Hi, I have been asked by a couple of pals to trade their money for them. One account of 25k and another of 42k. Not sure this is allowed is it ? I know I can get a POA to trade their account for them, but do I not need to be a CTA to do that ? Or is there a level of "friends accounts" I can trade before having to be registered ? Realize I could just access their account and just "trade it", but would only be comfortable doing it within the guidelines of the law. Advice appreciated.
IB's Version - has list of basic rules, what is allowed, what is not. I will let you worry about the ramifications of managing friend's / family's money. It is accepted wisdom that this is a bad idea. I have been doing it since 2004 in various forms - worked for me (at least the relationships are all intact LOL). I do not use this form though - I trade through a Limited partnership. Due to limited number of clients, I haven't bothered to become a CTA / RIA etc. And, yes, it's all legit
Let me tell you what is happening. Here it is: You have been trading successfully recently and you have talked to some of your pals about your success and they want the same success and don't know the risk or at least they cannot understand the pain of losing money so they have decided to ask you to take their money which is sitting in 1% CD and generate 20% a year. I am one million percent sure that if you lose just 1% of their money they will be mad at you like hell. They won't tell you this now because they are so sure that you won't lose money so they don't want to talk about impossibles.
That link at IB is a nice, concise view of it. Also call/email the NFA and get info in writing if you have specific questions. http://www.nfa.futures.org/ Now whether or not you should do it is another discussion in itself and there's been plenty of those floating around this forum for years. It's great when it works and can make your life miserable if not.
I'd like some clarification on this. I've heard that one can't charge performance fees without being a CTA or was that for seed hedge funds? If one is trading and charging performance fees for friends then must one preference with that as "not a financial adviser and without regard to your networth". Clarification desired. Or is the 15 account minimum? If it is 15 minimum then why start a seed hedge fund? You can't market those accounts in your performance record? Confused.
I am not a lawyer. That said, you CAN charge fees - don't have to be a CTA. But without being a CTA, you can NOT solicit or manage money for anyone that is not "family or friends" But if you go over 15 (don't know the exact number), you HAVE TO BE A CTA, even if they are all "family or friends" I don't know what performance record is acceptable for marketing purposes. I think usual sane rules apply - must be real, must have the usual disclaimers etc. etc.
It is my understanding fees may be charged on up to 15 friends and family accounts. After that, registration as a CTA is required, that part is true, but building limited partnership agreements can also accomplish some of your goals. Registration is required if you'd like to charge performance based fees, as special firm specific contracts are required prior to making these investments for clients or op. Without more clients I don't think you have much to worry about in this department. Don't be too concerned with registration unless you do think the performance based fees are attractive enough to pursue a more formal legal financial structure with regard to your trading activities.
Unless your are dealing with very sophisticated people who understand risk and consider it part of their business/investing life his comments are wisdom you cannot afford to ignore. Evaluate your friends and family. How will they feel about a 30 or 40% draw down? If you are honest in your evaluation, in at least 95% of the instances, you will reach the conclusion that they are incapable of understanding and bearing risk. It is not all wine and roses.