Starting Investment Company, For Beginners

I am studying for the Series 65 and want to start an Investment Company. I have family and friends interested and the seed money will be approx. $2million for starters. The bulk of that is from one person so not all of my investors are accredited investors. I'm looking to start a small LLC once am licensed.

1. I want to be able to charge a performance fee along with a management fee but not 2&20 but something else--don't quite know yet. Should I start an RIA firm or a Hedge Fund? I've heard that Mutual Funds are quite expensive to run. I'd like to keep this legal structure as simple as possible.

2. If I start an RIA firm can I still charge a performance fee? If not, what alternatives do I have?

3. Can I start a Hedge Fund if not all my investors are not accredited?

4. Once up and running, I'd like to have a system in place where I can allocate shares across all accounts at the same time. Is there a system/broker that will allow me to do that?

Thanks all

 

Do realize that with 2MM, after legal fees, costs, etc. you are left with very little money. Not enough to make a living, and that's assume 2/20.

Why would you charge your family a performance fee? Are your friends and family willing to pay a performance fee? Sounds like you want to charge something like that because it's some sort of standard. The days of 2/20 are gone and your friends and family should just pay .5% with index fund but hey more power to you if you want to charge them.

Yes, your investors have to be accredited for a hedge fund.

 

Please don't risk friends/family money because you have a deluded sense that you are prepared to manage money.

If you feel like this is your desired end route...call up your local BB PWM/GWM Branch and present a business plan. If you can survive the training program and bring in assets to meet your hurdles/ - perhaps there is a case to be made that you could survive on your own.

By no means am i telling you to abandon your dreams ; i just want to impart on you that still do not know what you do not know.

 
Best Response
  1. RIAs and hedge funds are like apples and fire hydrants, both red but completely fucking different. difficult to say what's best but I'd talk to an attorney

  2. can and should are 2 different things. many BDs who allow you to set up as a RIA really push a flat fee as opposed to a 2 & 20, so I would ask. there's nothing illegal with it though, to my knowledge.

  3. 99% sure the answer here is no. hedge funds have the benefits they do because their investors are accredited, period.

  4. any reputable prime broker & clearing firm can do that, but at $2mm AUM, you don't have the assets to get a really good system.

but I agree with everyone else who has posted warnings and will post warnings, don't do this. I'm sure you want to help but we get questions like this all the time and the short answer is you don't have the experience to manage family money just yet nor do you have the resources to start a reputable firm.

if you're really good, find a AM/HF shop that wants your services and get your friends & family to invest with them. alternatively, you could start a newsletter but not operate as a RIA and I think that would limit your legal liability. check with an attorney on that though.

 

I've set up an investment company with my brothers. We each own a third through our private holding companies. Hardest part is actually agreeing on where to invest the money, but we have a clause that we can buy a stake from each other at a premium to the underlying investments.

CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 
Km21118:

What's the legal structure of your company? I think if the funds are pooled together for investments you have to be properly licensed in order to do that; but i'm not sure.

Joint-stock company. No need for licenses and since I own less than half of the company in question, we are still classified as a retail investor through current MiFID regulation.

CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 

WTF mate - get your shit together and then ask. But this is properly a fucking waste of time. There are millions of ways to set up a company. What purposes do you have. Will you be paying yourself out of the company. Are you in the US or Fukmeland. Get your shit together, in the meantime take some monkey shit for not knowing a single thing about life and not googling it first.

 

All I have done so far is purchased a 30% and 10% equity stake in two different companies. I wanted to know if I could transfer these holdings into a Limited Company. Would that be worthwhile or best to just continue holding them in my name.

 
jdn1983:

All I have done so far is purchased a 30% and 10% equity stake in two different companies. I wanted to know if I could transfer these holdings into a Limited Company. Would that be worthwhile or best to just continue holding them in my name.

What's your tax rate - where are you based - what assets do you have ASIDE those two holdings - where do you want to incorporate

Damn you are thick! Next by jdn - I want to work in banking, what bank is the best to work at?

 
InvestingChamp:

I am studying for the Series 65 and want to start an Investment Company. I have family and friends interested and the seed money will be approx. $2million for starters. The bulk of that is from one person so not all of my investors are accredited investors. I'm looking to start a small LLC once am licensed.

1. I want to be able to charge a performance fee along with a management fee but not 2&20 but something else--don't quite know yet. Should I start an RIA firm or a Hedge Fund? I've heard that Mutual Funds are quite expensive to run. I'd like to keep this legal structure as simple as possible.

2. If I start an RIA firm can I still charge a performance fee? If not, what alternatives do I have?

3. Can I start a Hedge Fund if not all my investors are not accredited?

4. Once up and running, I'd like to have a system in place where I can allocate shares across all accounts at the same time. Is there a system/broker that will allow me to do that?

Thanks all

Speaking from experience:

  1. An RIA can manage anything from '40 Act funds (mutual funds) to separate accounts, or a hedge fund. If you want to solicit non-accredited investors registering is the way to go. You can always set up a GP/LP structure later.

  2. Yes, but only to qualified clients (>$2m net worth) and non-US clients. That is the case for a HF as well. Other clients pay only management fees. Note performance fees in separate accounts do not get carried interest treatment.

  3. You are limited in the number of non-accredited investors you can sell LP interests to - depends on the type of legal structure, but IIRC it is no more than 35 over the life of the fund and subject to some limitations.

  4. Highly recommend Interactive Brokers. You can open accounts under the advisor structure immediately but need to be licensed before you can charge fees.

 

thank you for your response, it was very helpful. Just one more question: Knowing that I won't be starting a hedge fund; and not so much a mutual fund; can I start an investment company that does not fall under the '40 Act--such as Mutual Funds (open/closed) etc.? Sorry but this is all new to me and I'm learning as I go along. Thanks

 
InvestingChamp:

thank you for your response, it was very helpful. Just one more question: Knowing that I won't be starting a hedge fund; and not so much a mutual fund; can I start an investment company that does not fall under the '40 Act--such as Mutual Funds (open/closed) etc.? Sorry but this is all new to me and I'm learning as I go along. Thanks

There have been a few unkind comments here, but they do raise a fair point that if you're having this much trouble parsing the basic legal structure it might be wise to garner a bit more experience before you strike out on your own.

The term investment company (http://www.sec.gov/answers/mfinvco.htm) refers to mutual funds, also known as '40 Act funds. The regulatory requirements for most investment companies are generally higher and more expensive than operating a hedge fund (which is basically an investment company exempt from registration) or a registered investment adviser. You may want to consider forming an investment adviser which could advise separate accounts. That entity could later serve as the adviser to a hedge fund or investment company if you formed one down the road.

 

Like @working9-5 said get a lawyer. There are many variables but you'll need to set up a company in India which is a pain in the ass, especially if you're not a citizen. I forget the best type to us there. Mostly likely you'll want a blocker entity in the Mauritius for tax purposes. The next level will depend entirely who your investors are. If it's all US based people you can do an LLC (or multiple LLC's). If there are non-US people involved it completely depends on their tax domicile.

You'll also need to investigate fdi and capital restrictions of bringing capital into India. I haven't done anything there in a few years so I forget the specifics but there are all sorts restrictions on investing foreign capital, especially debt, there.

 

Thanks folks. Yes eventually i will talk to a lawyer but I need to gain some insight into what I really need to be doing. I am not going to setup a company in India, I have spoken to a few companies where will our firm will be investing directly on their projects ( I believe in FDI model ) and eventually returned with profit to our US company and we will keep our margin and return it to the investors. All the investors are private investors and the companies in India where we will be investing are also Private companies. Do you think for this kind of setup I would be needing permisson from any organization in the US ? thanks

 

Hi there,

Can I setup a Private Investment company be the Owner of the company and have around 50 active investors including myself? i.e the investors collectively decide where to invest. In this setup should I have the company registered with SEC ? or I can register a LLC and that would be sufficient ? thank you for the help.

 

TempAccount is right. You can only charge performance fees as an RIA if they have a million with you or 2 million in total assets. Hedge funds have to be accredited investors under certain rules that TempAccount has stated. The IA Act and IC Act of '40 will give you most of the answers. Good luck.

 

Hey do you think its too late to invest? this checks off everything on my investing checklist:

  1. Incredibly long intro written in the third person that makes no sense whatsoever
  2. Experience managing fake money in a portfolio game
  3. No relevant experience whatsoever
  4. No college degree
  5. An unregistered LLC with no website
 
seekingalphabet:

Hey do you think its too late to invest? this checks off everything on my investing checklist:

1. Incredibly long intro written in the third person that makes no sense whatsoever
2. Experience managing fake money in a portfolio game
3. No relevant experience whatsoever
4. No college degree
5. An unregistered LLC with no website

  1. Looks like a major douchebag
Fortes fortuna adiuvat.
 

"He prefers debating ideas, selling/purchasing products, managing people/projects, entertaining clients and giving presentations as opposed to performing functions that require a high level of concentration and attention to minute details", I am lost for words on how much of an idiot this kid must be, maybe he should spend some more time concentrating and attention to details when writing another intro.

 

Wow, this guy is so young yet so accomplished. He's clearly grinding. He seems like a winner, you guys should stop berating him. What have you done with your life? He was a pizza delivery guy and now he own his own investment management company. Pretty impressive in my opinion

 
WallstreetBabe21:

Wow, this guy is so young yet so accomplished. He's clearly grinding. He seems like a winner, you guys should stop berating him. What have you done with your life? He was a pizza delivery guy and now he own his own investment management company. Pretty impressive in my opinion

How are you liking FDU, Andrew?

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.
 

he's a bookkeeper Wait, dude delivered pizza while interning in PWM? Did he deliver in Beverly Hills and that's how he snagged clients?

heister: Look at all these wannabe richies hating on an expensive salad. https://arthuxtable.com/
 

I think the reason this gets so much bad viewing is because the young ones that DO attempt this do it all wrong, usually knowingly and purposefully. They constantly lie about the majority of the details, exaggerate claims, don't file the necessary documents to even have the business established in the first place, etc. It's just an awful compilation of terrible. Why try and pretend like you're some sort of genius with edge and particular talent that no one else has, all at age 22?

I am one of the young ones that did this which is why it's particularly frustrating, granted I'm doing it more as a case study in order to help me obtain a job versus trying to "make it". I filed my two entities in TX and DL, form D with the SEC, annual reports with both state Comptrollers annually, third party providers for annual auditing, FS preparation, and investor statements, etc. I'm not some sort of genius master of markets, in fact I don't think I have any particular "edge" at all. I just have a simple strategy that has worked for 3 years thus far and that's it. No fancy BS word usage I don't understand, no exaggerated claims, no unnecessary complexity, that's it.

Just a sad mindset when you can't just be yourself that you have to craft an entire story and then maintain it. Effort would be better spent on actually executing that story...

 

Slumlord. I'm not kidding. I have 2 friends who've done very well, separately, buying & managing rental housing in low-income areas. Each had > $100K in starting capital but not that much more. It's not for the faint of heart though. Not only do you have to deal with tenants who will often be lowlifes or deadbeats, you have to do your own renovations & maintenance whenever possible to keep expenses down. But once your enterprise grows to a certain size, you can outsource the management, hire contractors for all onsite work, and shift your portfolio mix into better neighborhoods, as you build your 25,000-rental unit empire.

A well-known example of this trajectory is Fred Trump, Donald's dad. Their real family name, BTW, is "Drumpf."

 

I wouldn't fucking trust you to run to the store and buy a gallon of milk with my money. How did you convince your friends and family to give you anything? Are they all locked up in a basement somewhere? I feel like we should call the authorities.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.
 

You don't need any licensing if it's your money. I like LLC's and you probably want to consult an attorney to draw up the operating agreement and other docs but you don't need to deal with finra if it's only your money. But are you sure you want to do this with your operating company partner and not just on your own? If you're the finance guy and he's the tech guy and you lose money because you did something wrong (and I don't mean illegal wrong, just a bad strategy) or just through shit luck will he blame you and taint your real business?

 

All you're doing is setting up is an independent wealth management firm. Don't make it more confusion than it is. You have to pay a small % of AUM (maybe around 0.25%), and search for broker/dealers that serve independent wealth managers. They will send out account statements, clear your trades, offer you institutional research, deal with the SEC for you, provide legal support, etc.

You should be able to have all the paperwork drawn up at a law firm for 1-2k. Depending how complicated you make your venture. Although it really depends on your fee structure. Wealth management firms CANNOT charge clients a % of the profits. Hedge funds CAN. Wealth management firms can only charge a flat fee per time period or charge a % of AUM. So you have to let us know how you are charging clients before you move forward.

Or you can do it unofficial and sign some documents and just store the money in a bank account.

Good luck, and be careful with your friends and families money.

 

Thanks guys, that's very helpful.

I'm suprised 0.25% AUM is all it takes though. While it will operate more like wealth management firm, how I make money will be like a HF - % of profit. It won't be particularly complicated, no preferred/catch up. I have to think more about a high water mark.

Not sure why i had the quotes there, but yeah you're right, i was thinking I won't be doing indepth analysis of any companies.

I'll have to go through the site another day, looks interesting, thanks.

 

500,000 in AUM.. industry avg prob 2-3 percent? so your making about 10K-15K a year less expenses.I used to work at an RIA / BD and the beginning is definitely the toughest, which is why I chose another career. But the principals at my firm used to golf all day, have one hour of calls/ meetings, and then handle the occasional emergency. Not a bad life if you don't mind the hard start up.

Good thing is that you can build out your book and depending on your success can either continue the independent route or it def can give you a leg up on most candidates in your position once the economy picks up.

“I have never in my life learned anything from any man who agreed with me.” - Malone
 

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