Starting an investment fund

Discussion in 'Professional Trading' started by db1516, Sep 17, 2007.

  1. db1516


    Hi all,

    Could someone here help me understand the issues with running an investment fund? In particular, the responsibilities and potential liabilities and risks faced when managing money for others?
    Obviously, I’ll be taking legal advice but I would like to hear comments from anyone close to this industry with practical experience, as I have no background in this industry.

    For a several years now, I have been investing my own funds in the stock market, using a value, buy and hold type strategy. I have managed about 24% annual growth over the past 5 years. This is something that I now earn my living at full time, after selling my business.

    From time to time, friends and family have asked me to invest their cash for them, which I have always refused to do, although I have always been happy to give out recommendations, when asked.

    Anyway, I was recently approached by a local businessman, who is very wealthy and well known, who wishes to set up an investment fund.
    I was quite shocked to be approached by such a high profile guy but after meeting him a few times and talking stocks, he said he liked my ideas and has made me an interesting offer.

    His offer is this- I manage the investing and he will arrange the marketing and fundraising. In return, we have an equal share of the fund management company.
    He also tells me that he has contacts at the bank who can pull in the money no problem.

    I’m actually quite sceptical why he would approach me because, as I have already explained to him- my returns are not exactly outstanding, I have no formal training in stock-picking, analysis etc
    My only experience is from founding and running a real estate development business and the only track record I can show is from my brokerage account.
    But he feels my low risk, opportunistic value style would be very popular now.

    The other thing is, which is what really makes me cautious, is that he insists the fund must be a 2/ 20 set up, which I don’t like. My feeling is, if my returns are not too hot, which almost surely they will be from time to time, why should I still get paid.
    I certainly would not invest in a 2/20 fund myself.
    I think a much farer setup would be a percentage fee of gains after a minimum, say 5-6%, hurdle rate. But this is something he is not prepared to do and says I am naïve for thinking that way.

    Anyway, what I’m trying to ask here is- is there some way I can be scammed by this guy or left open to some form of liability. What is my risk in all of this?

    I would appreciate any comments.

    Thanks in advance.
  2. db1516


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  4. I've asked myself the same things, gone thru the same process. Don't bother. If you're making consistent money, just leverage your money and take 100%. There are many many ways to take say $100k to $1MM in buying power. There are literally thousands of funds that open every year with assets under few million and close because the 2/20 payout just makes no sense, especially if your own money is invested in the fund. Some of the greatest fund managers closed their funds and bot out their investors so they didn't have to deal with the bs. Outside investors can complicate your life, they'll aggravate you nonstop. Lawyers and legal docs make life even more complicated. (Never good). In my experience, hedge funds only work when you have a pedigree in that area, and you start with AT LEAST $50MM, preferably fund of funds allocation. You won't get that unless you've worked at Soros, GLG, Millenium, SAC, Goldman, etc. I've worked with various marketers, consultants and trust me, most investors don't care for random dude who returns 25% a year. They want pedigree, Harvard/MIT PhD, etc. It's very superficial and usually very dumb. But hey, that's the game.

    Unless you're in need of major attention like Tim Sykes, it's probably best to stick to your own managed account.