
  2. have you considered doing managed accounts? There is an exclusion from registration if you are only working for friends and family and have under a certain number of customers. See the NFA web site for details.

    By the way, IB has a nice, low cost setup that makes doing this very easy.
  3. LeeD


    That's what I thought...

    Legal services to set up a hedge fund properly will cost in the range of $30k. With $100k capital this cost is absolutely prohibitive. You can do the legel work yourslef... but for any serious investor that may come later this will be a massive glowing red flag.

    IB has 3 features that help trading in multiple accounts:
    1) "Advisor" account that grants trading access to a few other accounts but doesn't allow deposits or withdrawals
    2) You can set up it so that any stocks you buy or sell will be automatically allocated between accounts in specified ratios (the drawback is there are reported problems with allocation when scaling out)
    3) IB can even calculate and charge the fees for you

    Any performance with clients will be fully credible. However, if you want a fund to create "audited track record" for future marketing, you may want to start an "incubator" fund. It will be much cheaper to set up but it won't allow addional deposits or withdrawals or charging fees. So, it's better done with your own money.
  4. Tinkerz


    I would rather pay an indicated % every 6 months and take advantage of compound interest.

    If I let them see what I have made then they will think it unfair to pay an indicated rate
  5. LeeD


    Fund is just a different business model. If you take a loan, all the upside is yours, but so is downside.

  6. Limited partnership setup..
    make yourself general partner
    and contract investors in as limited partners.. establish a profit sharing setup in the contract ...
    get a series 7 and a clearing firm
    under 400k and 15 investors you dont need to register .. if you get more you do..
    get a lawyer and be safe to write up contracts .. its not 30k if you set it up this way..
  7. If u are doing a real partnership among a few people and not trying to join the "hedge fund industry" it can be done for much, much less than 30k. Take at least a zero off that.
  8. I have some similar questions as the original poster..

    I've had a decent run in the market and am contemplating starting a fund if I can pull off a couple more years of decent returns. I'm already doing some trading for friends and family in their own accounts, and am satisfied with the setup, so my priority wouldn't be to set up a structure for outside investors. I am mainly interested in establishing a track record which I can use to attract additional investors at a future time if I continue to have a good track record.

    It seems like the incubator route sounds like the logical thing for me. Is anyone familiar with the cheapest way this can be done? I'd be trading about $300-$500k of my own money and would prefer to use my existing discount brokers if possible.

  9. I would worry about those incubator structures. One bad fund might contaminate the whole batch. In others words, one guy get a margin call on some illiquid crap and you all go down.
  10. I have a setup exactly as you have described, except the payout part. Apologies if I have read you incorrectly, but what do you mean If I let them see what I have made?

    No matter how large or small the $ amount you manage, you have to decide on a few things first. You can never hide the fund P&L from your partners, if they are your partners. No matter if you pay them 100% of the P&L or 2% or whatever. I think it's a strict no. If you are a hotshot and can make a lot of money while paying only a indicated percentage, you do not have partners. You have people who loaned you money for an agreed upon interest rate. Nothing wrong with that, but let's make sure things are clear to everyone involved.

    I trade through a LP (Limited Partnership). A Corp. is the General partner in the LP, with myself owner of the Corp. All other investors are Limited Partners in the LP. This is perhaps more complicated that what it needs to be, but that's the way it's been and I will not change it unless I have to. I have not had any trouble with either TradeStation Securities or Interactive Brokers to open an account for the LP. I trade futures only.
    #10     Nov 30, 2010