Starting my own hedge fund

ScalperJoe · Aug 4, 2015

I found this interesting. It's from another thread (link below) regarding set up costs for an RIA, which are probably much lower than the set up costs for a hedge fund.

algorythm said:
If you think about what you're giving to prop firms in terms of a capital contribution, it might be worthwhile to think about just starting your own investment firm and spending the money on yourself instead.

If you are in the USA, registration as an investment adviser is ~$350 depending on the state.

If you incorporate plan on $100-$500 depending on where you do so.

Take the Series 65 for investment advisers. $155.

Kaplan has a good self-study Series 65 course for $159. Tip: after you go through the manual, just take the Q-Bank questions over and over again until you more or less have them all memorized. Test is then relatively straightforward.

Accounting will run you about $200/month for a limited client list.

Document creation? Probably around $2k all in which includes filling out all of the annoying forms.

Ongoing compliance? Another $200 month.

E&O insurance? $1400/year.

If you include accounting and compliance in your costs, all you really have to do is trade, market yourself a bit, and keep up with paperwork.

So in sum your first year is $350 (annually) +$500 (annually) +$159 (one time) +$155 (one time) +$2,000 (one time) +$1,400 (annually) +$2,400 (annually) +$2,400 (annually) = ~$9364 the first year ~$6700/year thereafter.

That's a complete bootstrap budget running things out of your garage or spare bedroom but since the only track record anyone in the industry takes seriously is one created under a regulated environment with a duration of ~3-5 years, it makes sense to spend the money on yourself instead of some operation which really is only looking out for Number 1 (i.e. themselves).

If you charge 2% per annum as a management fee, you can handily cover your costs with $500k in AUM. Less if your clients are QEPs or have more than $1M in assets with you -- in which case you can charge them an incentive fee of ~20%.

In other words, if you charge incentive fees in addition to a management fee of 2% and you make 10% on the $500k, you end up with 10k in management fees (fixed) and 10k in incentive fees (variable). Incentive fees lower your break-even required AUM (provided you have ongoing positive results).

Even if all you have is yourself, a few bold and adventurous family members, and a QEP or two, it seems to me you have a better chance of making a nice future for yourself starting your own company than you will trading for (and locking up capital with) a prop firm.

I'm also guessing that making a nice future for yourself is why you wanted to work for a prop firm in the first place.

Go solo!

Possible Service Providers:
Your Friendly Local Secretary of State
Your Friendly Neighborhood FINRA (administers the exam)
Kaplan Financial Education (Series 65 Test Prep)
RIA Registrar (Initial Registration, Compliance, E&O)
Krisan's Back Office (Accounting)

Disclaimer: I don't work for any of these places and am not registered myself. This is just the result of research I did over the years when I was still young enough to contemplate starting my own firm. There are a lot of firms other than RIA Registrar and Krisan which basically do the same thing for about the same price. But if you're bootstrapping it, these seemed like good options. Cheers!
More...

http://www.elitetrader.com/et/index.php?threads/no-capital-contribution.279818/

xandman · Aug 4, 2015

There is also RIA in a box and it's numerous tie ups.

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Starting my own hedge fund

ScalperJoe

xandman