I am researching starting a tiny hedge fund. Initial AOM would be just my contribution of 50k. While low, that is high enough to list on a few of the databases for performance after 1 year of audits. This is exclusively trading spot forex with an average hold time per trade of 3 days. The business structure I'm leaning on is an LLC for the management company that receives fees from an LLC that contains the funds that will be traded with Oanda. I have various questions, thanks for any replies in advance: 1. According to the March 2005 article http://www.goforex.net/Setting_Up_Forex_Funds.pdf , "Spot forex trading is not regulated by the CFTC and does not require CPO registration if the fund trades spot currencies exclusively". I believe this means initially I would not have to register with the CFTC or NFA unless required by the databases. Is the article accurate about registration being optional for spot forex funds? 2. If in addition to managing the fund, if I also place trades directly in some clients' accounts (eg CTA style), then at that point is registration required? Also, I would assume you put trades for direct client funds after (eg with worse fills) the trades you make for the fund? 3. I have seen various references that if the fund hits $400,000 AUM (used to be $200,000 a few years ago), then that triggers a much larger amount of accounting issues that can increase cost. Can anyone be specific about what is required here? I already will have auditing in place. Are there new registrations and fees required at this point? 4. Typically, funds have to account monthly. If I want to let investors add or remove funds any month, but there are open positions in process, is this something that can easily be accounted for? Do I have to close positions and re-open them based on the current capital if that makes sense? It would be much easier for me to allow new capital contributions/withdrawals once a month, but only during the first weekend of each month. The problem there is the databases (and government I believe) require monthly accounting to begin on the 1st. How are these open position issues typically handled? I feel I might be overcomplicating this somehow. 5. Trading is not my full-time job. I plan on address this by adding a section under additional risks and also under conflicts of interest. I think this is a bit unusual but not illegal, particularly if well disclosed. ? 6. I'm considering adding an equity kicker for initial investors (a separate class). Eg the first million of capital also comes with a a stake in the management company (future fees), however that class of investors is required to invest long-term to get that advantage. This is pretty unusual, and obviously reduces my future compensation percentage, but perhaps the advantage of being easier to raise initial capital would outweigh the disadvantages. Any thoughts on this? -Taric
In my opinion, $50K is too small to be meaningful. Even if you obtained great results, your methods may not scale up to be able to manage 5 million or more. I would recommend building up your capital to at least $500K before starting.
Isn't this true with any fund that is trying to substantially increase its assets? Let's say you have a $50 million fund. One could say the fund may not scale up to a $500 million fund without encountering some difficulty. The main argument I see against starting small is you are paying accounting and auditing costs without enough income from fees to offset that. There is something of a chicken and egg problem, though. It is hard to raise funds without a track record. Given the new accounting restrictions on providing track record information, it actually appears just starting the fund (even solo) is a more cost-effective way to obtain a track record than creating a track record separately. Thx! -Taric
If you receive 200:1 leverage in Forex isn;t that like swinging around $10,000,000? Some even get 400:1?
The main limitation on a forex fund is: "As a private fund, a forex fund cannot legally advertise either in the United States or abroad and it can only accept investors âknownâ to the fund manager. However, a fund manager may have a website to advertise its advisory business in most cases and the fund manager may offer access to the forex fund's daily performance through a password protected website." Quoted from the <a href="http://www.capitalmanagementlaw.com/index.html">Capital Management</a> website, who also seem to specialize in setting up forex funds and hedge funds. Their incubator hedge fund seems like a good way of getting a track record without incurring expensive accounts costs initially (especially if you're not looking for investors off the bat).
That is way too much leverage for most strategies-- including mine. In most cases even 10:1 is too excessive in terms of severe drawdown risk, at least for unhedged multi-day directional position trading. -Taric
Thanks for the info-- I'll look into it in more detail but that appears very promising at first glance. -Taric